The Business Cycle and Unemployment

The Business Cycle The United States’ GDP is not constant from year to year. Instead, the GDP grows most years and then shrinks in some years. The ups and downs in GDP over time is referred to as the business cycle.

The national economy fluctuates resulting in periods of boom and bust. THE BUSINESS CYCLE The national economy fluctuates resulting in periods of boom and bust. Inflation Unemployment Full employment A Recession is 6 month period of decline in output, income, employment, and trade. (If really bad…then depression)

200 Years of the Business Cycle Why is the business cycle like a roller coaster? How do wars affect the economy?

The Business Cycle Why does the economy fluctuate? Retailer and Producers send misleading information about consumer demand. Advances in tech, productivity, or resources. Outside influences (wars, supply shocks, panic). Who cares? Macroeconomics measures these fluctuations and guides policies to keep the economy stable. The government has the responsibility to: Promote long-term growth. Prevent unemployment (resulting from a bust). Prevent inflation (resulting form a boom).

2010 GDP Growth Rate= 2.8%

What is Economic Growth? An increase in real GDP over time An increase in real GDP per capita over time (usually used to determine standard of living) Why is economic growth the goal of every society? Provides better goods and services Increases wages and standard of living Allows more leisure time Economy can better meet wants

The Business Cycle Illustrated: Peak temporary maximum in Real GDP. At this point the unemployment rate (u%) is probably below the natural rate of unemployment, and the inflation rate (π%) is probably increasing. Recession The contractionary phase of the business cycle. A period of decline in Real GDP accompanied by an increase in u%. To be classified as a recession, the economic decline must be at least 6 months long. Trough The bottom of the business cycle. The u% is probably high and π% is probably low. Recovery The phase of the business cycle where the economy is returning to full employment.

The Business Cycle Illustrated: Important note The various phases of the business cycle last for different amounts of time. In recent history, expansions have lasted years longer than have recessions. The Great Depression is the most notable example of a long recession/trough

The Business Cycle Illustrated: Causes Irregularity of Investment Changes in productivity Changes in total spending (aggregate demand) Durable goods manufacturing is most susceptible to the effects of the business cycle Business cycle has become less severe because of technological advancements in supply-chain management and structural changes in U.S. economy.

Unemployment Class Activity

Unemployment Population Labor force Not in Labor Force Employed Number of people in a country Labor force # of people in a country that are classified as either employed or unemployed Labor Force Participation Rate % of working age population in the labor force (U.S. is approx 66%) Formula = # employed + # unemployed / # of people over 16 “Eligible” to work Not in Labor Force Kids, military personnel, retired people, stay at home Moms and Dads, full-time students, your 40 year old uncle who sleeps on the couch all day, most of the homeless. Employed People 16 years and older that have a job. It doesn’t matter if it’s part-time or full-time, as long as they work at least 1 hour every 2 weeks Unemployed People 16 years and older that don’t have a job, but have actively searched for a job in the last 2 weeks Unemployment rate formula = # of unemployed / # of people in labor force

Full Employment Occurs when there is no cyclical unemployment present in the economy May still have frictional and structural UE Associate with the Natural Rate of Unemployment (NRU). The level of unemployment experienced when the economy is producing at its full potential. The United States’ NRU is approx. 4%-5%

Why Unemployment is bad Okun’s Law- Every 1% increase in the u% causes a 2% decline in Real GDP. The burden of unemployment is not equally shared in society. It causes social unrest and is hard on individuals and families.

Types of Unemployment Frictional Structural Cyclical “between jobs”, voluntary, good for individuals and society Seasonal Mall Santas, Schlitterbahn Life-guards, Ride operators at Fiesta Texas, Golf-pros in Alaska during January. Structural Associated with lack of skills or declining industry (ex. High school dropouts, type-writer repairmen). Think “Creative Destruction” Cyclical Associated with downturns in business cycle. Bad for society and individuals.

Unemployment Quiz In each case is it Cyclical, Frictional, or Structural Computer programmer – laid off due to recession Newspaper editor leaves NYC for LA Recent college graduate needs to start his career Email makes the U.S. Postal workers obsolete Cashier laid off as sales continue to decline

Criticisms of the Unemployment Rate What is wrong with the unemployment rate? misdiagnose the actual unemp. rate because: Discouraged job seekers- Some people are no longer looking for a job because they have given up. Part-Time Workers- Someone who wants more shifts but can’t get them is still considered (fully) employed. Illegal Labor- Many people work under the table. 18 18

2006 Practice FRQ 19 19