Potential GDP Time Total Production Every year we produce more than the previous year Full Employment: zero unemployment, no excess capacity Above Full employment Below Full employment At Full employment Potential GDP

2 Real GDP the economy produces when workers and factories are fully employed

Growth Increases in GDP come from: More workers More factories and/or Better technology More workers: Growth in the labor force More factories: Growth in the country’s stock of capital Improvements in technology More workers: Growth in the labor force More factories: Growth in the country’s stock of capital Improvements in technology Real GDP = Hours of work X Output per hour Real GDP = Hours of work x Labor productivity Growth rate of potential GDP = Growth rate of labor force x Growth rate of labor productivity

4 4 Example Hours of work per year = 250 B Labor productivity = $56 per hour. Real GDP= 250 B *$56 per hour =$14T Real GDP = Hours of work x Labor productivity

Unemployment A measure of wasted resources: Wasted Labor hours and/or wasted capital 8/13/2015(c) 2002 Claudia Garcia-Szekely5

Measuring Unemployment Since  Unemployment is measured by the Bureau of Labor Statistics (BLS) part of the Department of Labor.  Data is compiled from monthly surveys (60,000 households) Current Population Survey  Data does not come from unemployment insurance (UI) records… UI is one of many factors used. 8/13/2015(c) 2002 Claudia Garcia-Szekely6

Employed  Have a job: Full time, part time or temporary work.  Worked at least ONE hour or more for pay or profit during the survey week.  Worked 15 hours or more without pay in a family business.  Temporarily absent from work Illness, vacation, labor dispute, etc. 8/13/2015(c) 2002 Claudia Garcia-Szekely7

Unemployed  Do not have a job.  Available for work: Made specific efforts to find a a job.  Not working, waiting to be called back to a job from which they were temporarily laid off. 8/13/2015(c) 2002 Claudia Garcia-Szekely8

Not in the Labor Force  Those who have no job and are not looking for a job. Retired Full time students Home makers. Volunteers  Institutional Population. Mental Institutions Prison Military 8/13/2015(c) 2002 Claudia Garcia-Szekely

8/13/2015 >

> LF = Employed + Unemployed Unemployment Rate (U r ) = Unemployed Labor Force X 100 = Labor Force Active Population X 100 Labor Force Participation Rate 154M 14M 9.09% 140M 14M 154M 243.3M 65.7%

SEE PROGRESSIONPROGRESSION Unemployment 8/13/2015(c) 2002 Claudia Garcia-Szekely12

Is Unemployment Measured Correctly? No. There are three problems with the way we measure unemployment 8/13/2015(c) 2002 Claudia Garcia-Szekely14

1. Discouraged Workers A discouraged worker is someone who gave up looking for a job.  NOT counted as unemployed  Should be included as unemployed: they are part of the active population and would work if a job was available. 8/13/2015(c) 2002 Claudia Garcia-Szekely15

1M give up looking for work Employed Unemployed LF = =154 U r = 16/154=10.4% New LF = 154-1=153 New U r = 15/153=9.8% Unemployed 16-1=15

Discouraged Worker Effect. The longer the recession lasts, the less accurate the Ur

8/13/2015 (c) 2002 Claudia Garcia-Szekely 18 Discouraged Workers Thousands

Is Unemployment Measured Correctly? No. There are three problems with this statistic: 1. The Discouraged Worker Effect 2. The treatment of part time work as full time. 8/13/2015(c) 2002 Claudia Garcia-Szekely19

Employed: Worked at least ONE hour or more for pay or profit  Some PT workers would work full time if a job was available.  They should be counted –at least partially- as unemployed.

8/13/2015 (c) 2002 Claudia Garcia-Szekely 21

Is Unemployment Measured Correctly? No. Three problems: 1. The Discouraged Worker Effect 2. The treatment of part time work as full time. 3. Underemployment A person working on a job that does not use his/her full potential.

 Underemployed individuals are counted as employed even though their skills are not.  There are no official statistics on underemployment Difficult to develop objective criteria. Employed: Worked at least ONE hour or more for pay or profit

The Unemployment Rate:Three Misrepresentations 8/13/2015(c) 2002 Claudia Garcia-Szekely24 Discouraged Workers Not Unemployed Underestimate true Unemployment Underestimate true Unemployment Part Time Workers Counted as employed Inflate Number employed Underestimate true Unemployment Under- employed Workers Counted as employed

Employed? Unemployed? Not in the LF? 1. After 14 months, Mrs. Smith gives up searching for a job. 2. Claudia reports wanting to work, but she made no specific efforts to find employment. 3. John works as a clerk in a government office. 4. Harry is in active duty in the military. 5. Raul was paid for 2 hours work during the survey week. 6. Joe is retired and volunteers his time at a hospital. 7. Anthony was given a 2 day suspension from work for being late. 8. Joseph works two days a week at a restaurant. 9. Mary, a part time teacher, reports searching unsuccessfully for a full time job. 10. Ron, a PhD in Philosophy, drives a delivery van after searching unsuccessfully for a job. 25

5. Suppose that the active population is 230 million, the labor force participation rate is 66% and the unemployment rate is 5%. If the number of discouraged workers increases by 5 million, what does the unemployment rate become? 5. Active population is 30 million, labor force participation rate 60%, number of discouraged workers 2 million, number of people with full time jobs 13 million, number of people with part time jobs is 2 million. Calculate the unemployment rate.

Potential GDP Real GDP the economy produces when workers and factories are fully employed 27 Output produced when unemployment is zero

Unemployment is never ZERO

Three types of unemployment:  Structural: workers who do not have skills currently in demand…there is no job for them.  Frictional: workers who have the necessary skills but there is a job for them  Cyclical: workers have the necessary skills for the job, but lack of demand prevents firms from hiring them back. 8/13/2015(c) 2002 Claudia Garcia-Szekely29

Potential GDP Real GDP the economy produces when workers and factories are fully employed 30 Output produced when cyclical unemployment is zero

Unemployed due to lack of skills 1% Unemployed due to lack of skills 1% Unemployed due to recession 5% Unemployed due to recession 5% Between Jobs 4% Between Jobs 4% Zero Cyclical Frictional 4% Frictional 4% Cyclical 5% Cyclical 5% Structural 1% Structural 1% U r =10% Frictional 4% Frictional 4% Structural 1% Structural 1% Recession Ends Natural Rate of Unemployment 5% N a t u r a l R a t e o f U n e m p l o y m e n t 5 %

Unemployment increases Inequality 8/13/2015 (c) 2002 Claudia Garcia-Szekely 32 Worst2013 Teens Black or African American Hispanic Men Women White “When the economy catches a cold minorities and young people get pneumonia” Alan Blinder “When the economy catches a cold minorities and young people get pneumonia” Alan Blinder

Unemployment Costs: Okun ’ s Law 1% Unemployment = 2.5% of GDP 33 GDP*0.025 = Goods and Services lost for each 1% extra unemployment 14,000B *0.025 = 350B lost for each 1% extra unemployment

Okun’s Law: an example 2007 Ur = 4.9% GDP= 11,620b 2008 Ur = 7.2% Extra Unemployment = 7.2 – 4.9 = 2.3% Each 1% extra unemployment = 2.5% GDP % Lost GDP = 2.3(2.5) = 5.75% Lost GDP = 11,620b (5.75%)= 668B

Cyclical? Structural? Frictional? 1. Richard loses his job at UPS due to a downturn in general business conditions. 2. Mark loses his job as a parking attendant. His job was replaced by a new automated system. 3. Sarah quits her job as a hostess to look for work that is more fun. 4. Andrew quits looking for work because he does not think he can find a suitable job. 5. Nancy lost her job as a real estate agent during the housing crisis. 6. Mathew just graduated from college and does not have a job yet. 7. Pedro lost his job as software developer for a weapons manufacturer. He is looking for a new job. 8. John lost his job as a public phone repairman because his skills are no longer needed. 35

True or False? 8/13/2015 (c) 2002 Claudia Garcia-Szekely 36 1.Frictional unemployment is a "necessary" cost of a dynamic economy. 2.Someone unemployed for a long period of time due to technological change would be described as structurally unemployed.

The Natural Rate of Unemployment

8/13/2015 (c) 2002 Claudia Garcia-Szekely 38 Less than HS HS graduates Some College Bachelor Degree and higher 11.2% 7.9% 6.7% 3.8%

8/13/2015(c) 2002 Claudia Garcia-Szekely39 More women work outside the home Fewer men work outside the home 2008:73% 2008: 58.7%

Unemployment Inflation Bush Clinton Bush Oba ma 09-