Business Cycles and Unemployment

Four phases of a business cycle Alternating periods of economic growth and contraction, which can be measured by changes in real GDP Four phases of a business cycle Peak Recession Trough Recovery

Why is growth an economic goal? Peak the phase of the business cycle during which real GDP reaches its maximum after rising during a recovery Economic growth an expansion in national output measured by the annual percentage increase in a nation’s real GDP Why is growth an economic goal? it increases our standard of living - it creates a bigger “economic pie”

Government Recession Definition Trough the phase of the business cycle in which real GDP reaches its minimum after falling during a recession Recession a downturn in the business cycle during which real GDP declines Government Recession Definition at least two consecutive quarters in which GDP declines

The Depression Recovery The term depression is primarily an historical reference to the extreme deep and long recession of the early 1930’s Recovery An upturn in the business cycle during which real GDP rises

Hypothetical Business Cycle Peak Real GDP Growth trend line Peak Trough Recession Recovery

Post-World War II Recessions Recession Dates Duration % Decline in GNP Peak Unemployment Rate Nov 1948-Oct 1949 11 -1.7 7.9% July 1953 – May 1954 10 -2.7 5.9 Aug 1957 – Apr 1958 8 -1.2 7.4 Apr 1960 – Feb 1961 -1.6 6.9 Dec 1969 – Nov 1970 -0.6 Nov 1973 – Mar 1975 16 -3.1 8.6 Jan 1980 – July 1980 6 -2.2 7.8 July 1981 – Nov 1982 -2.9 10.8 July 1990 – Mar 1991 -1.3 6.8 Mar 2001 – Nov 2001 -0.5 5.6 Mar. 2001 - Nov. 2001 -3.5 9.5 Dec. 2007-June 2009 18 -4.1 9.7 Average -2.0 7.6

Business Cycles in the U.S. 1929-2010 Annual real GDP growth 15 Long-term average growth 10 5 Annual Real GDP Growth Rate (percent) 3.5 Zero growth -5 -10 -15 `29 `30 `35 `40 `45 `50 `55 `60 `65 `70 `75 `80 `85 `90 `95 `00 `05 `10 `15

Three types of economic indicators Leading Coincident Lagging Leading Indicator Variables that change before real GDP changes Changes in business and consumer credit New orders for plant and equipment New consumer goods orders Unemployment claims Delayed deliveries New business formed Average workweek New building permits Changes in inventories Material prices Stock prices Money supply

Coincident Indicator Lagging Indicator Variables that change at the same time that real GDP changes Nonagricultural payrolls Personal income Industrial Production Manufacturing and trade sales Lagging Indicator Variables that change after real GDP changes Unemployment rate Duration of unemployment rate Labor cost per unit of output Inventories to sales ratio Outstanding commercial loans Commercial credit to personal income ratio Prime interest rate

Who is considered employed? Civilian Labor Force People 16 years or older who are either employed or unemployed, excluding members of the armed forces and people in institutions Who is considered employed? Anyone who works at least one hour a week for pay or at least 15 hours per week as an unpaid worker in a family business

Primary Cause of Unemployment When total spending falls, businesses will find it profitable to produce a lower volume of goods and avoid unsold inventory Who is considered unemployed? Anyone who is 16 years of age and above who is actively seeking employment

Total Population age 16 and over Not in Labor Force Civilian labor force Armed forces Household workers Students Retirees Persons with disabilities Institutionalized Discourage workers Employed Employees Self-employed Unemployed New entrants Re-entrants Lost last job Quit last job Laid off

Where to find current unemployment rate? The percentage of people in the labor force who are without jobs and are actively seeking jobs Unemployment rate unemployed civilian labor force X 100 = Calculated 60,000 households are surveyed each month Where to find current unemployment rate? http://www.bls.gov

Civilian non-institutional population Current Population Estimates Year Civilian non-institutional population Labor Force Unemployed Unemployment Rate Not in Labor Force 2000 212,577 142,583 5,692 4.0 69,994 2001 215,092 143,734 6,801 4.7 71,359 2002 217,570 144,863 8,378 5.8 72,707 2003 221,168 146,510 8,774 6.0 74,658 2004 223,357 147,401 8,149 5.5 75,956 2005 226,082 149,320 7,591 5.1 76,762 2006 228,815 151,428 7,001 4.6 77,387 2007 231,867 153,124 7,078 78,743 2008 233,788 154,287 8,924 79,501 2009 235,801 154,142 14,265 9.3 81,659 2010 237,830 153,889 14,825 9.6 83,941 Unemployment rate unemployed civilian labor force X 100 = 9.6% 14,825 153,889 X 100 =

Criticisms of the Unemployment Rate Discouraged Worker a person who wants to work, but who has given up searching for work Underemployment people working at jobs below their level of skills Criticisms of the Unemployment Rate Does not include discouraged workers Includes part-time workers Does not measure underemployment

U.S. Unemployment Rate (percent) 25 20 U.S. Unemployment Rate (percent) 15 10 5 1930 1940 1950 1960 1970 1980 1990 2000 2010

Seasonal Unemployment Types of Unemployment Seasonal Frictional Structural Cyclical Seasonal Unemployment Unemployment caused by recurring changes in hiring due to changes in weather conditions

Cyclical Unemployment Frictional Unemployment Normal search time required by workers with marketable skills who are changing jobs, entering, or re-entering the labor force Structural Unemployment A mismatch between unemployed worker skills and the skills required for existing job opportunities Cyclical Unemployment Unemployment caused by the lack of jobs during a recession

What is considered full employment? Unemployment equals the sum of seasonal, frictional, and structural unemployment What is considered full employment? The natural rate of unemployment changes over time, but today it is considered to be about 3% - 5% GDP Gap The difference between full-employment real GDP and actual real GDP

Cost of Unemployment GDP Gap - the gap between actual and potential real GDP measures the monetary losses of real goods and services when at less than full employment 16 14 GDP GAP (positive) 13 GDP GAP (negative) Actual real GDP 12 11 Potential real GDP 10 `97 `98 `99 `00 `01 `02 `03 `04 `05 `06 `07 `08 `09 `10 `11 `12 `13 `14