UNEMPLOYMENT INTEREST RATES

Identifying Unemployment Total population Working Age Non-working Age Working age population total number of people aged 16 years and over who are not in a jail, hospital, or some other form of institutional care, or in the army. Non-Working Age Population Total number of people under 16 years of age, living in institutions, or in the military

Identifying Unemployment The working-age population those in the labor force those not in the labor force. Labour force Number employed Number unemployed

Identifying Unemployment Survey Criteria for a nationally representative subset of the population employed: all persons who, during the week before the survey: Worked at least 1 hour in a paid job or 15 hours unpaid in family business. Were not working but who had jobs from which they were temporarily absent. E.g. maternity leave, sick leave, etc

Identifying Unemployment Unemployed: all persons who, during the week before the survey: Had no employment Were available for work and either: Had made efforts to find employment during the previous four weeks, or Were waiting to be recalled to a job from which they had been laid off. Perhaps the most difficult point in this chapter to get across to students is explaining the difference between the layperson’s definition of unemployment and unemployment as measured by the Bureau of Labor Statistics. The layperson typically considers anyone who is not working as unemployed. It is worth reemphasizing that a person is only considered officially unemployed if the person is not working but also is actively seeking employment. Here is a good opportunity to ask students a direct question to which they will happily provide several answers. Why might someone be not working and not looking for work? Students will no doubt point to some of the most obvious answers: full‐time student, homemaker, retired etc.

How Employment Status is Measured Yes Worked one or more hours for pay? Employed No Yes Temporary lay off? Unemployed No Searched for work? Yes Unemployed No Not in the Labour force

Identifying Unemployment Two Main Labor Market Indicators The unemployment rate The labor force participation rate Unemployment is an emotionally charged subject and is a good one for reinforcing the important point that economics is positive in contrast to normative. Economists do not make normative judgments as to whether unemployment is good or bad; rather they explain why unemployment exists and what determines its rate. Some students mistakenly compute the unemployment rate as the number unemployed divided by the number employed. Make sure to explain that economists consider the labor force to include not only those who are employed but also those who are unemployed and looking for work.

Identifying Unemployment Unemployment rate Percentage of labor force that is without a job

Identifying Unemployment Labor-force participation rate Labour force refers to the number of people in the population who have a job, or are looking for one Percentage of the total adult population that is in the labor force Fraction of the population that has chosen to participate in the labor market

Identifying Unemployment Alternative Measures of Unemployment The official definition of unemployment omits two types of labor: Marginally attached workers Part-time workers

Identifying Unemployment A marginally attached worker is a person who does not have a job, is available and willing to work, has not made specific efforts to find a job within the previous four weeks, but has looked for work sometime in the recent past. Discouraged worker is a marginally attached worker who has not made specific efforts to find a job within the previous four weeks because previous unsuccessful attempts were discouraging.

Identifying Unemployment Part-Time Workers Full-time workers are people who usually work 35 hours or more a week. Part-time workers are people who usually work less than 35 hours a week. Part-time for economic reasons are people who work 1 to 34 hours per week but are looking for full-time work. (Also called involuntary part-time workers)

Problems in Measuring Unemployment Treatments of Involuntary part-time workers Discouraged workers

Problems in Measuring Unemployment Involuntary part-time workers May want to work more hours Classification into ‘employed’ category understates unemployment problem

Problems in Measuring Unemployment Discouraged workers Would like to work Given up looking for work Classified as ‘not in the labour force’, instead of ‘unemployed’ Effect on the measurement of the unemployment rate? Include or not include in the measure of unemployment rate?

Frictional Unemployment Seasonal Unemployment Structural Unemployment Types of Unemployment Frictional Unemployment Seasonal Unemployment Structural Unemployment Cyclical Unemployment

Frictional Unemployment Short-term unemployment People who are between jobs Entering for the first time Re-entering after period of absence Not so critical Use up savings Borrow from relatives, friends, etc Benefits of Frictional unemployment?

Frictional Unemployment Benefits of frictional unemployment? Find better-suited jobs Higher incomes Firms have more productive workers Society has more goods and services

Seasonal Unemployment Short-term joblessness related to: Weather Tourist patterns Not so critical Workers typically compensated for off-season Predictable Complicates interpretation of unemployment data

Structural Unemployment Mismatch between job-seekers and employers Skills Geography 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

Cyclical Unemployment This refers to the joblessness that arises from changes in production over the business cycle Occurs when economy goes into recession and total output falls 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?

Economic Costs of Unemployment Lost Output and incomes Borne mostly by unemployed May be borne by employed also if government taxes incomes of employed populations to cater for unemployed.

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 Effects on businesses and economy nominal versus real Effects on businesses and economy

Real and Nominal Interest rates Interest is the payment made by individuals, firms and businesses for the use of money Cost of borrowing money When an individual deposits money in a bank in the present, the bank returns that money sometime in the future, with interest Future GHCs may however have a different value from current GHCs

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

Real and Nominal Interest Rates Interest rate as usually reported Without a correction for the effects of inflation Real interest rate Interest rate corrected for the effects of inflation = 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.

Interest rates Nominal interest rate Always exceeds the real interest rate, in practice Exception? Economies often experience rising consumer price levels in every year

Discussion Question When deciding how much of their income to save for retirement, should workers consider the real or the nominal interest rate that their savings will earn?

Next Class Dr Bekoe takes over with remainder of semester IA set for 19th March at 12pm at (Venue to be determined) Format Multiple Choice Questions Scope Lectures Weeks 1-6