Economic Costs of Unemployment

8 - 2 GDP Gap and Okun’s Law The basic loss of unemployment is forgone output. This is a set of goods and services that is forever lost.This is a set of goods and services that is forever lost. We will be producing inside the PPC.We will be producing inside the PPC. We measure this as the GDP GapWe measure this as the GDP Gap. Potential GDP is the capacity of the economy assuming the Natural Rate of Unemployment. The growth of the Potential GDP assumes the normal growth rate of the real GDP.

8 - 3 GDP Gap and Okun’s Law Approximately a 2% GDP Gap occurs. For every 1% unemployment exceeds the natural rate... exceeds the natural rate... GDP GAP The amount by which actual GDP falls short of potential GDP falls short of potential GDP Arthur Okun first to quantify the idea:

8 - 4 GDP Gap and Okun’s Law GDP Gap for recent years

8 - 5 GDP Gap and Okun’s Law The higher the unemployment rate the larger the GDP Gap. So… if the rate of unemployment is 4.3% and we assume a natural unemployment rate of 4%, we can use Okun’s Law to calculate a loss of $64.8 billion (.003 x 2 x $10.8 Trillion) But…if the rate of unemployment is 5.2% and we assume a natural unemployment rate of 4%, we use Okun’s Law to calculate a loss of $259.2 billion. (.012 x 2 x $10.8 Trillion)

8 - 6 GDP Gap and Okun’s Law At times, the economy’s actual output will exceed its potential— “negative” GDP gap. … when the statistics don’t agree with what’ happening because some facts are lost or missed. … when the statistics don’t agree with what’ happening because some facts are lost or missed. … Extra shifts of workers, capital equipment used beyond its design capacity, overtime work and moonlighting are common statistics that cannot be accurately counted. In , an economic expansion caused actual GDP to exceed potential GDP. This condition eventually caused inflation and could not be sustained.

8 - 7 Unequal Burdens of Unemployment OccupationOccupation AgeAge Race and EthnicityRace and Ethnicity GenderGender EducationEducation DurationDuration

Dec 2007 DATA Source: Labor force: 153,866,000Employed 146,211,000Unemployed 7,078,000 Labor force participation rate: 66.0% Unemployment Rate 4.6% Discouraged 369,000

Is There A Social Cost To Extended Unemployment? Non-Economic Costs of Unemployment Cyclical Unemployment, when high, causes social problems. Cyclical Unemployment, when high, causes social problems. 1. People out of work become depressed and crime rates rise. 2. Violence in the home rises as well because of the frustration factor. 3. Families suffer and often fall apart. 4. Severe depression can cause major political and social change. The Great Depression programs of the New Deal changed American thinking about the role of government in aiding citizens when they are needy. The Great Depression programs of the New Deal changed American thinking about the role of government in aiding citizens when they are needy.

Social Cost of Unemployment FBI crime statistics show that both property crime and violent crime increased between 1985 and 1991 and fell dramatically from 1993 to 2003 in step with the decrease in unemployment. Crime rates move with the business cycle…rising during periods of high unemployment and falling during periods of low unemployment. Bureau of Justice Statistics