Unemployment and the Business Cycle

Peak

Contraction

TroughRecovery/Expansion

Labor Force Labor force – total number employed + unemployed adult workers

Complete pool of U.S. workers Who qualifies for the labor force? Adult Non-Institutionalized Civilian Population

Over the age of 16 Not in the military Not in jail or prison Not living permanently in nursing homes, or in an other “institution”.

Labor Force Who is not in the labor force?

Children under 16 Full-time student

(not looking for a job) Homemaker Retiree Jailed Person or other “institution” Military personnel

Employed Employed – number of adult civilians (over 16) who are working and on a

payroll of some type. Full-time and part-time workers Business owners (entrepreneurs sole proprietors) Unpaid workers in a family business People on a leave of absence (maternity, illness, etc.)

Unemployed Unemployed – adults that are not working but are actively seeking work

Looking for work within the past 4 weeks

Types of Unemployment

Frictional Seasonal Structural Cyclical

Types of Unemployment1. Frictional Unemployment – caused by movement in the economy. It is

always present in the economy, resulting from temporary transitions made by workers and employers When people move in order to find a job Someone graduates and looks for a job Stay at home parent goes back to work

Types of Unemployment2. Seasonal Unemployment – occurs as a result of seasonal change or when

industries slow or shut down for a season Summer Waves lifeguard (no winter waves) Santa during the holidays UPS workers during busy holiday season

Types of Unemployment3. Structural Unemployment – jobs that are permanently lost; workers skill do

not match the jobs that are available or in demand Jobs that no longer exist, are not coming back Building a new economic structure Machines replacing workers Jobs sent to other countries

(outsourcing)

Types of Unemployment4. Cyclical Unemployment – rises during economic downturns and falls when

the economy improves (caused by changes in the business cycle) Contractions – unemployment rises Expansion – unemployment falls

Labor Force LF = E + U

2012, labor force (in millions), 141.2 (E) + 12.8(U) = 154 (LF) Unemployment Rate – number of unemployed divided by the labor force

multiplied by 100 U/LF X 100 Unemployment rate = (12.8/154) X 100 = 7.8%

Labor-force participation rate – percentage of the adult population that is in the labor force Labor-force participation rate = LF/AP X 100 January 2012,labor-force participation rate = (154/243) X 100 = 64%

Natural Rate of Unemployment Natural rate of unemployment – unemployment rate of 5 to 6 percent is

considered a normal/healthy economy July 2008 – 5.8% The unemployment rate in the United States was last reported at 8.3

percent in January of 2012 From 1948 until 2010 the United States' Unemployment Rate averaged 5.70

percent reaching an historical high of 10.80 percent in November of 1982 and a record low of 2.50 percent in May of 1953.

Full Employment Full Employment – is at the natural rate of unemployment, 5-6% Zero unemployment is not an achievable goal

Unemployment rate in the early 2000’s, 3.8% was indication of economy dealing with inflationary conditions; over-performing economy

http://www.google.com/url?sa=i&rct=j&q=unemployment%20rate%20map%202013&source=images&cd=&cad=rja&docid=YvTUEyE0sEImkM&tbnid=eVXedvHqQeEWKM:&ved=0CAUQjRw&url=http://www.economicpopulist.org/content/state-unemployment-and-payrolls-august-2013-5374&ei=2813Uuu3KIyLkAezloHgBw&bvm=bv.55819444,d.cWc&psig=AFQjCNEI-87axMlw-6ZzflFu_hNmaqm4_A&ust=1383669592428404

Underemployed and Discouraged Workers Underemployed Workers – working at a job for which one is

overqualified, or working part-time when full-time work is desired Discouraged workers – a person who wants a job, but has given up

looking (do not count against unemployment rate)Dropped out of the labor force (retired, living with parents, back to

school, etc.)

Video – Types of Unemploymenthttp://www.youtube.com/watch?v=Ulu3SCAmeBA&list=PL2914757C7B6E3C9A&index=9&feature=plpp_video

Video – Hedge Fund to Pizza Deliveryhttp://www.youtube.com/watch?v=teXPMVg-4q4&list=PL2914757C7B6E3C9A&index=1&feature=plpp_video

Calculating Unemployment

http://www.youtube.com/watch?v=Zi3APBJuxZU&list=PL2914757C7B6E3C9A&index=22&feature=plpp_video

Unemployment Rate Cartoon http://www.youtube.com/watch?v=DnL7

Br8gc3Q

Unemployment Examples

1. Is your retired grandfather unemployed? 

2. Is a woman that stays home with her kids unemployed? 

3. A thief serving time in prison lost his job when he was convicted. Is he unemployed? 

4. An aunt serving in the Armed Forces is posted in Iraq. Is she employed? 

5. Is a full-time college student who is looking for a job unemployed? 

6. Are you unemployed? 

[No. While he is not working, he is also not looking for work.]

[No. While she may not be working outside the home, she is also not looking for work.]

[No. Those serving time in prison are not in the adult population and hence not in the labor force.]

[No. She is not a member of the civilian labor force because she serves in the military]

[Yes, they actively looking for a job and thus counted in the labor force.]

[Depends on individual situations.]

Types of Unemployment Chart

Unemployed Type of Unemployment

1. A computer programmer is laid off because of a recession.2. A literary editor leaves her job in New York to look for a job in San Francisco.3. An unemployed college graduate is looking for his first job.4. Advances in technology make the assembly-line worker’s job obsolete.

5. Slumping sales lead to a cashier being laid off.6. Workers are laid off when the local manufacturing plant closes because of a downturn in the economy.7. A company outsources their jobs to China and domestic workers lose their jobs.8. Summer ends and local teens lose their jobs.

Cyclical Unemployment

Frictional

Frictional

Structural

Cyclical

Cyclical

Structural

Seasonal

CALCULATING THE UNEMPLOYMENT RATEUse the following formula to calculate the unemployment rate:

Unemployment rate = Number of people unemployed X100 labor force 1. 2006, the number of people unemployed = 9.4 millionNumber of people in the civilian labor force = 147.1 million

_________ ÷ _________ = _________

_________ x 100 = __________

2. In 2012, the number of people unemployed = 15.2 millionNumber of people in the civilian labor force = 156.2 million

_________ ÷ _________ = _________

_________ x 100 = __________

9.4 147.1

.064 6.4%

15.2 156

.097 9.7%

.064

.097

Review - Unemployment StatisticsThe country of Ecoland has collected the following information:

Adult Population 240,000Employed 180,000Unemployed 30,000

Determine the following:1. Labor Force = __________ + _______ = _____________2. Unemployment rate = (_________/_________) X 100% = ______3. Labor-force participation rate = (_______/_______) X 100% = _______

30,000 210,000 14.3%210,000 240,000 87.5%

180,000 30,000 210,000

What can cause unemployment to remain high?

1. Unemployment Checks2. Minimum wage3. Unions and Collective

Bargaining4. Efficiency Wages

Public Policy and Causes of Unemployment Unemployment insurance - government program partially protects workers’ incomes when they become unemployed Eligible – people who are laid off through no fault of their own Ineligible – people who quit, were fired for cause, or just entered the

labor force Argument against U.I. is that it Increases frictional unemployment

Unemployment Insurance

99ers Video http://www.youtube.com/watch?v=Cwpd

GyIY2fQ&list=PL2914757C7B6E3C9A&index=7&feature=plpp_video

Life and Death of Ashboro http://www.youtube.com/watch?v=GkMU

FBNsJr4&list=PL2914757C7B6E3C9A&index=19&feature=plpp_video

Minimum-Wage Laws Minimum-wage laws can cause unemployment

Forces the wage to remain above the equilibrium level○ Increases the quantity of labor supplied○ Decreases the quantity of labor demanded○ Surplus of labor – unemployment

Unemployment from a wage above equilibrium level

Unemployment from a wage above equilibrium level

Wage

Quantity of Labor 0

Minimum wage

LDLS

Surplus of labor = Unemployment

Labordemand

Laborsupply

LE

WE

Unions and Collective Bargaining Unions – legally recognized as representatives of workers in many industries

Address issues such as collective bargaining over wages, benefits, and working conditions for their membership

Represent their members if management attempts to violate contract provisions

Collective Bargaining - a process of negotiations between employers and the representatives of employees aimed at reaching agreements that regulate working conditions

Wage scales, working hours, training, health and safety, overtime, grievance mechanisms, etc.

Unions and Collective Bargaining Unions raise the wage above the equilibrium level; this can lead to unintended consequence of increases in unemployment Better off: employed workers (insiders) Worse off: unemployed (outsiders)

○ May stay unemployed (increasing unemployment)○ Take jobs in firms that are not unionized

Efficiency Wages Efficiency wages – above-equilibrium wages paid by firms to

increase worker productivity1. Worker health - better paid workers eat a more nutritious diet

healthier and more productive2. Worker turnover – firm can reduce turnover among its workers by

paying them a high wage3. Worker quality – firm pays a high wage attracts a better pool of

workers increases the quality of its workforce4. Worker effort - high wages make workers more eager to keep their

jobs give workers an incentive to put forward their best effort

Chapter 28 Practice Review

a. What is the labor force in 2004 and 2005?Answer:2004: 7.4 + 105.2 = 112.6 million2005: 8.1 + 104.2 = 112.3 millionb. What is the labor force participation rate in 2004 and 2005?Answer:2004: (112.6/168.2) x 100 = 66.9%2005: (112.3/169.5) x 100 = 66.3%c. What is the unemployment rate in 2004 and 2005?Answer:2004: (7.4/112.6) x 100 = 6.6%2005: (8.1/112.3) x 100 = 7.2%

d. From 2004 to 2005, the adult population went up while the labor force went down. Provide a number of explanations why this might have occurred.Answer: Earlier retirements, students staying in college longer, more parents staying at home with children, discouraged workers discontinuing their job search.

e. If the natural rate of unemployment in Employment Country is 6.6percent, how much is cyclical unemployment in 2004 and 2005? IsEmployment Country likely to be experiencing a recession in either ofthese years?Answer:2004: 6.6% – 6.6% = 0%2005: 7.2% – 6.6% = 0.6%

In 2004, unemployment is "normal" for Employment Country; therefore, there is no recession.However, in 2005, unemployment is above normal (positive cyclical unemployment), soEmployment Country may be in a recession.

Chapter 28 Practice Review

Chapter 28 Practice Review

Due Today – 11-141. Mankiw Practice Review

Worksheet 2. Identifying Unemployment 3. Understating Unemployment 4. Daily Tens 5. Notes 6. Terms Chapter 28

Please include on test1. Name2. Date – 11-133. Class Period4. Chapter 28 Test 5. ID: A, B, C

Extra Credit1. Give a scenario of

someone that would be eligible for unemployment checks; what would disqualify someone from eligibility?

2. Draw a supply and demand graph showing how the minimum wage causes unemployment.

3. Explain your interpretation of the political cartoon (Illustrator’s message, symbols etc.)