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CHAPTER 1: UNEMPLOYMENT AND ITS NATURAL RATE Prepared by Nyaz Najmadin For the 2 nd stage at Commerce College 1.

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Presentation on theme: "CHAPTER 1: UNEMPLOYMENT AND ITS NATURAL RATE Prepared by Nyaz Najmadin For the 2 nd stage at Commerce College 1."— Presentation transcript:

1 CHAPTER 1: UNEMPLOYMENT AND ITS NATURAL RATE Prepared by Nyaz Najmadin For the 2 nd stage at Commerce College 1

2 IDENTIFYING UNEMPLOYMENT  Long-run versus Short-run Unemployment:  Long-run: The natural rate of unemployment  Short-run: The cyclical rate of unemployment 2

3 Natural Rate of Unemployment The amount of unemployment that the economy normally experiences and does not go away on its own even in the long run. the designation natural does not imply that this rate of unemployment is desirable. Nor does it imply that it is constant over time or impervious to economic policy. It merely means that this unemployment does not go away on its own even in the long run. 3

4 Cyclical Unemployment  Associated with with short-term ups and downs of the business cycle and refers to the year-to-year fluctuations in unemployment around its natural rate. 4

5 Describing Unemployment  Three Basic Questions: How does government measure the economy’s rate of unemployment? What problems arise in interpreting the unemployment data? How long are the unemployed typically without work? 5

6 How Is Unemployment Measured?  Unemployment is measured by the Bureau of Labor Statistics (BLS).  It surveys 60,000 randomly selected households every month.  The survey is called the Current Population Survey.  Based on the answers to the survey questions, the BLS places each adult (over 16) years old into one of three categories:  Employed  Unemployed  Not in the labor force 6

7 Employed, Unemployed, Not in the Labor Force, Labor Force  Employed: A person is considered employed if he or she has spent most of the previous week working at a paid job.  Unemployed: A person is unemployed if he or she is on temporary layoff, is looking for a job, or is waiting for the start date of a new job.  Not in the Labor Force: A person who fits neither of these categories, such as a full-time student, homemaker, or retiree, is not in the labor force.  Labor Force  The labor force is the total number of workers and the BLS defines the it as the sum of the employed and the unemployed. 7

8 How Is Unemployment Measured?  The unemployment rate is calculated as the percentage of the labor force that is unemployed.  Unemployment Rate= (Unemployed/Labor Force)*100  The labor force participation rate is the percentage of the adult population that is in the labor force.  Labor-force Participation Rate= (Labor Force/Adult Population)*100 8

9 Issues in Measuring Unemployment  It is difficult to distinguish between a person who is unemployed and a person who is not in the labor force.  Discouraged workers, people who would like to work but have given up looking for jobs after an unsuccessful search, don’t show up in unemployment statistics.  Other people may claim to be unemployed in order to receive financial assistance, even though they aren’t looking for work. 9

10 Why does unemployment occur?  In an ideal labor market, wages would adjust to balance the supply and demand for labor, ensuring that all workers would be fully employed.  Frictional unemployment refers to the unemployment that results from the time that it takes to match workers with jobs. In other words, it takes time for workers to search for the jobs that are best suit their tastes and skills.  Structural unemployment is the unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one. 10

11 Frictional Unemployment and Job Search  Job search results from the fact that it takes time for qualified individuals to be matched with appropriate jobs.  طةران بة دواي كاردا لةو راستيةوة رودةدات كة تاكة كارامةكان كاتيان دةويَت تا كاري طونجاو بدؤزنةوة  This kind of unemployment is not caused by a wage rate higher than equilibrium.  ئةم جؤرة بيَكاريية بةو هؤيةوة دروست نابيَت كة كريَي كار بةرزترة لة هاوسةنطي ( لة كريض لة بازاراد ) 11

12 Frictional unemployment  It is caused by the time spent searching for the “right” job.  بةلكو بةهؤي ئةو كاتةي كة ثيَويستة لة طةران بة دواي كاري طونجاودا، دروست دةبيَت.  Frictional unemployment is inevitable because the economy is always changing.  بيَكاري احتكاكي ( بةريةككةوتو ) بة ناضاري رودةدات، ضونكة ئابوري هةميشة لة طؤرانداية.  Changes in the composition of demand among industries or regions are called sectoral shifts. Thus, it takes time for workers to search for and find jobs in new sectors.  طؤران لة ثيَكهاتةي خواست لة نيَو ثيشةسازييةكاندا يان ناوضةكاندا ناسراوة بة طواستنةوةي سيَكتةري ( طؤران لة نيضو كةرتةكاندا ). بؤية كاتي دةويَت تا كارمةندان بطةريَن و كاري نويَ بدزؤنةوة 12

13 Public Policy and Job Search  Government programs can affect the time it takes unemployed workers to find new jobs through:  ثرؤطرامةكاني حكومةت دةتوانيَت كار بكاتة سةر ئةو كاتةي كة كارمةنديَكي بيَكار ثيَويستيةتي لة دؤزينةوةي كاردا، لة ريَطاي : 1- Government-run employment agencies: These agencies give out information about job vacancies in order to match workers and jobs more quickly. 1 - نوسينطة حكومييةكاني كاردؤزينةوة : ئةم نوسينطانة زانياري دةبةخشن لةسةر ئةو شويَن - كارانةي بةتالن ( شاغر ) بؤ ئةوةي كارمةندان و كارةكان بة يةك بطةينينن بة خيَرايي.. 13

14 ----Public Policy.. 2- Public training programs: these programs aim to ease the transition of workers from declining to growing industries and to help disadvantaged groups escape poverty. 2 - ثرؤطرامةكاني مةشقي طشتي : ئةم ثرؤطرامانة ئامانجيان طواستنةوةي كارمةندانة لةو ثيشةسازيانةي كة بةرةو نةمان ( يان كةمبونةوة ) دةضن بؤ ئةو ثيشةسازيانةي كة لة طةشةدان، هةروةها هاوكاري ئةو كارمةندانة دةكةن كة سودمةند نةبون بؤ ئةوةي لة دةست هةذاري هةلَبيَن. 3- Unemployment insurance: it is a government program that partially protects workers’ incomes when they become unemployed. 4 - بيمةي بيَكاري : ثرؤطراميَكي حكوميية كة برِيَك داهات بؤ كارمةندان دابين دةكات لةو كاتةدا كة بيَكارن ( واتة بريَك داهات دابين دةكات بؤ كارمةندان ). 14

15 Effects of Unemployment Insurance 1- increases the rate of unemployment. 1 - ريَذةي بيَكاري بةرزدةكاتةوة. 2-It reduces the search efforts of the unemployed. 2 - طةران بة دواي كاردا كةمدةكاتةوة. 3- It may improve the chances of workers being matched with the right jobs. 3 - دةشيَت ضانسي كارمةندان زياد بكةات لةوةي ئةو كارةيان دةست بكةويَت كة خؤيان دةيانةويَت. 15

16 Structural Unemployment  Structural unemployment occurs when the quantity of labor supplied exceeds the quantity demanded.  Structural unemployment is often thought to explain longer spells of unemployment. 16

17 Public Policy and Job Search  Why is there Structural Unemployment? 1- Minimum-wage laws 2- Unions 3- Efficiency wages Minimum-wage laws: When the minimum wage is set above the level that balances supply and demand, it creates unemployment. 17

18 Figure 4 Unemployment from a Wage Above the Equilibrium Level Copyright©2003 Southwestern/Thomson Learning Quantity of Labor 0 Surplus of labor = Unemployment Labor supply Labor demand Wage Minimum wage LDLD LSLS WEWE LELE 18

19 UNIONS AND COLLECTIVE BARGAINING  A union is a worker association that bargains with employers over wages and working conditions.  The process by which unions and firms agree on the terms of employment is called collective bargaining.  A strike will be organized if the union and the firm cannot reach an agreement.  In the 1940s and 1950s, when unions were at their peak, about a third of the U.S. labor force was unionized. 19

20 Are Unions Good or Bad for the Economy?  By acting as a cartel with ability to strike or otherwise impose high costs on employers, unions usually achieve above- equilibrium wages for their members. Union workers earn 10 to 20 percent more than nonunion workers. Advocates of unions contend that unions are a necessary antidote to the market power of firms that hire workers.  They claim that unions are important for helping firms respond efficiently to workers’ concerns. 20

21 Are Unions Good or Bad for the Economy?  Critics argue that unions cause the allocation of labor to be inefficient and inequitable. 1-Wages above the competitive level reduce the quantity of labor demanded and cause unemployment. 2- Some workers benefit at the expense of other workers. 21

22 THE THEORY OF EFFICIENCY WAGES Efficiency wages are above-equilibrium wages paid by firms in order to increase worker productivity.  A firm may prefer higher than equilibrium wages for the following reasons:  1- Worker Health: Better paid workers eat a better diet and thus are more productive.  2- Worker Turnover: A higher paid worker is less likely to look for another job. 3- Worker Effort: Higher wages motivate workers to put forward their best effort. 4- Worker Quality: Higher wages attract a better pool of workers to apply for jobs. 22

23 Chapter 2: Short Run Trade Off Between Inflation and Unemployment  Unemployment and Inflation  The natural rate of unemployment depends on various features of the labor market.  Examples include minimum-wage laws, the market power of unions, the role of efficiency wages, and the effectiveness of job search.  The inflation rate depends primarily on growth in the quantity of money, controlled by the Fed (or the central bank). 23

24 Trade Off  Society faces a short-run tradeoff between unemployment and inflation.  If policymakers expand aggregate demand, they can lower unemployment, but only at the cost of higher inflation.  If they contract aggregate demand, they can lower inflation, but at the cost of temporarily higher unemployment. 24

25 Phillips Curve The Phillips curve illustrates the short-run relationship between inflation and unemployment. The Phillips curve shows the short-run combinations of unemployment and inflation that arise as shifts in the aggregate demand curve move the economy along the short-run aggregate supply curve. 25

26 The Phillips Curve Unemployment Rate (percent) 0 Inflation Rate (percent per year) Phillips curve 4 B 6 7 A 2 Copyright © 2004 South-Western 26

27 Disinflationary Monetary Policy in the Short Run and the Long Run Unemployment Rate 0Natural rate of unemployment Inflation Rate Long-run Phillips curve Short-run Phillips curve with high expected inflation Short-run Phillips curve with low expected inflation 1. Contractionary policy moves the economy down along the short-run Phillips curve but in the long run, expected inflation falls, and the short-run Phillips curve shifts to the left. B C A Copyright © 2004 South-Western 27

28 Chapter 3: Inflation and Measuring the Cost of Living  THE CONSUMER PRICE INDEX  The consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a typical consumer 28

29 HOW THE CONSUMER PRICE INDEX IS CALCULATED  let’s consider a simple economy in which consumers buy only two goods: hot dogs and hamburgers. Table 1 shows the five steps that the BLS follows.  Step 1: Survey Consumers to Determine a Fixed Basket of Goods  Basket = 4 hot dogs, 2 hamburgers 29

30  Step 2: Find the Price of Each Good in Each Year  Year Price of Hot Dogs Price of Hamburgers  2008 $1 $2  

31 Step 3: Compute the Cost of the Basket of Goods in Each Year  2008 ($1 per hot dog × 4 hot dogs) + ($2 per hamburger × 2 hamburgers) = $8 per basket  2009 ($2 per hot dog × 4 hot dogs) + ($3 per hamburger × 2 hamburgers) = $14 per basket  2010 ($3 per hot dog × 4 hot dogs) + ($4 per hamburger × 2 hamburgers) = $20 per basket 31

32 Step 4: Choose One Year as a Base Year (2008) and Compute the Consumer Price Index  in Each Year  2008 ($8 / $8) × 100 = 100  2009 ($14 / $8) × 100 = 175  2010 ($20 / $8) × 100 =

33 Step 5: Use the Consumer Price Index to Compute the Inflation Rate from Previous Year  2009 (175 – 100) / 100 × 100 = 75%  2010(250 – 175) / 175 × 100 = 43%  Now:  Inflation rate in year 2 = CPI in year 2 – CPI in year 1 / CPI in year 1 × 100.  As shown at the bottom of the table, the inflation rate in our example is 75 percent in 2009 and 43 percent in

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