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6-1 Unemployment We recognize unemployment as one of the two major macroeconomic problems we can face. When is a person “unemployed”? What are the costs of unemployment? What is an appropriate goal for “full employment”?
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6-2 Learning Objectives 06-01. Know how unemployment is measured. 06-02. Know the socioeconomic costs of unemployment. 06-03. Know the major types of unemployment. 06-04. Know the meaning of “full employment.”
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6-3 The Labor Force Labor force: all persons age 16 and over who are either employed or actively seeking work. Out of the labor force: those not working and not actively seeking employment. Total population Out of the labor force Labor force Employed Unemployed
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6-4 The Labor Force The labor force comprises about half the population. The size of the labor force has more than doubled since 1960 due to population growth. The labor force participation rate increased rapidly due to the increasing numbers of women joining the labor force.
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6-5 Impact of Labor Force Growth The labor force grows due to population growth and immigration, adding 2 million new workers yearly. The PPC pushes outward, increasing the capacity to produce goods and services. We need to create 2 million new jobs for the expanding labor force, or we end up at point F inside the PPC.
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6-6 Unemployment Unemployment: the inability of labor force participants to find jobs. This is an idled resource, so the economy operates inside its PPC, in the inefficient zone. Okun’s Law: a 1 percent increase in unemployment results in a 2 percent decrease in GDP.
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6-7 Measuring Unemployment A person is counted as unemployed if he or she is not working but is actively seeking work. Unemployment rate: the proportion of the labor force that is unemployed: 14,825,000 2010 unemployment rate = = 9.6% 153,889,000 Number of unemployed people Unemployment rate =Labor force
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6-8 Exercise Calculate the unemployment rate. #in labor force = 200,000 #unemployed = 10,000 Unemployment rate = (10,000/200,000) x 100 = 5% Number of unemployed people Unemployment rate =Labor force
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6-9 Demographics of Unemployment The unemployment rate is higher for Men than women. Blacks and Hispanics than whites. Less educated people than higher-educated people. Teenagers than people older than them.
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6-10 Duration of Unemployment Duration: how long does joblessness last? When the economy is growing, both the unemployment rate and the duration decrease. When the economy stagnates or goes into decline, both the unemployment rate and the duration increase.
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6-11 Reasons for Unemployment Job leavers. They quit to seek other opportunities. Job losers. They are laid off or fired. New entrants. First-time job seekers. Reentrants. They had left the labor force but have returned.
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6-12 Discouraged Workers Former job seekers who have given up and no longer actively seek employment. They drop out of the labor force. They are no longer counted in unemployment statistics.
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6-13 Underemployment People who want full-time work in their field but can find only part-time work or work at jobs below their capability. They are counted as employed.
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6-14 The Human Costs of Unemployment Loss of income. Loss of confidence. Social stress. Declining health.
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6-15 Defining Full Employment Full employment is not the same as zero unemployment. There are four categories of unemployment. Seasonal unemployment. Fictional unemployment. Structural unemployment. Cyclical unemployment. At full employment, all of these exist except cyclical unemployment.
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6-16 Defining Full Employment Seasonal unemployment: unemployment due to seasonal changes in employment. The Labor Department reports seasonally adjusted unemployment rates for every month. Unemployment data exclude the effects of seasonal unemployment.
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6-17 Defining Full Employment Frictional unemployment: brief periods of unemployment experienced by people moving between jobs or into the labor market. Adequate demand for frictionally unemployed. They have skills required for existing jobs. The job search period is relatively short.
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6-18 Defining Full Employment Structural unemployment: unemployment caused by a mismatch between the skills (or location) of job seekers and the requirements (or location) of available jobs. Caused by a change in the market for the product made, or … a change in the technology or process by which the goods is made.
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6-19 Defining Full Employment Cyclical unemployment: unemployment caused by a decline in economic activity. The demand for products decreases and workers get laid off. Results in an excess supply of workers for the remaining available jobs. The economy must grow at least as fast as the labor force to avoid cyclical unemployment.
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6-20 Defining Full Employment Economists think that we are near full employment when rising prices signal that we are nearing production capacity – that is, the PPC. Inflationary flashpoint: the rate of output at which inflationary pressures intensify. Full employment: the lowest unemployment rate compatible with price stability; zero cyclical unemployment.
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6-21 Defining Full Employment Full employment: the lowest unemployment rate compatible with price stability; zero cyclical unemployment. Both frictional and structural unemployment exist at full employment. Full employment ranges between 4 and 6 percent unemployment, depending on the size of structural unemployment.
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6-22 Changes in Structural Unemployment Changes in structural unemployment come from changes in society itself. Growing numbers of youth and women. Changes in transfer payments for the jobless. Changes in products demanded by consumers. Changes in how (and where) products are made. During periods of change, structural unemployment increases. When changes are fully absorbed, structural unemployment decreases.
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6-23 The “Natural” Rate of Unemployment Natural rate of unemployment: long-term rate of unemployment determined by structural forces in labor and product markets.
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6-24 The Economy Tomorrow Outsourcing jobs: relocation of production (and jobs) to other countries to take advantage of lower production costs. Cheaper labor. Low-cost, high-speed communications. A two-way street. Foreign producers also outsource jobs from their countries when they build production facilities in the United States. More jobs are “insourced” this way than we outsource. Production possibilities expand, not contract, with outsourcing. As world trade expands, we will see more outsourcing – and insourcing – in the economy tomorrow.
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6-25 Revisiting the Learning Objectives 06-01. Know how unemployment is measured. The unemployed are part of the labor force who are not working but who are actively seeking work. It is usually expressed as the unemployment rate, the ratio of unemployed to the labor force.
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6-26 Revisiting the Learning Objectives 06-02. Know the socioeconomic costs of unemployment. Okun’s Law estimates there is a 2% decline in output for every 1% increase in unemployment. The human costs of unemployment include not only financial losses but also social, physical, and psychological costs. Minorities, teens, and the less educated have higher rates of unemployment.
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6-27 Revisiting the Learning Objectives 06-03. Know the major types of unemployment. Seasonal: people who work part of a year, in season, but are unemployed at other times. Frictional: people who leave a job to pursue better opportunity elsewhere. Structural: people who lose their job when demand for a product declines or when there are major changes in how the product is produced. Cyclical: people who lose their job due to an overall decline in demand – that is, a recession.
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6-28 Revisiting the Learning Objectives 06-04. Know the meaning of “full employment.” The lowest unemployment rate compatible with price stability. Zero cyclical unemployment. Frictional and structural unemployment exist. Estimated to be in the range of 4 to 6 percent unemployment, depending on structural factors.
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