Principles of Macroeconomics Lecture 5 UNEMPLOYMENT

Unemployment  People who are looking for work but have no jobs.  ACTIVELY LOOKING is critical to the definition.

Definitions for Unemployment  Labor Force = Employed + unemployed  Unemployment Rate = number of unemployed / total labor force  Labor Force Participation Rate = labor force / population 16 and over

Definitions of Unemployment  Discouraged Workers  People who left the labor force because they could not find jobs.  Underemployed  Workers holding part-time work, but prefer full-time work OR hold jobs that are far below their capabilities.

The reasons for unemployment Frictional Unemployment Structural Unemployment Seasonal Unemployment Cyclical Unemployment

When GDP fluctuates, demand in the economy is not sufficient to provide jobs for all those who seek work. – Recession – Depression

Frictional Unemployment People in between jobs. Short period of time while changing jobs. 3% - 4% frictional employment is considered normal.

Structural Unemployment When changes in market supply or demand conditions affect major industries or regions. The part of unemployment that results from the mismatch of skills and jobs.

Causes of Structural Unemployment Decline in demand for a product Increased foreign competition Automation of production Increased raw material costs Lack of labor mobility between occupations or regions.

Seasonal Unemployment Most seasonal unemployment tends to occur in certain industries. – Hotel and catering – Tourism – Fruit picking – Christmas

Unemployment Statistics  Natural Rate of Unemployment  Level of unemployment at which there is no cyclical unemployment.  Full Employment  Level of employment that occurs when the unemployment rate is at the “natural rate.”

The Natural Rate of Unemployment  Depending on whom you talk to …  4% to 5% is considered the natural rate.  Consists of only structural and frictional unemployment.

Historic Unemployment Rates  1933 during the Great Depression – 25%  1998 – Unemployment fell to 3.9%  October 2009 – 10.2% - highest in 26 years!  March 2010 – 9.7%

3.9% Unemployment  Why wouldn’t this be good for the economy?

Wage Inflation  How do employers attract or keep employees if there is not enough workers?  Higher Wages  More Benefits  1999, Amigos was paying $9 per hour and McDonalds offered $500 signing bonuses.

Why would that be bad?  Costs go up (labour), so prices have to rise to cover labour.  Higher prices make workers demand more money.  Cost – Push Inflation

Current Data on Unemployment for the US  According to the Bureau of Labour Statistics (  Currently wages are stagnant to negative.

Unemployment Data  Previously: 303,000 new jobless claims were filed in March  Currently: in the week ending April 24, 2010  people reported getting jobs in March 2010

Comparison of key countries December 09

BRIC Country Unemployment  Brazil – 9.7% (est.)  Russia – 6.4% (est.)  India – 6.8% (DOWN)  China – 4.0%

BTW:  Top 3 of unemployment:  Nauru  Liberia  Zimbabwe

Countries with the lowest unemployment -  Countries with the lowest unemployment  Andorra  Monaco  Qatar

Consequences of Unemployment Real Output Effects – Each 1% of unemployment results in a reduction of $100-billion in output. – Lower real investment means less growth and reduced future output. – OKUN’S LAW!

Consequences of Unemployment Income Effects Income Effects  Loss of income and benefits (Health insurance)  Loss of income to others because of reduced purchasing power  Reduced tax income and increased outlays of government.

Consequences of Unemployment Social Effects – Health Problems – Increased suicides – Break up of families – Increased child abuse – Increased crime

Review  How do economists measure the unemployed?  Previously unemployed individuals who have stopped looking for work are called ____ workers.  What are the types of unemployment?  The natural rate of unemployment consists solely of frictional and structural unemployment.