Unemployment and Okun’s Law AP Macro Economics 2301 © Robin Foster

Unemployment formulas to know Unemployment rate= employed x100 labor force Labor force=employed +unemployed Labor force participation rate=labor force x 100 working age pop.

Jobs and Unemployment Total population of the USA. Working Age population is the total number of people aged 16 and older who are not in jail, hospital, institutionalized or in the military. Civilian Labor Force number of persons employed and unemployed. Unemployed those without jobs, and looking for work.

Civilian Labor Force Start with population of the USA. -those under 16 years old -full time military -institutionalized and in prison This leaves you with the “non institutionalized adult civilians” -retired persons -homemakers -full time students over 16 -discouraged workers, not looking for work This leaves you with the Civilian Labor Force. This includes: Employed or part time, employed and unpaid workers working in a family business, those on sick leave, strike or on vacation, on the 12th of the month.

UNEMPLOYMENT RATE The percentage of people in the labor force who are unemployed. Too low of an unemployment Rate is just as bad as one that Is too high. I need a job I Unemployment rate=number unemployed x 100 labor force Got Jobs?

Unemployment rate determination problems The BLS does a survey of 60,000 homes to determine who is employed and not-employed. Part time workers are considered fully employed. Discouraged workers are not counted in labor force-leads to under reporting of unemployment rate.

Labor Force Participation RATE The percentage of the working age population who are members of the labor force. Discouraged workers-do not have jobs, can work but are not really looking for work within the past 4 weeks. Full time-35 or more hours per week Part time-under 35 hours per week Involuntary part time-looking for a full time job, but are employed part time

Part time workers Work less than 35 hours a week. Part time workers are counted in labor statistics Some work part time because they can’t work full time, some work part time while working for full time work.

Discouraged workers I’m not looking for a job, I give up. A person who does not have a job, is available and willing to work but has not looked for a job in 4 weeks.

Unemployment rates 0-3%-overextended economy like WWII 4-5%-probably at full-employment. 6-9%-recession 25%-depression

Full employment or the natural rate of unemployment (NRU) Does not mean zero unemployment. NRU occurs when job seekers equal job vacancies. Everyone who wants a job has one. The NRU has changed over time. In the 60’s it was 6% today it is 4-5%

Why has the NRU Changed? Portion of young workers have declined. Growing temp agencies and internet workers. Work requirements tied to new welfare laws. Doubling of prison population since 1985, removed high unemployment individuals from the labor force.

Sources of unemployment Job losers-persons fired or laid off. Job leavers-people who quit their jobs-either get better job or leave labor force. Entrants-enter work force either after school, will be unemployed until they get a job. Reentrants-someone who previously had a job, quit, left the labor force and now wants a job again.

Types of unemployment Good or okay unemployment: 1. Frictional-in between jobs due to new opportunity, new lifestyle, education levels. 2. Seasonal-waiting for correct season to conduct trade and know interruption is temporary and natural. Wages and hours are planned accordingly.

Types of Unemployment Bad unemployment: 1. Cyclical-the business cycle has turned and business is bad. Seek government help. 2. Structural-technology and times have changed, therefore what we do no longer fits the market. Now what?

GDP Gap and Okun’s Law When the economy fails to create enough jobs for all who are able and willing to work, potential production of goods and services is irretrievably lost.

Okun’s Law and GDP Gap Macroeconomist Arthur Okun was the first to quantify the relationship between the unemployment rate and the GDP gap.

Okun’s Law Okun’s Law— For every 1% by which the actual unemployment rate exceeds the natural rate, a GDP gap of about 2% occurs.

Okun’s Law Example: In 1992 the actual unemployment rate was 7.4%. The natural unemployment rate was 6%. 7.4-6=1.4 1.4x2=2.8% of potential GDP (in real dollars)

Okun’s Law If the GDP in 1992 was $6300 trillion. Based on Okun’s law 2.8% of potential GDP was lost? How much was GDP was lost in 1992? 2.8% x $6300 trillion-$176 billion

Okun’s Law Potential GDP can occasionally be exceeded, but the excess of actual over potential GDP typically causes inflation and cannot be sustained indefinitely.