Unemployment Types of Unemployment Interest rates Outline Definition and Measurement Types of Unemployment Frictional Unemployment Seasonal Unemployment Structural Unemployment Cyclical Unemployment Interest rates Real and nominal

Unemployment: Definition and Measurement Employed: those who work as paid employees, work in their own businesses or work as unpaid workers in a family member’s business. It also includes those who are not working but who had jobs from which they are temporarily absent because of illness, vacation, bad weather etc. Unemployed: Includes those who are not working, are available for work and actively looking for a job. It also includes those waiting to be recalled to a job from which they had been laid off.

Not in the labour force: Those who fit neither of the first two categories such as full-time students, homemakers or retirees. Labour force= Number of employed + Number of Unemployed This rate can be calculated for different sub-groups. Example: Assume 139.3 million people were employed and 8.1 million people were unemployed. What is the labour force and unemployment rate? Labour force= 139.3+8.1= 147.4 million Unemployment rate: (8.1/147.4)=5.5%

Frictional Unemployment Short-term unemployment experienced by People who are between jobs Entering for the first time Re-entering after period of absence It takes a lot of time to find employment- -time to prepare a convincing resume, look for the appropriate job and send a cv, wait for a response, investigate job offers and make the right decision. Classified as unemployed: searching for work but not working Not so critical; causes little hardship People may have enough savings to support themselves Borrow from relatives, friends, etc Benefits of Frictional unemployment?

Frictional Unemployment Benefits of frictional unemployment? Find better-suited jobs (spending time searching for suitable jobs) makes workers more productive Higher incomes Firms have more productive workers Society has more goods and services

Seasonal Unemployment Short-term joblessness related to: Weather Tourist patterns Seasonal factors Not so critical Workers typically compensated for off-season Construction workers are paid higher than average hourly wages to compensate for the high probability of joblessness in the winter ( rainy season) Predictable Complicates interpretation of unemployment data Pushes up the unemployment rate in certain months and pulls it down in other months. For example, during the long vacation, university students begin looking vacation jobs and thus figures reported in bloats the unemployment figures. Unemployment rates are seasonally adjusted

Structural Unemployment There may be jobs available but.. Mismatch between job-seekers and employers Skills For example: available jobs in nursing and health care providers, engineers, maths and science teachers Unemployed workers are mainly in automobile, construction and other industry jobs They do not have the skills and training to work where the jobs are- skills mismatch Mismatch could also be geographic Industry jobs could be in Tema but unemployed workers may be in the northern regions. Unemployment from these mismatches are described as structural because it arises from structural changes in the economy Dying industry (typewriter) replaced with new industries( computer) requires different skills set. Long-term problem Why?

Structural Unemployment Why is Structural Unemployment a long-term phenomenon? Takes time to learn required skill Relocate to another part of country All 3 types discussed so far arise largely from micro causes Changes in specific industries and specific labour markets rather than the overall level of production in the country These types cannot be completely eliminated People will always spend time searching for new jobs There will always be seasonal industries The structure of the economy will keep changing

Cyclical Unemployment Macroeconomic cause Occurs when economy goes into recession and total output falls Caused by the business cycle Most critical type of unemployment Requires macroeconomic policy intervention Full employment when cyclical unemployment= zero Even if frictional, seasonal and structural unemployment exists

Costs of Unemployment Economic costs Broader costs

Economic costs of Unemployment What are some economic costs of unemployment?

Broader costs of Unemployment Examples of broader costs of unemployment?

Broader costs of unemployment Psychological effects suicides, psychiatric episodes, depression Health effects High blood pressure, troubled sleep Physical effects Domestic violence, alcoholism Setbacks in achieving social goals Fairness and equality

In-class exercise Classify each of the following as employed, not employed or not in the labour force 1. Steve worked 40 hours last week in an office supply store. 2. Last week, Elizabeth worked 10 hours as a computer programmer for the National Video Company and attended night classes at the local college. She would prefer a full-time job. 3. Roger lost his job at the R-gone Manufacturing Company. Since then he has been trying to find a job at other local factories. 4. Linda is a homemaker. Last week she was occupied with her normal household chores. She neither held a job nor looked for a job. 5. Linda’s father is unable to work 6. Scott has a Ph.D. He worked full-time but does not like his job as a dishwasher. He has applied for jobs with three companies and five universities. As soon as he gets an offer, he will quit his current job. 7. Mary-Helen has been out of work for a full year. She would take a job if it was offered, but no local companies are hiring. She is not actively searching for work.

Take-Home Exercise Use the table below to answer the ensuing questions. How large is the labour force? How many discouraged workers live in this economy? How many of the citizens are not in the labour force? Compute the unemployment rate Population 60,000 Under 16 9000 Over 16 In military service 600 In hospitals 60 In prison 200 Worked one hr or more in previous week 46000 Searched for work during previous month 2140 Did not work in previous week, did not look for work, but would have taken a job if one was offered

The interest rate Definition Types; nominal versus real

The interest rate Definition Types; nominal versus real Effects on businesses and economy

Real and Nominal Interest rates The concept of interest rates involves comparing amounts of money at different time periods When you deposit money in your account, you give the bank your money now, and the bank returns the money with some interest in the future. Similarly, when you borrow money from the bank, you get the money now but you will repay the loan with interest in the future. Interest is the payment made by individuals, firms and businesses for the use of money Cost of borrowing money In both cases, the two parties acknowledge the fact that future money could have a different value than today’s money and as such, transactions regarding future money must correct for the effects of inflation.

Scenario Ama puts Ghc1000 in the bank at beginning of the year Receives Ghc1100 at end of year... Annual rate of interest= 10% Is Ama richer?

Scenario Depends on what her money can buy! Changes in price level Suppose Ama at the beginning of year could buy GTP cloth at Ghc10 per yard Her Ghc1000 was equivalent to 100 yards Is she richer? Depends on price of GTP cloth

Scenario Zero inflation 6% inflation 10% inflation 12% inflation If price remains at Ghc10, can buy 110 yards at end of year 6% inflation If price of GTP cloth is Ghc10.60, she can buy 104 yards 10% inflation If price rises from Ghc10 to Ghc11, she can buy same 100 units 12% inflation If prices rise to Ghc11.20, she can only buy 98 yards

Scenario What if prices fall by 2%? Deflation Price is now Ghc9.80 Increase in her purchasing power from 100 to 112 These examples show that the higher the inflation rate, the smaller the increase in Ama’s purchasing power If the rate of inflation exceeds the interest rate, the purchasing power falls and vice versa How much a person earns ( in terms of purchasing power) on a saving’s account depends on the interest rate and the rate of inflation.

Real and Nominal Interest Rates Interest rate as usually reported Without a correction for the effects of inflation Measures the change in dollar/cedi amounts Real interest rate Interest rate corrected for the effects of inflation The nominal and real interest rate and inflation are related as: Real Interest Rate= Nominal Interest Rate- Inflation Rate

Scenario Nominal Interest rate Inflation rate Real Interest rate 10% Purchasing power increased 6% 4% No change in purchasing power 12% -2% Purchasing power decreased

Nominal and real interest rate The nominal interest rate tells you how fast the number of dollars in your bank account rises over time The real interest rate tells you how fast the purchasing power of your bank account rises over time.

Real and Nominal Interest Rates This figure shows nominal and real interest rates using annual data since 1965. The nominal interest rate is the rate on a 3-month Treasury bill. The real interest rate is the nominal interest rate minus the inflation rate as measured by the consumer price index. Notice that nominal and real interest rates often do not move together.

Interest rates in the U.S. Economy Nominal interest rate Always exceeds the real interest rate U.S. economy has experienced rising consumer prices in every year Inflation is variable Real and nominal interest rates do not always move together Periods of deflation Real interest rate exceeds the nominal interest rate

Real and Nominal interest rates Effect of Interest Rate on businesses Business people borrow funds for businesses Pay interest on those funds from profits Effect of interest rate on profits? Effect of interest rate on borrowing and investment?

Real and nominal interest rates Effect of interest rates on economy Effect of interest rate on investment? Effect on production of goods and services...economic growth?

Next Class ECONOMIC GROWTH Economic growth defined Potential GDP and the GDP gap Growth in potential GDP Determinants of economic growth Benefits and costs of growth