1. Principles of Macroeconomics ECON203, Lecture 8: Jobs (employment) and Unemployment Instructor: Turki Abalala

2. Recap of Last Lecture  Labor Market Indicators The Unemployment Rate The labor force participation Rate  Sources of unemployment ECON203 - 2nd Semester 20142

3. Class Outline  Unemployment and Full-employment Types of Unemployment Full Employment and Natural Unemployment Rate Unemployment and Real GDP  Review Questions ECON203 - 2nd Semester 20143

4. Unemployment and Full Employment  Four types of unemployment: 1.Frictional unemployment 2.Structural unemployment 3.Seasonal unemployment 4.Cyclical unemployment ECON203 - 2nd Semester 20144

5. 5 1.Frictional Unemployment: It is the unemployment that arises from normal labor turnover- from people entering and leaving the labor force, from quitting jobs to find better ones, and from the ongoing creation and destruction of jobs. It is a permanent and healthy phenomenon in dynamic and growing economy. Firms and workers spend time searching out what they believe will be the best attainable match, while these unemployed people are searching, they are fractionally unemployed. Unemployment and Full Employment ECON203 - 2nd Semester 2014

6. 6 2.Structural Unemployment: It is the unemployment that arises when changes in technology or international competition change the skills needed to perform jobs or change the location of jobs. For example, telephone switching is now done by computer rather than by operators. Also, call centers have been relocated to India. Structural unemployment usually last longer than frictional unemployment because workers must retrain and possibly relocate to find a job. Unemployment and Full Employment ECON203 - 2nd Semester 2014

7. 7 3.Seasonal Unemployment: Unemployment caused by seasonal patterns. For example, farm workers find jobs picking fruit as it ripens, but once the fruit is picked they are laid off. Another example, during the month of Ramadan and Eid festival, the demand for labor increases and other months may decrease. To eliminate the impact of such changes, monthly unemployment statistics are seasonally adjusted which smoothe out these factors Unemployment and Full Employment ECON203 - 2nd Semester 2014

8. 8 4.Cyclical Unemployment: It is the fluctuating unemployment over the business cycle that increases during a recession and decreases during an expansion. For example, during the recession of 2008–2009, many workers were laid off as business activity declined. Government policies to stimulate aggregate demand during recessions is aimed at reducing this type of unemployment. Unemployment and Full Employment ECON203 - 2nd Semester 2014

9. 9  Some people are unemployed for a week or two and others for a year or more.  A short unemployment spell is not a major problem, especially if the person ends up with a better job than the previous one.  But a long spell of unemployment imposes a large personal cost to the unemployed, leads to a loss of human capital, and leads to underproduction and waste.  The average duration of unemployment varies over the business cycle.  Average duration increases in a recession and decreases during an expansion. Unemployment and Full Employment ECON203 - 2nd Semester 2014

10. 10  Why are teenage unemployment rates so high? There are two reasons: 1.Teenagers are still discovering what they are good at, so they try different jobs and leave their jobs more frequently than older workers. 2.Teenagers have little job experience, so firms often hire them on a short-term or trial basis, which makes the rate of job loss higher for teenagers than for older workers. Unemployment and Full Employment ECON203 - 2nd Semester 2014

11. 11  When there is no cyclical unemployment or, equivalently, when all the unemployment is frictional, structural, or seasonal, the state of the economy is at full employment: The divergence of unemployment rate from full employment is cyclical unemployment.  The unemployment rate when the economy is at full employment is called natural unemployment rate.  Full employment and natural rate of unemployment are examples of technical economic terms that does not correspond with everyday language. Unemployment and Full Employment ECON203 - 2nd Semester 2014

12. 12  Unemployment and Real GDP: Cyclical unemployment is the fluctuating unemployment over the business cycle—unemployment increases during recessions and decreases during expansions. At full employment, there is no cyclical unemployment. At the business cycle trough, cyclical unemployment is positive. At the business cycle peak, cyclical unemployment is negative. Unemployment and Full Employment ECON203 - 2nd Semester 2014

13. 13  The value of real GDP when all the economy’s factors of production―Labor, capital, land, and entrepreneurial ability― are employed is called Potential GDP.  The difference between Real GDP or actual output and Potential GDP is called GDP gap or the output gap  The percentage of Output gap is the real GDP minus the potential GDP divided by the potential GDP which is always express in percentage: Unemployment and Full Employment ECON203 - 2nd Semester 2014

14. 14  Potential GDP is the level of real GDP that the economy would produce if it were at full employment.  Because the unemployment rate fluctuates around the natural unemployment rate, real GDP fluctuates around potential GDP: When the unemployment rate is above the natural rate, real GDP is below potential GDP. When the unemployment rate is below the natural unemployment rate, real GDP is above potential GDP. Unemployment and Full Employment ECON203 - 2nd Semester 2014

15. 15  When the economy is at full employment, real GDP equals potential GDP and there is no output gap.  When the unemployment rate is above the natural rate, real GDP is below potential GDP and the output gap is negative.  When the unemployment rate is below the natural unemployment rate, real GDP is above potential GDP and the output gap is positive. Unemployment and Full Employment ECON203 - 2nd Semester 2014

16. 16  Unemployment rate fluctuates around the natural unemployment rate. Unemployment and Full Employment ECON203 - 2nd Semester 2014

17. 17  Because unemployment rate fluctuates around the natural unemployment rate, real GDP fluctuates around potential GDP. Unemployment and Full Employment ECON203 - 2nd Semester 2014

18. Reference Chapter 6 of “Foundations of Macroeconomics” ECON203 - 2nd Semester 201418

19. 19 Now it’s over for today. Any question? ECON203 - 2nd Semester 2014