Lecture 10:Deficits and Unemployment Deficits Measures of Well-Being –unemployment –inflation Link back to Lecture 9

Government Budget and International Deficits

Deficits An international deficit exists if our imports exceed our exports. Current Account –Our exports minus our imports; but it also takes interest payment paid to and received from the rest of the world into account.

Government Budget and International Deficits

Do Deficits Matter? Governments must borrow if it spends more than it earns in tax revenue. If the borrowed funds are used to purchase assets that earn a profit, the investment may be sound.

Macroeconomic Policy Challenges and Tools Policy Challenges 1) Boost economic growth 2) Stabilize the business cycle 3) Reduce unemployment 4) Keep inflation low 5) Reduce the government and international deficits

Macroeconomic Policy Challenges and Tools Policy Tools 1) Fiscal policy Making changes in taxes and government spending –Long term growth –Smooth the business cycle

Macroeconomic Policy Challenges and Tools Policy Tools 2) Monetary policy Changing interest rates and the amount of money in the economy –Control inflation –Smooth business cycle

Jobs and Unemployment Jobs –In 1996, 127 million people had jobs. An increase of 20 million over 1985 and 23 million over 1975 On average, 1.8 million new jobs are created every year

Jobs and Unemployment The type of job you will get when you graduate will depend, to some degree, on: –the total number of jobs available –the unemployment rate –what is the unemployment rate today? –ck out today’s WSJ

Unemployment Unemployment is a condition in which there are qualified workers who are available for work at the current wage rate and who do not have jobs. –To be counted as unemployed, a person must have made some effort to find a job during the previous four weeks.

The Labor Force and the Unemployment Rate Unemployment plus employment equals the labor force. The unemployment rate is the percentage of the labor force that cannot find work.

Part-Time Workers Part-time workers are counted as employed. However, some part-time workers would accept a full-time job if one were available. This group should be counted as “partially employed.” They are counted as fully employed by the Bureau of Labor Statistics.

Unemployment in the United States None of our recent experiences with high unemployment come close to the peak of 25% unemployment experienced at the depths of the Great Depression (1933). In recent years, the United States has experienced periods of high unemployment.

Unemployment Around the World Since 1980, the U.S. unemployment rate has averaged 7 percent, compared with 8.1 percent in Europe and 2.5 percent in Japan. –U.S. unemployment fluctuates with the business cycle. –Japanese unemployment barely fluctuates at all. –European unemployment has been rising sharply.

Why Unemployment Is a Problem The value of training and education may be significantly reduced if people can’t find entry- level jobs. Higher unemployment rates are statistically associated with higher rates of crime, alcoholism, depression, suicide, and domestic violence. The unemployed lose self-esteem.

Jobs and Unemployment Unemployment –On average, 7 million people are unemployed in the U.S. Unemployed worker –One who does not have a job but is available for work, is willing to work, and has made some effort to find work within the previous four weeks

Jobs and Unemployment Labor Force –Sum of the people who are unemployed and the people who are employed Unemployment Rate –The percentage of the labor force who are unemployed

Jobs and Unemployment Discouraged Worker –A person who does not have a job, is available for work, and is willing to work but who has given up the effort to find work

Jobs and Unemployment The unemployment rate may be misleading because: –Discouraged workers are excluded –Part-time workers who want full-time jobs are considered employed

Unemployment in the United States Important Features 1) The unemployment rate during the Depression peaked in 1933 at 25%. 2)After 1934, the unemployment rate overstated the true rate because it counts the people who had make-work jobs.

Unemployment in the United States Important Features 3) Unemployment rates have reached high levels in recent years during recessions. 4) The unemployment rate never falls to zero.

Unemployment in the United States

Unemployment in Industrial Economies

Why Unemployment is a Problem Lost Production and Incomes Lost Human Capital –Prolonged unemployment can hurt a person’s job prospects.