A measure of wasted resources: Wasted labor hours and capital Unemployment A measure of wasted resources: Wasted labor hours and capital 6/20/2018 (c) 2002 Claudia Garcia-Szekely

Measuring Unemployment Since 1940 Bureau of Labor Statistics (BLS) part of the Department of Labor. Data compiled from Current Population Survey (monthly, 60,000 households) Data does not come from unemployment insurance (UI) records… Monthly surveys 6/20/2018 (c) 2002 Claudia Garcia-Szekely

Labor Force Participation Rate = Total Population 16 years and older (Active) Non Institutional Employed Unemployed Not in the Labor Force Institutional Nursing homes, prisons and active duty in the Armed Forces Children (Non-Active ) 154Mill 140 Mill 14 Mill Labor Force = Employed + Unemployed 140 Mill 63.4% 154Mill Labor Force Participation Rate = Labor Force x 100 Active Population 239 Mill 14 Mill 243 Mill 243 Mill 85 Mill 14 Mill 9.09% Unemployed Unemployment Rate = x 100 309 Mill Labor Force 154 Mill

(c) 2002 Claudia Garcia-Szekely Employed Full time, part time or temporary work. Worked at least ONE hour or more for pay or profit during the survey week. Worked 15 hours or more without pay in a family business. Temporarily absent from work Illness, vacation, labor dispute, etc. http://www.bls.gov/bls/glossary.htm Persons 16 years and over in the civilian noninstitutional population who, during the reference week, did any work at all (at least 1 hour) as paid employees; worked in their own business, profession, or on their own farm, or worked 15 hours or more as unpaid workers in an enterprise operated by a member of the family; and (b) all those who were not working but who had jobs or businesses from which they were temporarily absent because of vacation, illness, bad weather, childcare problems, maternity or paternity leave, labor-management dispute, job training, or other family or personal reasons, whether or not they were paid for the time off or were seeking other jobs. Each employed person is counted only once, even if he or she holds more than one job. Excluded are persons whose only activity consisted of work around their own house (painting, repairing, or own home housework) or volunteer work for religious, charitable, and other organizations. (c) 2002 Claudia Garcia-Szekely

(c) 2002 Claudia Garcia-Szekely Unemployed Made specific efforts to find a a job. Waiting to be called back to a job from which they were temporarily laid off. Persons aged 16 years and older who had no employment during the reference week, were available for work, except for temporary illness, and had made specific efforts to find employment sometime during the 4-week period ending with the reference week. Persons who were waiting to be recalled to a job from which they had been laid off need not have been looking for work to be classified as unemployed. 6/20/2018 (c) 2002 Claudia Garcia-Szekely

(c) 2002 Claudia Garcia-Szekely Not in the Labor Force Do not have a job and are not looking for a job. Retired Full time students Home makers Volunteers Institutional Population. Mental Institutions Prison Military The survey is designed so that each person age 16 and over who is not in an institution such as a prison or mental hospital or on active duty in the Armed Forces is counted and classified in only one group. Military personnel This segment of the population is excluded from the civilian labor force because military personnel are not considered as resources available for productive activity. Moreover, the military operates under its own set of "employment" rules, apart from resource and labor markets that exist in the rest of the economy. The reasoning behind excluding this segment is perhaps most obvious during periods of rising and declining military activity (that is, during and immediately after wars). If military personnel are included in the labor force, then a major movement of civilians into the military has no apparent affect on the labor resources available for productive activity, when in fact, the quantity of labor available for domestic production declines. 6/20/2018 (c) 2002 Claudia Garcia-Szekely

Is Unemployment Measured Correctly? No. There are three problems with the way we measure unemployment 6/20/2018 (c) 2002 Claudia Garcia-Szekely

(c) 2002 Claudia Garcia-Szekely 1. Discouraged Workers Someone who gave up looking for a job. NOT counted as unemployed Should be included as unemployed: they are part of the active population and would work if a job was available. 6/20/2018 (c) 2002 Claudia Garcia-Szekely

1M give up looking for work LF = 138+16=154 Ur = 16/154=10.4% New LF = 154-1=153 16 138 Employed Unemployed New Ur = 15/153=9.8% Unemployed 16-1=15 An increase in the number of discouraged workers shows up as a decrease in the unemployment rate! Discouraged Worker Effect

Discouraged Worker Effect. The longer the recession lasts, the less accurate the Ur

(c) 2002 Claudia Garcia-Szekely Discouraged Workers Thousands 6/20/2018 (c) 2002 Claudia Garcia-Szekely

Employed: Worked at least ONE hour or more for pay or profit Unemployment Rate is Not Accurate Employed: Worked at least ONE hour or more for pay or profit Some PT workers would work full time if a job was available. They should be counted –at least partially- as unemployed.

(c) 2002 Claudia Garcia-Szekely 6/20/2018 (c) 2002 Claudia Garcia-Szekely

Employed: Worked at least ONE hour or more for pay or profit Unemployment Rate is Not Accurate Employed: Worked at least ONE hour or more for pay or profit Underemployed individuals are counted as employed even though their skills are not No official statistics on underemployment (Difficult to develop objective criteria) http://www.bls.gov/cps/cps_faq.htm Because of the difficulty of developing an objective set of criteria which could be readily used in a monthly household survey, no official government statistics are available on the total number of persons who might be viewed as underemployed. Even if many or most could be identified, it would still be difficult to quantify the loss to the economy of such underemployment.

Unemployment Rate: Three Misrepresentations Not counted as Unemployed Underestimate true Unemployment Discouraged Workers Counted as employed Part Time Workers Under-employed Workers Counted as employed

Unemployment is never ZERO

Three Types of Unemployment Structural: workers who do not have skills currently in demand There is no job for them. Frictional: workers who have the necessary skills There is a job for them Cyclical: workers have the necessary skills for the job, but lack of demand prevents firms from hiring them back.

Unemployment Rate is Never Zero Frictional 4% Natural Rate of Unemployment Between Jobs 4% NRU=5% Unemployed due to lack of skills 1% Structural 1% Ur=10% Recession Ends Unemployed due to recession 5% Cyclical 5% Zero Cyclical Unemployment

Lowest Unemployment: 4%-5% Natural Unemployment Frictional 4% Structural 1% Lowest Unemployment: 4%-5%

zero Cyclical unemployment Potential GDP: GDP at Full Employment zero Cyclical unemployment Above Full employment Every year we could produce more GDP At Full employment Below Full employment Time

1. Unemployment Increase Inequality Costs of Unemployment 1. Unemployment Increase Inequality 6/20/2018

Lowest Unemployment: 4%-5% Teens 27% Black 17% Hispanic 13% Teens 16% Men 10% All 10% White 9% Women 8.3% Black 8% Asian 8% Hispanic 6% All 5% Women 4.5% Men 4.5% White 4% Asian 4% Worst: 2010 2016 Lowest Unemployment: 4%-5%

2. Lost Production: Okun’s Law GDP*0.025 in lost Goods and Services Costs of Unemployment 2. Lost Production: Okun’s Law 1% Unemployment = 2.5% of GDP 1% unemployment = GDP*0.025 in lost Goods and Services Textbook has 3%… 14,000B *0.025 Lost Output 350Billion Lost

Okun’s Law: an example NRU = 5% GDP= 12T Ur = 9% Extra Unemployment = 9 – 5 = 4% For each 1% extra unemployment we lose 2.5% of GDP: % Lost GDP = 4(2.5) = 10% Lost GDP = 12T (0.10)= 1.2T Lost Production that can not be recovered

3. Increase Suicide Rates Costs of Unemployment 3. Increase Suicide Rates video 6/20/2018 (c) 2002 Claudia Garcia-Szekely

Phillips Curve: Trade off between inflation and unemployment Years of High Inflation To reduce inflation by 1%, unemployment must increase 2% above the natural rate Inflation 1% 2% Years of Low Inflation Years of Low Unemployment High Unemployment Unemployment

Inflation Unemployment To drop Inflation by 6% points Inflation Unemployment 10% http://cr4re.com/charts/charts.html?CPI#category=CPI&chart=UnemploymentInflation.jpg Increase unemployment by 12% points

How do we Fight Inflation? Joblessness Slowing down Aggregate Demand for goods and services

4.8% http://cr4re.com/charts/charts.html?CPI#category=CPI&chart=UnemploymentInflation.jpg

Majority find jobs in less than 5 weeks 6/20/2018 (c) 2002 Claudia Garcia-Szekely

Majority are unemployed for more than 6 months 6/20/2018 (c) 2002 Claudia Garcia-Szekely

(c) 2002 Claudia Garcia-Szekely Less than HS 11.2% 7.9% HS graduates 6.7% Some College 3.8% Bachelor Degree and higher 6/20/2018 (c) 2002 Claudia Garcia-Szekely

(c) 2002 Claudia Garcia-Szekely How do you protect yourself from unemployment? STAY IN SCHOOL 6/20/2018 (c) 2002 Claudia Garcia-Szekely