Fluctuations in Economic Output, Unemployment, and Inflation

The Business Cycle The phases of the business cycle are: Recovery or Expansion, Peak or Boom (shaded green) Recession or Contraction trough or Depression (blue shaded areas). Time Real GDP Business peak Depression or trough Recession Recovery Business peak Depression or trough Trend line

Ups and downs characterize business activity. There has been an upward trend in real GDP in the United States and other industrial nations. The Business Cycle Cycles are irregular Source: Economic Report of the President, various issues. Annual growth rate of real GDP Long-run growth rate (approx. 3%)

Economic Fluctuations and the Labor Market

4 Labor Market Classifications 1. Employed – a person (16 years old or over) who is working for pay at least one hour per week, self employed, or, working 15 hours or more each week without pay in a family-operated enterprise. 2. Unemployed – a person not currently employed who is either actively seeking a job, or, waiting to begin or return to a job. 3. Civilian Labor force – civilians (16 years and older) who are either employed or unemployed. 4. Not in the labor force – persons (16 years and older) who are neither employed nor unemployed (like retirees, students, homemakers, or disabled persons).

The figures below (in millions) are for the U.S. during the year Population (age 16 and over) Civilian pop. (age 16 and over) Employed Unemployed 7.0 c. Calculate the employment/ population ratio b.Calculate the labor force participation rate. a.Calculate the unemployment rate

U.S. Employment and Unemployment, 2012 Total adult population over the age of million In the labor force154.9 million (63.7%) Employed142.4 million Unemployed12.5 million Out of the labor force88.3 million (36.3%)

Labor Force Participation Rate = # in the Labor Force Civilian population (16+) Economic Fluctuations and the Labor Market The non-institutional civilian adult population is grouped into two broad categories: Persons not in the labor force, and, persons in the labor force. Employed + Unemployed Recall the Labor Force = To be classified as unemployed, one must either be on layoff or actively seeking work. Rate of Unemployment = # Unemployed # in the Labor Force

The definition of unemployed involves some subjectivity. Some argue the employment/population ratio is a better indicator of job availability than the unemployment rate. Unemployment and Measurement Problems Employment / Population Ratio = # employed Civilian population (16+)

Total adult population over the age of million In the labor force154.9 million (63.7%) Employed142.4 million Unemployed12.5 million Out of the labor force88.3 million (36.3%)

Total adult population over the age of million In the labor force154.9 million (63.7%) Employed142.4 million Unemployed12.5 million Out of the labor force88.3 million (36.3%)

Total adult population over the age of million In the labor force154.9 million (63.7%) Employed142.4 million Unemployed12.5 million Out of the labor force88.3 million (36.3%)

U.S. Population, Employment, and Unemployment: 2001 Civilian population 16 and over Civilian labor force Employed Employees Self-employed workers Unemployed New entrants Reentrants Lost last job Quit last job Laid off Not in the labor force Household workers Students Retirees Disabled Labor Force Participation Rate = Civilian labor force Civilian population (16+) = 66.9% Employment / Population Ratio = Number employed Civilian population (16+) = 63.8% Rate of Unemployment = Number unemployed Civilian labor force = 4.8% million million 70.1 million million 6.7 million

U.S. Population, Employment, and Unemployment: 2004 Civilian population 16 and over Civilian labor force Employed Employees Self-employed workers Unemployed New entrants Reentrants Lost last job Quit last job Laid off Not in the labor force Household workers Students Retirees Disabled Labor Force Participation Rate = Civilian labor force Civilian population (16+) = 66.0% Employment / Population Ratio = Number employed Civilian population (16+) = 62.3% Rate of Unemployment = Number unemployed Civilian labor force = 5.5% million million 76.0 million million 8.1 million = = =

U.S. Population, Employment, and Unemployment: 2006 Civilian population 16 and over Civilian labor force Employed Employees Self-employed workers Unemployed New entrants Reentrants Lost last job Quit last job Laid off Not in the labor force Household workers Students Retirees Disabled Labor Force Participation Rate = Civilian labor force Civilian population (16+) = 66.4% Employment / Population Ratio = Number employed Civilian population (16+) = 63.2% Rate of Unemployment = Number unemployed Civilian labor force = 4.6% million million 77.4 million million 7.0 million = = =

Labor Force Participation Rate = Civilian labor force Civilian population (16+) = 66.9% Employment / Population Ratio = Number employed Civilian population (16+) = 63.8% Rate of Unemployment = Number unemployed Civilian labor force = 4.8% Labor Force Participation Rate = Civilian labor force Civilian population (16+) = 66.0% Employment / Population Ratio = Number employed Civilian population (16+) = 62.3% Rate of Unemployment = Number unemployed Civilian labor force = 5.5% = = = Labor Force Participation Rate = Civilian labor force Civilian population (16+) = 66.4% Employment / Population Ratio = Number employed Civilian population (16+) = 63.2% Rate of Unemployment = Number unemployed Civilian labor force = 4.6% = = = = = =

Fluctuations in the Unemployment Rate:

The labor force participation rate of women has been steadily increasing for several decades. During the same period the rate of men has been falling. Labor Force Participation Rate of Men and Women: Labor Force Participation Rate of Men and Women Source: % 83% 74 % 33 % 38 % 46 % 58 % ––––––– Men ––––––– –––––– Women –––––– % 76 % 59 %

The Unemployment Rate By Gender:

Little difference in the rate of unemployment between men and women. Rate for persons under age 25 is much higher than for both Unemployment Rate, 2006 Source: All workers 16.9 % 8.7 % 4.6 % 13.8 % 7.6 % –– Men aged –– The Unemployment Rate By Age and Gender: 2006 All men All women –– Women aged –– % 4.6 % 3.7 %

The Unemployment Rate For Women, by Age:

The Unemployment Rate By Race and Ethnicity:

ReasonPercentage New Entrants10.8% Re-entrants28.5% Job Leavers8.1% Job Losers: Temporary8.5% Job Losers: Non-Temporary44.1% Reasons for Being Unemployed

Source: Composition of the Unemployed by Reason There are various reasons why persons were unemployed in A little less than two-fifths (39.1%) of the unemployed were dismissed from their previous jobs. 43.6% of the unemployed were either new entrants or reentrants into the labor force. Dismissed from previous jobs 39.1% Job leavers 12.5 % New entrants 9.5% Reentrants 34.1% On layoff 13.3%

Length of TimePercentage Under 5 weeks23.2% 5 to 14 weeks22.8% 15 to 26 weeks16.7% Over 27 weeks37.3% Length of Unemployment, May 2013

1. Frictional 1. Frictional 2. Structural 2. Structural 3. Cyclical 3. Cyclical 4. Seasonal 4. Seasonal temporary job less business job replaced between jobs

1. Frictional? 1. Frictional? 2. Structural? 2. Structural? 3. Cyclical? 3. Cyclical? Deals with which type? Deals with which type?

1. A student who decides at mid- semester to devote the rest of the term to studying quits her part-time job 1. A student who decides at mid- semester to devote the rest of the term to studying quits her part-time job 2. A graphic artist who is out of work because a computer now does her job. 2. A graphic artist who is out of work because a computer now does her job. 3. A waiter who quits his job and is applying for the same type of work in a restaurant where morale is better. 3. A waiter who quits his job and is applying for the same type of work in a restaurant where morale is better.

4. The son of a local farmer who works 20-hour weeks without pay on the farm while waiting for a job at a nearby factory. 4. The son of a local farmer who works 20-hour weeks without pay on the farm while waiting for a job at a nearby factory. 5. A travel agent who is laid off because the economy is in a slump and vacation travel is at a minimum. 5. A travel agent who is laid off because the economy is in a slump and vacation travel is at a minimum. 6. A plumber who works 5 hours per week for his church (on a paid basis) until he can get a full-time job 6. A plumber who works 5 hours per week for his church (on a paid basis) until he can get a full-time job

1. Frictional 1. Frictional 2. Structural 2. Structural but no Cyclical but no Cyclical At full employment there will still be some: At full employment there will still be some:

actual unemployment may only get as low as actual unemployment may only get as low as 4 – 5 % 4 – 5 %

Ups and downs characterize business activity. There has been an upward trend in real GDP in the United States and other industrial nations. The Business Cycle Cycles are irregular Share of labor force unemployed Natural rate of unemployment Actual rate of unemployment

Unemployment Across Economies Recently, the unemployment rate in the U.S. and Japan has been lower than in major European economies. Higher unemployment benefits, less flexible bargaining, and more regulated labor markets of Europe explain this. 5.8 % 8.2 % 11.2 % 3.1 % 7.5 % 10.6 % 19.9 % Spain Italy Germany Japan Average Unemployment Rate ( ) France U.K. U.S. Source: Economic Outlook, OECD (Dec. 2000).

5.8 % 8.2 % 11.2 % 3.1 % 7.5 % 10.6 % 19.9 % Spain Italy Germany Japan Average Unemployment Rate ( ) France U.K. U.S. Source: Economic Outlook, OECD (Dec. 2000). 5.1 % 8.6 % 10.6 % 4.2 % 6.5 % 10.5 % 14.6 % Spain Italy Germany Japan Average Unemployment Rate ( ) France U.K. U.S. Source: Economic Outlook, OECD (June 2004). Unemployment Across Economies

U.S. and Japan lower than major European economies. Higher unemployment benefits, less flexible collective bargaining, and more regulated labor markets in Europe. 4.9 % 8.5 % 9.7 % 4.6 % 5.4 % 9.2 % 11.6 % Spain France U.K. Japan Average Unemployment Rate ( ) Italy Germany U.S. Source: Economic Outlook, OECD (June 2007).

Actual and Potential GDP Potential output : Maximum sustainable output level consistent with the economy’s resources, (on the production possibilities curve.) Actual and potential output will be equal when the economy is at full employment.

Here we illustrate both actual and potential GDP. Note the gap (shaded area) between actual and potential GDP during periods of recession. Historically Speaking Real GDP (billions of 2000 $) 1970 recession recession 1980 recession 1982 recession recession 2001 recession 1960 recession 8,000 6,000 4,000 2, ,000 Potential GDP 12,000 Actual GDP

a. a person who is not working but applied for a job at Wal- Mart last week b. a person working part-time who is searching diligently for a full-time job c. an auto worker vacationing in Florida during a layoff at a General Motors plant who expects to be recalled in a couple of weeks d. a 17-year-old who works six hours per week as a route person for the local newspaper e. homemaker working 70 hours a week preparing meals and performing other household services f.a college student who spends between 50 and 60 hours per week attending classes and studying g.a retired Social Security recipient Classify each of the following as (a) employed, (b) unemployed, or (c) not in the labor force: a a b b b c c c

2.Suppose there was a country with an adult (age 16 and over) population of 1,000, of which 100 were unemployed and 700 were employed. Which of the following is true? a.The employment population ratio is 87.5 percent. b.The labor force participation rate is 70 percent. c.The unemployment rate is 12.5 percent. d.There are 700 individuals in this country’s labor force. 3.The type of unemployment caused by changes in the business cycle is a. cyclical b. natural c. frictional d. structural. 4.Frictional unemployment is the result of a.not enough jobs for everyone to be employed. b.unemployed workers’ skills not matching those needed for the available jobs. c.a decline in the demand for labor, such as during a recession. d.imperfect information and temporary periods of unemployment while workers are changing jobs. 1. Which of the following individuals would be considered unemployed by the official government definition? a. George, who returned to graduate school after failing to find a job the last four months b. Gwen, a medical student, who is still in college and is not working c. Morgan, who is employed part-time but desires a full-time job d. Ralph, an auto worker vacationing in Florida during a layoff at a General Motors plant.

5.Suppose there was a country with an adult (age 16 and over) population of 1,000, of which 100 were unemployed and 700 were employed. Which of the following is true? a.The employment population ratio is 87.5 percent. b.The labor force participation rate is 70 percent. c.The unemployment rate is 12.5 percent. d.There are 700 individuals in this country’s labor force. 6.The type of unemployment caused by changes in the business cycle is a. cyclical b. naturalc. frictional d. structural. 7.Frictional unemployment is the result of a.not enough jobs for everyone to be employed. b.unemployed workers’ skills not matching those needed for the available jobs. c.a decline in the demand for labor, such as during a recession. d.imperfect information and temporary periods of unemployment while workers are changing jobs.

8.The labor force participation rate of women in the United States has been a.increasing for several decades. b.decreasing for the past several decades after increasing dramatically in the early 1900s. c.approximately constant during the last three decades. d.decreasing since the early 1900s. 7.Which of the following individuals would be considered unemployed by the official government definition? a. George, who returned to graduate school after failing to find a job the last four months b. Gwen, a medical student, who is still in college and is not working c. Morgan, who is employed part-time but desires a full-time job d. Ralph, an auto worker vacationing in Florida during a layoff at a General Motors plant.