Low Unemployment Chapter 17

Unemployment Rate An indication of the health of the economy Falling rate = improved economy Increasing rate = worsening economy Determined by the “pool” of unemployment and the demand for labor

Who is Considered? Labor force 16+ who currently are working Constant state of change Inflows and outflows Unemployed Are actively looking for work but not working Problem How do you count everyone?

Unemployment Rate (Unemployed ÷ Work Force) X 100 Remember to add a % sign Full employment When there is NO cyclical unemployment Hidden unemployment is about 5% all the time

Types of Unemployment Frictional unemployment When people take time to find a job Person is not in a hurry to find a job Person is being “picky”

Frictional Unemployment Solution Supply-side policies designed to increase the quantity and improve the quality of labor Interventionist policies Market-based policies Make people more able to take vacant jobs Encourage people to be more willing to take vacant jobs Lower unemployment benefits Improve the flow of information from potential employers to people looking for jobs

Types of Unemployment Structural unemployment Worker’s skills do not match those needed for the jobs available Causes Development of new technology Discovery of new resources making others outdated Changes in consumer demand Globalization Lack of education

Structural Unemployment Solution Train for occupational flexibility Improve occupational mobility Give subsidies to firm who retrain Give subsidies to those who will move Create apprenticeship programes Disadvantages High opportunity costs to the government Only effective in the long term

Structural Unemployment Solution Market-based/free market supply-side policy Reduce unemployment benefits Deregulate labor markets Problem Increases inequity in the economy Could move to position with worse working conditions

Types of Unemployment Seasonal unemployment Harvest schedules Vacations Seasonal shifts in production schedule

Seasonal Unemployment Solution Encourage people to take a different job in their “off season” Lower unemployment benefits Improve information flow

Types of Unemployment Cyclical unemployment Rises during economic downturns and falls when the economy improves THE MOST DAMAGING TO THE ECONOMY AND TO PEOPLE

Hidden Unemployment Underemployed Part-time instead of full-time Overqualified Discouraged workers Unemployment during recession reported as 10% should have been 17% Current US unemployment rate 5.% Current AZ unemployment rate 6.0%

Distribution of Unemployment US at 5% is an average Geographical disparities Inner city is higher vs. suburban (rural) Age disparities Under-25 age group higher Ethnic differences Minorities are higher, specifically teen African Americans Gender disparities

Costs of Unemployment To the unemployed themselves Less income; depression; lower standard of living; higher stress levels; mental health To society Poverty; homelessness; higher rates of crime and vandalism; increased gang activities To the economy Lack of output; government spending on unemployment benefits; less taxes collected

Factors Affecting Unemployment Level Inflows People who have lost their jobs, resigned, left school but have not found work, returning to work, moved into the country but not found work Outflows People who find jobs, retire, go back to school, return to the home, emigrate to other countries, discouraged workers, died

Labor Market Graph p. 208 Demand for labor (AD L ) Derived demand Supply of labor (AS L )

Disequilibrium Unemployment Real-wage unemployment p. 209 Classical unemployment Impacted by minimum wages and union negotiations for wages above equilibrium

Disequilibrium Unemployment Solution Remove trade unions Abolish minimum wage Problem Causes greater inequality Poorest are affected the most Affects living standards for those with low wages

Demand-deficient Unemployment AKA cyclical unemployment p. 210 Associated with a downturn in the economy Part of problem – wages are “sticky”

Demand-deficient Unemployment Solution Increase government spending Lower direct and indirect taxes Decrease interest rates Increase the money supply

Equilibrium Unemployment Graph p. 211 Reminder Full employment = no cyclical unemployment Natural unemployment Frictional unemployment Accepted level is about 5%

Demand- or Supply-Side Policies Problem Often difficult to distinguish between types of unemployment Both policies can lead to long-term problems Lag time between policy and hiring Demand-side policies Manipulating interest rates is common Supply-side policies Ensures skilled and flexible work force Can shift LRAS to right

Budget Deficits Government “borrows” money to stimulate the economy Causes “crowding out” p. 218 Keynesian = no crowding out if economy is producing at less than full employment Classical = opposed to demand-side policies; crowding out happens