1 Business Cycles and Unemployment Economics for Today by Irvin Tucker, 6 th edition ©2009 South-Western College Publishing

2 What puzzles will I learn to solve? What is the difference between a recession and a depression? Is a worker who has given up searching for work counted as unemployed? Can an economy produce more output than its potential?

3 This chapter will answer these questions: How are cycles measured? What causes business cycles? What is unemployment?

4 What is a business cycle? Alternating periods of economic growth and contraction, which can be measured by changes in real GDP

5 What are the four phases of a business cycle? Peak Recession Trough Recovery

6 What is a peak? The phase of the business cycle during which real GDP reaches its maximum after rising during a recovery

7 What is economic growth? An expansion in national output measured by the annual percentage increase in a nation’s real GDP

8 Why is growth an economic goal? It increases our standard of living - it creates a bigger “economic pie”

9 What is a trough? The phase of the business cycle in which real GDP reaches its minimum after falling during a recession

10 What is a recession? A downturn in the business cycle during which real GDP declines

11 How long before a downturn is a recession? At least two consecutive quarters in which GDP declines

12 When is a downturn considered a depression? The term depression is primarily an historical reference to the extreme deep and long recession of the early 1930’s

13 What is a recovery? An upturn in the business cycle during which real GDP rises

14 Hypothetical Business Cycle Peak RecessionRecovery Real GDP per year Growth trend line Trough

15 Severity of Post-World War II Recessions Recession DatesDuration% Decline in GNPPeak Unemployment Rate Nov 1948-Oct % July 1953 – May Aug 1957 – Apr Apr 1960 – Feb Dec 1969 – Nov Nov 1973 – Mar Jan 1980 – July July 1981 – Nov July 1990 – Mar Mar 2001 – Nov Average

Business Cycles in the U.S Long-term average growth Annual real GDP growth Zero growth

17 What are the three types of economic indicators? Leading Coincident Lagging

18 What is a leading indicator? Variables that change before real GDP changes

19 Leading Indicators Changes in business and consumer credit New orders for plant and equipment New consumer goods orders Unemployment claims Delayed deliveries New business formed Average workweek New building permits Changes in inventories Material prices Stock prices Money supply

20 What is a coincident indicator? Variables that change at the same time that real GDP changes

21 Coincident Indicators Nonagricultural payrolls Personal income Industrial Production Manufacturing and trade sales

22 What is a lagging indicator? Variables that change after real GDP changes

23 Lagging Indicators Unemployment rate Duration of unemployment rate Labor cost per unit of output Inventories to sales ratio Outstanding commercial loans Commercial credit to personal income ratio Prime interest rate

24 U.S.JapanCanadaU.K.GermanyMexicoFranceChina Russia 10

25 What is the civilian labor force? People 16 years or older who are either employed or unemployed, excluding members of the armed forces and people in institutions

26 Who is considered employed? Anyone who works at least one hour a week for pay or at least 15 hours per week as an unpaid worker in a family business

27 What causes unemployment? When total spending falls, businesses will find it profitable to produce a lower volume of goods and avoid unsold inventory

28 Who is considered unemployed? Anyone who is 16 years of age and above who is actively seeking employment

29 Total Population age 16 and over Not in Labor Force Not in Labor Force Armed forces Household workers Students Retirees Persons with disabilities Institutionalized Discourage workers Civilian labor force Employed Employees Self-employed Unemployed New entrants Re-entrants Lost last job Quit last job Laid off

30 What is the unemployment rate? The percentage of people in the labor force who are without jobs and are actively seeking jobs

31 Unemployment rate unemployed civilian labor force X 100 =

32 How is the unemployment rate calculated? 60,000 households are surveyed each month

33 Who is a discouraged worker? A person who wants to work, but who has given up searching for work

34 What is underemployment? People working at jobs below their level of skills

35 What are criticisms of the unemployment rate? Does not include discouraged workers Includes part-time workers Not measure underemployment

The U.S. Unemployment Rate

37 What are the types of unemployment? Seasonal Frictional Structural Cyclical

38 What is seasonal unemployment? Unemployment caused by recurring changes in hiring due to changes in weather conditions

39 What is frictional unemployment? Normal search time required by workers with marketable skills who are changing jobs, entering, or re-entering the labor force

40 What is structural unemployment? A mismatch of the skills of workers out of work and the skills required for existing job opportunities

41 What is cyclical unemployment? Unemployment caused by the lack of jobs during a recession

42 What is full employment? Unemployment equals the sum of seasonal, frictional, and structural unemployment

43 What is considered full employment? The natural rate of unemployment changes over time, but today it is considered to be about 5%

44 U.S.JapanCanadaU.K.GermanyItalyFranceSwitzerland % 9.0% 4.1% 4.6% 5.4% 6.3%6.8% 8.1%

45 What is the GDP gap? The difference between full-employment real GDP and actual real GDP

46 What is the cost of unemployment? The GDP gap

47 Conclusion? The gap between actual and potential real GDP measures the monetary losses of real goods and services when at less than full employment

48 END