Economics I Unemployment (2h)

Unemployment The aim of this lecture is to describe the most serious macroeconomic instability - unemployment. In times of economic recession it is the actual problem. There will be illustrated the issue of measuring the rate of unemployment and the causes of unemployment will be explained and also its forms (types), and in the end the consequences of unemployment (its impact on the economy), and the macroeconomic policy of the government focusing on the reduction of the unemployment rate.

Content introduction – defining the goals definition and measurement of unemployment the causes of unemployment and its forms the consequences of unemployment the possibilities of state macroeconomic policy concerning reducing unemployment short-term and long-term Phillips curve conclusion – summary, homework

Definition and measurement of unemployment unemployment - the most serious macroeconomic instability general unemployment rate u = (U / L).100 [%] U = number of unemployed workers, L = labor force or economically active population hidden unemployment voluntary vs. involuntary unemployment perfect competitive labor market vs. imperfect competitive labor market (revision from microeconomics) 4

The causes of unemployment and its forms Forms or types of unemployment (related to its cause): – frictional unemployment, – structural unemployment, – cyclical unemployment, – seasonal unemployment (usually assigned to frictional unemployment). different interpretations of cyclical unemployment (Keynesian interpretations, interpretations conservative economics), related to the interpretation of economic cycles concept of the natural rate of unemployment (natural rate of unemployment vs. actual rate of unemployment) NAIRU = „Non-Accelerating-Inflation Rate of Unemployment“ (natural rate of unemployment) concept of hysteresis at the labor market 5

The consequences of unemployment economic, social a political consequences: – economic: decline in output, see "Okun's Law", decrease or loss of skills of workers; – social: psychological stress - loss of income, and perhaps a crisis in the family, negative phenomena in the economy, the burden on certain groups in society; – political: trying to solve economic and social problems (frequent are disagreements between different social groups in society). 6

The possibilities of state macroeconomic policy concerning reducing unemployment passive employment policy - support and assistance in case of unemployment active employment policy - an effort to reduce the unemployment rate (Keynesian anti-cyclical economic policy - aimed at increasing the AD and Y, employment policy directions conservative economics - an effort to reduce the natural rate of unemployment) problem of rigidity at labor markets in continental Western Europe ("Eurosclerosis") 7

8 Original Phillips curve 1958, A. W. Phillips (1914 – 1975) ΔW t W t – 1 = wage inflation (g w ) rate of unemployment (U t ) PC later reconsidered ln (g w + 0.9) = ln 9.64 – 1.39 ln U t

Contemporary interpretation: short-term and long-term Phillips curve 9 inflation rate (π) rate of unemployment (u) LPC u* SPC 1 SPC 2 (higher rate of expected inflation) A B C D There is a constant rate of expected inflation along the SPC curves.

Literature FRANK, R. H., BERNANKE, B. S. Principles of Macroeconomics. 3rd Edition. McGraw- Hill/Irwin: NY, ISBN p. MANKIW, G. N. Principles of Macroeconomics. 4 th ed. USA: Thomson South- Western, p. ISBN McCONNELL, C. R., BRUE, S. L. Economics: Principles, Problems, and Policies. 17th ed. NY: McGraw/Irwin. 716 p. ISBN SAMUELSON, P. A., NORDHAUS, W. D. Economics. 15th ed. McGraw-Hill, 1995.

Internet sources Czech Statistical Office. Macroeconomic data (rate of unemployment). Available at www: Ministry of Labor and Social Affairs of the Czech Republic. Unemployment rate (monthly); active and passive employment policy. Available at www:

Homework Exercise “Unemployment” The UOZ Economy reported the following statistics in 2010: 685,210 people according to the census, 69,540 unemployed, 476,570 employed or self-employed people and 21,320 vacancies at labor offices. Calculate: a)the number of economically active population, b)the number of economically inactive population, c)the rate of unemployment, d)the number of unemployed per one vacancy. Find information about minimum wage of the Czech Republic from the website of the Ministry of Labor and Social Affairs: Make a comment.