Unemployment and the Business Cycle The Four Phases of the Business Cycle Unemployment Defined Types of Unemployment GDP Gap

I. Four Phases of The Business Cycle Expansion Phase: denotes growth in the economy; businesses, employment and price level is growing Peak Phase: highest point of the expansion phase; unemployment at its lowest point Contraction Phase: also called “recession (a period in which of GDP declines for 2 consecutive quarters)downside of expansion; unemployment grows; business downsize and make cuts Trough: “bottoming-out” of contraction phase; unemployment and firm contraction reach its lowest point

Unemployment Line of the 1930s The most frequently discussed characteristic of a recession is unemployment Unemployment statistics are based on a survey of households conducted by the Bureau of Labor Statistics (BLS), a branch of the Department of Labor There are certain people who do not work but are not considered unemployed

II. Defining and Measuring Unemployment Defining Unemployment: Employed: Any person 16 years of age or older Who works for pay, either for someone else or in his or her own business for one or more hours per week Who works without pay for more than 15 hours per week in a family enterprise (farmers) Part-time workers are considered employed Unemployed: A person 16 years old or older who is not working, is available for work, and has made specific efforts to find work during the previous 4 weeks Identifying unemployment: the Bureau of Labor Statistics (BLS) surveys 60,000 households every month

Measuring Unemployment: Labor Force = Employed + Unemployed Population = Labor Force + Not in Labor Force Unemployment Rate = _____Unemployed _______ X 100 Employed + Unemployed Labor Force Participation rate = Labor Force X 100 Population Labor force: the number of people employed plus the number of unemployed Population: 16 years and older equal to the number of people in the labor force plus the number not in the labor force Unemployment Rate: the ratio of the number of people unemployed to the total of people in the labor force Labor-force participation rate: the ratio of the force to total population 16 years old or older

III. Types of Unemployment Frictional Unemployment: Will always occur; the normal turnover of employee Workers that are between jobs, but have the skills needed to fill a job opening When workers are either searching for jobs or waiting to take jobs When people change occupations or locations, or are new entrants and reentrants Occurs in the short term (less than 5 weeks) Occurs when there is imperfect information between job seeker and employer Structural Unemployment: Will always occur Workers who becomes unemployed due to a lack of skill with new technology introduced by his or her employer Occurs when there is a mismatch of skills and available jobs, change in consumer taste for new product or change in technology These two are almost the same; in both cases there are job openings and people looking for those jobs; the difference Frictional people have the job skills to fill the job opening in structural they don’t Frictional Unemployment: have the skills necessary; Voluntarily moving from one job to another, fired from employment; just graduated from college looking for employment; or just been laid off Structural Unemployment: lack needed skills; Causes: New technology; New Resources; Change in consumer demand; Globalization; Lack of Education

Cyclical Unemployment: Workers that are unemployed as a results from the normal fluctuations in the business cycle; due to a recession Cyclical unemployment caused by a decline in total spending in the economy (occurs in the contraction stage of the business cycle) Seasonal Unemployment Unemployment that varies with the seasons of the year due to seasonal fluctuations in supply and demand for labor Unemployment is low around holiday season when businesses hire extra help Government statisticians smooth out this to help other trends

IV. The Concept of Full Employment It does not mean “zero unemployment” The level of unemployment that results when the rate of unemployment is normal, considering both frictional and structural factors The level of employment reached when there is no cyclical unemployment Natural Rate of Unemployment: The unemployment rate that exists in “normal” times; when there is neither a recession nor a boom (Real GDP = potential GDP) The long-run average unemployment rate due to frictional and structural unemployment (page 202 in text) It is a rate that is sustainable into the future ( “maximum sustainable rate”) Also call the “non-accelerating inflation rate of unemployment” The lowest rate of unemployment that will not result in inflation; when employment falls below this rate, inflation accelerates

During a recession: the actual unemployment rate rises above the natural Unemployment rate During a recession, the real GDP falls below potential GDP

V. Nature of Unemployment Reasons people are unemployed Job losers Job leavers New (or re-) entrants Long-term vs. Short-term Unemployment Hardship of unemployment depends on it’s duration; the long you are unemployed the harder it is to maintain standard of living 50% of unemployment is short-term (less than 5 weeks) 35% of unemployment last 5 to 26 weeks 15% is long-term (more than 6 months) Long-term unemployment increases during recessions and fall during booms (expansionary)

Unemployment for different groups Overall unemployment rate does not capture the long-term hardships experienced by certain groups Certain groups of workers experience long duration of unemployment and suffer great hardship and find it difficult to find work Group Unemployment Adults low Teenagers high Drop outs high Teenage minorities highest

VI. Determination of Employment Labor demand and Labor supply Labor Demand Curve: describes the behavior of firms Indicates how much labor they would demand at a given wage (the price of labor) Labor Supply Curve: Describes the behavior of the workers Shows how much labor they would supply at a given wage Real Wage: We must think of wage relative to the average price of goods Real Wage = wage Price level

V. Psychological Aspects of Unemployment Economic loss; no money Unemployment is hard on an individual’s self-respect and can destroy families (no college, smaller house, etc.) Youth can become disillusioned about their future