Eco 6351 Economics for Managers Chapter 10b. The Business Cycle Prof. Vera Adamchik

Civilian noninstitutional population: Persons 16 years of age and older residing in the 50 states and the District of Columbia, who are not inmates of institutions (e.g., penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces. Civilian noninstitutional population

Who is counted as employed? All persons who, during the reference week (week including the twelfth day of the month), (a) did any work as paid employees, worked in their own business or profession or on their own farm, or worked 15 hours or more as unpaid workers in an enterprise operated by a member of their family, or (b) were not working but who had jobs from which they were temporarily absent. Each employed person is counted only once, even if he or she holds more than one job.

Who is counted as employed? Persons also are counted as employed if they have a job at which they did not work during the survey week because they were on vacation; ill; experiencing child-care problems; taking care of some other family or personal obligation; on maternity or paternity leave; involved in an industrial dispute; or prevented from working by bad weather.

All persons who: had no employment during the reference week, were available for work, except for temporary illness, and had made specific efforts to find employment some time 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. Who is counted as unemployed?

Civilian labor force Civilian Labor Force includes all persons in the civilian noninstitutional population classified as either employed or unemployed. People in the civilian noninstitutional population who are neither employed nor unemployed are classified as not in the labor force.

Who is not in the labor force? Persons not in the labor force are those who not classified as employed or unemployed. Many who do not participate in the labor force are going to school or are retired. Family responsibilities keep others out of the labor force. Still others have a physical or mental disability which prevents them from participating in labor force activities.

Civilian noninstitutional population

The unemployment rate is the percentage of the labor force that is unemployed. That is: Unemployment rate = (Unemployed  Labor Force)*100% The unemployment rate

The unemployment record

Problems with measuring the unemployment rate Discouraged workers are available for work but have not looked for a job during the previous four weeks because they believe no jobs are available for them. These workers are not counted as unemployed by the BLS. Hence, the official unemployment rate may significantly understate the true degree of joblessness in the economy.

The BLS counts people as being employed if they hold part-time jobs even though they would prefer to hold full-time jobs. In a recession, counting as “employed” a part-time worker who wants to work full-time tends to understate the degree of joblessness in the economy. Problems with measuring the unemployment rate

On the other hand, some measurement problems tend to overstate the true extent of joblessness: People say they are looking for a job, but they do not No legitimate job, but involved in illegal activity /shadow economy. Problems with measuring the unemployment rate

People become unemployed if they: –lose their jobs –leave their jobs –enter or re-enter the labor force People end a spell of unemployment if they: –are hired –withdraw from the labor force Unemployment dynamics

Figure shows the labor market flows that create and end unemployment Labor Market Flows

Unemployment is classified into four types: –frictional –structural –seasonal –cyclical Types of unemployment

Frictional unemployment is the unemployment that arises from normal labor market turnover. Usually it is a brief period of unemployment associated with job search. On the supply side, as people age, old workers leave the labor force and new workers enter the labor force. Some people voluntarily quit their jobs. Types of unemployment

On the demand side new businesses are set up and existing businesses fail. In this process, jobs are created and destroyed. The unemployment that arises from these normal flows on both the supply side and demand side of the labor market is frictional unemployment. Types of unemployment

Structural unemployment is the unemployment that arises when changes in technology or international competition change the skills needed to perform jobs or change the locations of jobs. It results from mismatch between skills of labor force participants and skills needed by employers. Structural unemployment usually lasts longer than frictional unemployment because workers must usually retrain and possibly relocate to find a job. Types of unemployment

Seasonal unemployment is unemployment that arises from the seasonal nature of some jobs. Types of unemployment

Cyclical unemployment is the unemployment that arises from the business cycle. Not enough jobs to go around due to downturns in the business cycle. In a recession, cyclical unemployment rises and in an expansion, cyclical unemployment falls. Types of unemployment

Some unemployment is inevitable. So what is “full employment”? Full employment occurs when the unemployment rate equals the natural rate. Full employment

The natural rate of unemployment is the unemployment rate when there is no cyclical unemployment. Equivalently, the natural rate of unemployment is the unemployment rate when all the unemployment is frictional, structural, and seasonal. Natural rate of unemployment

The actual unemployment rate fluctuates around the natural rate. The divergence of the unemployment rate from the natural rate is cyclical unemployment. Notice that cyclical unemployment is negative at a business cycle peak. Total unemployment is less than the sum of frictional and structural unemployment.

This view of the natural rate of unemployment is controversial. Some economists even refuse to use the term “natural” rate. Instead, they talk about the NAIRU-- Non Accelerating Inflation Rate of Unemployment.

The policy goal Full employment is the lowest rate of unemployment comparable with price stability. It is estimated to be between 4 and 6 percent unemployment.