1. Unemployment and the Business Cycle
The Four Phases of the Business Cycle
Unemployment Defined
Types of Unemployment
GDP Gap

2. I. Four Phases of The Business Cycle
Expansion Phase: denotes growth in the economy; businesses, employment and price level is growing
Peak Phase: highest point of the expansion phase; unemployment at its lowest point
Contraction Phase: also called “recession (a period in which of GDP declines for 2 consecutive quarters)downside of expansion; unemployment grows; business downsize and make cuts
Trough: “bottoming-out” of contraction phase; unemployment and firm contraction reach its lowest point

3. Unemployment Line of the 1930s
The most frequently discussed characteristic of a recession is unemployment
Unemployment statistics are based on a survey of households conducted by the Bureau of Labor Statistics (BLS), a branch of the Department of Labor
There are certain people who do not work but are not considered unemployed

4. II. Defining and Measuring Unemployment
Defining Unemployment:
Employed:
Any person 16 years of age or older
Who works for pay, either for someone else or in his or her own business for one or more hours per week
Who works without pay for more than 15 hours per week in a family enterprise (farmers)
Part-time workers are considered employed
Unemployed:
A person 16 years old or older who is not working, is available for work, and has made specific efforts to find work during the previous 4 weeks
Identifying unemployment:
the Bureau of Labor Statistics (BLS) surveys 60,000 households every month

5. Measuring Unemployment: Labor Force = Employed + Unemployed
Population = Labor Force + Not in Labor Force
Unemployment Rate = _____Unemployed _______ X 100
Employed + Unemployed
Labor Force Participation rate = Labor Force X 100
Population
Labor force: the number of people employed plus the number of unemployed
Population: 16 years and older equal to the number of people in the labor force plus the number not in the labor force
Unemployment Rate: the ratio of the number of people unemployed to the total of people in the labor force
Labor-force participation rate: the ratio of the force to total population 16 years old or older

6. III. Types of Unemployment
Frictional Unemployment:
Will always occur; the normal turnover of employee
Workers that are between jobs, but have the skills needed to fill a job opening
When workers are either searching for jobs or waiting to take jobs
When people change occupations or locations, or are new entrants and reentrants
Occurs in the short term (less than 5 weeks)
Occurs when there is imperfect information between job seeker and employer
Structural Unemployment:
Will always occur
Workers who becomes unemployed due to a lack of skill with new technology introduced by his or her employer
Occurs when there is a mismatch of skills and available jobs, change in consumer taste for new product or change in technology
These two are almost the same; in both cases there are job openings and people looking for those jobs; the difference Frictional people have the job skills to fill the job opening in structural they don’t
Frictional Unemployment: have the skills necessary; Voluntarily moving from one job to another, fired from employment; just graduated from college looking for employment; or just been laid off
Structural Unemployment: lack needed skills; Causes: New technology; New Resources; Change in consumer demand; Globalization; Lack of Education

7. Cyclical Unemployment:
Workers that are unemployed as a results from the normal fluctuations in the business cycle; due to a recession
Cyclical unemployment caused by a decline in total spending in the economy (occurs in the contraction stage of the business cycle)
Seasonal Unemployment
Unemployment that varies with the seasons of the year due to seasonal fluctuations in supply and demand for labor
Unemployment is low around holiday season when businesses hire extra help
Government statisticians smooth out this to help other trends

8. IV. The Concept of Full Employment
It does not mean “zero unemployment”
The level of unemployment that results when the rate of unemployment is normal, considering both frictional and structural factors
The level of employment reached when there is no cyclical unemployment
Natural Rate of Unemployment:
The unemployment rate that exists in “normal” times; when there is neither a recession nor a boom (Real GDP = potential GDP)
The long-run average unemployment rate due to frictional and structural unemployment (page 202 in text)
It is a rate that is sustainable into the future ( “maximum sustainable rate”)
Also call the “non-accelerating inflation rate of unemployment”
The lowest rate of unemployment that will not result in inflation; when employment falls below this rate, inflation accelerates

9. During a recession: the actual unemployment rate rises above the natural Unemployment rate
During a recession, the real GDP falls below potential GDP

10. V. Nature of Unemployment
Reasons people are unemployed
Job losers
Job leavers
New (or re-) entrants
Long-term vs. Short-term Unemployment
Hardship of unemployment depends on it’s duration; the long you are unemployed the harder it is to maintain standard of living
50% of unemployment is short-term (less than 5 weeks)
35% of unemployment last 5 to 26 weeks
15% is long-term (more than 6 months)
Long-term unemployment increases during recessions and fall during booms (expansionary)

11. Unemployment for different groups
Overall unemployment rate does not capture the long-term hardships experienced by certain groups
Certain groups of workers experience long duration of unemployment and suffer great hardship and find it difficult to find work
Group Unemployment
Adults low
Teenagers high
Drop outs high
Teenage minorities highest

12. VI. Determination of Employment
Labor demand and Labor supply
Labor Demand Curve:
describes the behavior of firms
Indicates how much labor they would demand at a given wage (the price of labor)
Labor Supply Curve:
Describes the behavior of the workers
Shows how much labor they would supply at a given wage
Real Wage:
We must think of wage relative to the average price of goods
Real Wage = wage
Price level

13. V. Psychological Aspects of Unemployment
Economic loss; no money
Unemployment is hard on an individual’s self-respect and can destroy families (no college, smaller house, etc.)
Youth can become disillusioned about their future