Business Cycles and Unemployment

Business Cycle Alternating periods of economic growth and contraction, which can be measured by changes in real GDP Four phases of a business cycle Peak Recession Trough Recovery

Peak the phase of the business cycle during which real GDP reaches its maximum after rising during a recovery Economic growth an expansion in national output measured by the annual percentage increase in a nation’s real GDP Why is growth an economic goal? It increases our standard of living - it creates a bigger “economic pie”

Trough the phase of the business cycle in which real GDP reaches its minimum after falling during a recession Recession a downturn in the business cycle during which real GDP declines Government Recession Definition at least two consecutive quarters in which GDP declines

The Depression The term depression is primarily an historical reference to the extreme deep and long recession of the early 1930’s Recovery An upturn in the business cycle during which real GDP rises

Hypothetical Business Cycle Peak RecessionRecovery Real GDP Growth trend line Trough

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 Mar Nov Average

Business Cycles in the U.S `29 `30 `35 `40 `45 `50 `55 `60 `65 `70 `75 `80 `85 `90 `95 `00 `05 ` Year Annual Real GDP Growth Rate (percent) Annual real GDP growth Long-term average growth Zero growth

Three types of economic indicators Leading Coincident Lagging Leading Indicator Variables that change before real GDP changes 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

Coincident Indicator Variables that change at the same time that real GDP changes Nonagricultural payrolls Personal income Industrial Production Manufacturing and trade sales Lagging Indicator Variables that change after real GDP changes 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

Civilian Labor Force People 16 years or older who are either employed or unemployed, excluding members of the armed forces and people in institutions 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

Primary Cause of Unemployment When total spending falls, businesses will find it profitable to produce a lower volume of goods and avoid unsold inventory Who is considered unemployed? Anyone who is 16 years of age and above who is actively seeking employment

Total Population age 16 and over 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 Not in Labor Force

Unemployment rate The percentage of people in the labor force who are without jobs and are actively seeking jobs Unemployment rate unemployed civilian labor force X 100 = Calculated 60,000 households are surveyed each month Where to find current unemployment rate?

Year Civilian non- institutional populationLabor ForceUnemployed Unemployment Rate Not in Labor Force ,577142,5835, , ,092143,7346, , ,570144,8638, , ,168146,5108, , ,357147,4018, , ,082149,3207, , ,815151,4287, , ,867153,1247, , ,788154,2878, , ,801154,14214, , ,830153,88914, ,941 Current Population Estimates Unemployment rate unemployed civilian labor force X 100 = 9.6% 14, ,889 X 100 =

Discouraged Worker a person who wants to work, but who has given up searching for work Underemployment people working at jobs below their level of skills Criticisms of the Unemployment Rate Does not include discouraged workers Includes part-time workers Does not measure underemployment

U.S. Unemployment Rate Year U.S. Unemployment Rate (percent)

Types of Unemployment Seasonal Frictional Structural Cyclical Seasonal Unemployment Unemployment caused by recurring changes in hiring due to changes in weather conditions

Frictional Unemployment Normal search time required by workers with marketable skills who are changing jobs, entering, or re-entering the labor force Structural Unemployment A mismatch of the skills of workers out of work and the skills required for existing job opportunities Cyclical Unemployment Unemployment caused by the lack of jobs during a recession

Full Employment Unemployment equals the sum of seasonal, frictional, and structural unemployment What is considered full employment? The natural rate of unemployment changes over time, but today it is considered to be about 3% - 5% GDP Gap The difference between full-employment real GDP and actual real GDP

Cost of Unemployment GDP Gap - the gap between actual and potential real GDP measures the monetary losses of real goods and services when at less than full employment `97 `98 `99 `00 `01 `02 `03 `04 `05 `06 `07 `08 `09 `10 14,000 13,500 13,000 12,500 12,000 11,500 11,000 10,500 10,000 9,500 GDP GAP (positive) Actual real GDP Potential real GDP GDP GAP (negative)