HBC608 ECON203 Principles of Macroeconomics Week 5 Topic: JOBS (EMPLOYMENT) versus UNEMPLOYMENT HBC608HBC608 ECON582 Dr. Mazharul Islam Finance NotesFinance notes Finance notes 1

After studying these topics you should be able to: HBC608HBC608 HBC608 ECON582 Lesson Objectives To learn about After studying these topics you should be able to: Understand about labor force, employment, unemployment, employed, unemployed, full employment, sources of unemployment, types of unemployment, potential GDP, output gap. Calculation unemployment rate, labor force participation rate, Understand the relationship between unemployment and output gap Dr. Mazharul Islam Finance NotesFinance notes Finance notes 2

Employment and Unemployment The population is divided into two groups: The working-age population—the number of people aged 16 years and older who are not in jail, hospital, or some other institution. People too young to work (under 16 years of age) or in institutional care. The working-age population is divided into two groups: 1. People in the labor force 2. People not in the labor force

Labor Force, Employment and Employed HBC608HBC608 ECON582 HBC608 Labor Force refers all citizens 16 years of age and older who are working or looking for work. Labor force = employed + unemployed population Employment refers a simple term holding of a job for which a wage is paid, or the operating of one’s own business. A person in this situation is said to be employed. Dr. Mazharul Islam Finance NotesFinance notes Finance notes 4

Unemployment and unemployed HBC608HBC608 HBC608 ECON582 Unemployment and unemployed Unemployment refers to the number or proportion of people in an economy who are willing and able to work but are unable to get a job. A person in this situation is said to be unemployed. Unemployment rate refers the percentage of those in the labor force who are unemployed. It is equals the number unemployed divided by the number in the labor force. Dr. Mazharul Islam Finance NotesFinance notes Finance notes 5

Other Definitions of Unemployment Marginally Attached Workers A marginally attached worker is a person who currently is neither working nor looking for work but has indicated that he or she wants and is available for a job and has looked for work sometime in the recent past. A discouraged worker is a marginally attached worker who has stopped looking for a job because of repeated failure to find one.

Calculating Unemployment Rate HBC608HBC608 ECON582 HBC608 Calculating Unemployment Rate Example: In Saudi Arabia, if the number of people unemployed in 2010 was 5 million and the labor force was 155 million , here : Unemployment rate = (5/ 155) x 100 =3.2 %. Dr. Mazharul Islam Finance NotesFinance notes Finance notes 7

Labor Force Participation Rate ECON582 HBC608 HBC608HBC608 Labor Force Participation Rate Labor Force Participation Rate refers the share of the population 16 years and older working or seeking work. In 2008, the labor force was 154.6 million and the working-age population was 233.8 million. Dr. Mazharul Islam Finance notes Finance NotesFinance notes 8

Importance of Real GDP Dr. Mazharul Islam HBC608HBC608 ECON582 HBC608 Importance of Real GDP Labor force consists of employed and unemployed persons Those not working include 1) those not in the working force, and 2) those unemployed The population includes the employed unemployed people not in the labor force Dr. Mazharul Islam Finance NotesFinance notes Finance notes 9

Sources of Unemployment ECON582 HBC608 HBC608HBC608 Sources of Unemployment People become unemployed if they are Job losers Job leavers Entrants or reentrants Dr. Mazharul Islam Finance NotesFinance notes Finance notes 10

Sources of Unemployment HBC608HBC608 ECON582 Sources of Unemployment HBC608 Job losers: A job looser is someone who is laid off from a job, either permanently or temporarily. People lose their jobs for many reasons ; Some people are not a good match for their jobs. Firms fail, or a new technology destroys some types of jobs. A job looser who decided to look for a new job remains in the labor force and becomes unemployed. Dr. Mazharul Islam Finance NotesFinance notes Finance notes 11

Sources of Unemployment ECON582 HBC608 HBC608HBC608 Sources of Unemployment Job leavers: Few people quit their jobs because they want to spend time looking for better one , these job leavers become unemployed. But a Job leaver is someone who voluntarily quits a job because he or she has found a better job or has decided to withdraw from labor force. Neither of these two types of job leavers becomes unemployed. Dr. Mazharul Islam Finance NotesFinance notes Finance notes 12

Sources of Unemployment ECON582 HBC608 HBC608HBC608 Sources of Unemployment Entrants or reentrants: An entrant is someone who has just finish school and is looking for a job. Many entrants spend time looking for first job and during this period they are unemployed. A reentrant is someone who has previously had a job, has been quiet and left the labor force, and has now decided to look for a job again. Dr. Mazharul Islam Finance NotesFinance notes Finance notes 13

Types of Unemployment Four types of unemployment ECON582 HBC608 HBC608HBC608 Types of Unemployment Four types of unemployment Frictional unemployment Structural unemployment Seasonal unemployment Cyclical unemployment Dr. Mazharul Islam Finance NotesFinance notes Finance notes 14

Types of Unemployment Frictional Unemployment: HBC608HBC608 ECON582 Types of Unemployment HBC608 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. - 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. Dr. Mazharul Islam Finance NotesFinance notes Finance notes 15

Types of Unemployment Structural Unemployment: HBC608HBC608 ECON582 Types of Unemployment HBC608 Structural Unemployment: It is the unemployment that arises when there is a mismatch of skills or geographic location. Occurs because changes in tastes, technology, or competition reduce the demand for certain skills and increase the demand for other skills. Structural unemployment lasts longer than frictional unemployment. Dr. Mazharul Islam Finance NotesFinance notes Finance notes 16

Types of Unemployment Seasonal Unemployment: HBC608HBC608 ECON582 Types of Unemployment HBC608 Seasonal Unemployment: Unemployment caused by seasonal changes in labor demand during the year. For 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 smoothest out these factors Dr. Mazharul Islam Finance NotesFinance notes Finance notes 17

Types of Unemployment Cyclical Unemployment: HBC608HBC608 ECON582 Types of Unemployment HBC608 Cyclical Unemployment: It occurs because of business cycle fluctuations in output that occurs during recessions. Cyclical unemployment is the higher than normal unemployment at a business cycle trough and lower than normal unemployment at a business cycle peak. Example: A worker laid off because the economy is in a recession and is then rehired when the expansion begins experiences cycle unemployment. Government policies to stimulate aggregate demand during recessions is aimed at reducing this type of unemployment. Dr. Mazharul Islam Finance NotesFinance notes Finance notes 18

HBC608HBC608 ECON582 Full Employment HBC608 Full employment occurs when unemployment arises from frictions, seasons, and structural change exist but there is no cyclical unemployment. It is also called natural unemployment. The natural unemployment rate is natural unemployment as a percentage of labor force. Natural unemployment rate = natural unemployment x 100 labor force Dr. Mazharul Islam Finance NotesFinance notes Finance notes 19

Potential GDP& Output Gap ECON582 HBC608 HBC608HBC608 Potential GDP& Output Gap Potential GDP is the value of the real GDP when all the economy’s factors of production are employed i.e. Potential GDP is the quantity of real GDP produced at full employment. The GDP gap or the output gap is the difference between Real GDP (actual output) and Potential GDP i.e. output gap = Real GDP - potential GDP. The percentage of Output gap is the real (actual) GDP minus the potential GDP divided by the potential GDP which is always express in percentage. [(Real GDP- Potential GDP)/Potential GDP]*100 Output Gap Definition The output gap is a measure of the difference between actual output (Y) and potential output (Yf). The output gap = Y- Yf Negative Output Gap This occurs when actual output is less than potential output gap. This is also called a deflationary (or recessionary) gap. In this situation the economy is producing less than potential. There will be unemployment, low growth and / or a fall in output. A negative output gap will typically cause low inflation or even deflation. Positive Output Gap This occurs when actual output is greater than potential output. This will occur when economic growth is above the long run trend rate (e.g. during an economic boom). It will involve firms asking workers to overtime. With a positive output gap, there will be inflationary pressures. It will also tend to cause a bigger current account deficit as consumers buy more imports due to domestic supply constraints. Dr. Mazharul Islam Finance NotesFinance notes Finance notes 20

The Relationship Between Unemployment & the Output Gap HBC608HBC608 ECON582 The Relationship Between Unemployment & the Output Gap HBC608 When unemployment rate exceeds full employment rate (the natural unemployment rate), the real GDP is below potential GDP and the Output Gap is negative. When Unemployment rate is below full employment rate (the natural unemployment rate), the real GDP is above potential GDP and the Output Gap is positive. Dr. Mazharul Islam Finance NotesFinance notes Finance notes 21

Now it’s over for today. Do you have any question? HBC608 ECON582 HBC608HBC608 Now it’s over for today. Do you have any question? Dr. Mazharul Islam Finance NotesFinance notes Finance notes 22