1. Unemployment Types of Unemployment Interest rates Outline
Definition and Measurement
Types of Unemployment
Frictional Unemployment
Seasonal Unemployment
Structural Unemployment
Cyclical Unemployment
Interest rates
Real and nominal

2. Unemployment: Definition and Measurement
Employed: those who work as paid employees, work in their own businesses or work as unpaid workers in a family member’s business. It also includes those who are not working but who had jobs from which they are temporarily absent because of illness, vacation, bad weather etc.
Unemployed: Includes those who are not working, are available for work and actively looking for a job.
It also includes those waiting to be recalled to a job from which they had been laid off.

3. Not in the labour force: Those who fit neither of the first two categories such as full-time students, homemakers or retirees.
Labour force= Number of employed + Number of Unemployed
This rate can be calculated for different sub-groups.
Example: Assume million people were employed and 8.1 million people were unemployed. What is the labour force and unemployment rate?
Labour force= = million
Unemployment rate: (8.1/147.4)=5.5%

4. Frictional Unemployment
Short-term unemployment experienced by
People who are between jobs
Entering for the first time
Re-entering after period of absence
It takes a lot of time to find employment-
-time to prepare a convincing resume, look for the appropriate job and send a cv, wait for a response, investigate job offers and make the right decision.
Classified as unemployed: searching for work but not working
Not so critical; causes little hardship
People may have enough savings to support themselves
Borrow from relatives, friends, etc
Benefits of Frictional unemployment?

5. Frictional Unemployment
Benefits of frictional unemployment?
Find better-suited jobs (spending time searching for suitable jobs)
makes workers more productive
Higher incomes
Firms have more productive workers
Society has more goods and services

6. Seasonal Unemployment
Short-term joblessness related to:
Weather
Tourist patterns
Seasonal factors
Not so critical
Workers typically compensated for off-season
Construction workers are paid higher than average hourly wages to compensate for the high probability of joblessness in the winter ( rainy season)
Predictable
Complicates interpretation of unemployment data
Pushes up the unemployment rate in certain months and pulls it down in other months.
For example, during the long vacation, university students begin looking vacation jobs and thus figures reported in bloats the unemployment figures.
Unemployment rates are seasonally adjusted

7. Structural Unemployment
There may be jobs available but..
Mismatch between job-seekers and employers
Skills
For example: available jobs in nursing and health care providers, engineers, maths and science teachers
Unemployed workers are mainly in automobile, construction and other industry jobs
They do not have the skills and training to work where the jobs are- skills mismatch
Mismatch could also be geographic
Industry jobs could be in Tema but unemployed workers may be in the northern regions.
Unemployment from these mismatches are described as structural because it arises from structural changes in the economy
Dying industry (typewriter) replaced with new industries( computer) requires different skills set.
Long-term problem
Why?

8. Structural Unemployment
Why is Structural Unemployment a long-term phenomenon?
Takes time to learn required skill
Relocate to another part of country
All 3 types discussed so far arise largely from micro causes
Changes in specific industries and specific labour markets rather than the overall level of production in the country
These types cannot be completely eliminated
People will always spend time searching for new jobs
There will always be seasonal industries
The structure of the economy will keep changing

9. Cyclical Unemployment
Macroeconomic cause
Occurs when economy goes into recession and total output falls
Caused by the business cycle
Most critical type of unemployment
Requires macroeconomic policy intervention
Full employment when cyclical unemployment= zero
Even if frictional, seasonal and structural unemployment exists

10. Costs of Unemployment
Economic costs
Broader costs

11. Economic costs of Unemployment
What are some economic costs of unemployment?

12. Broader costs of Unemployment
Examples of broader costs of unemployment?

13. Broader costs of unemployment
Psychological effects
suicides, psychiatric episodes, depression
Health effects
High blood pressure, troubled sleep
Physical effects
Domestic violence, alcoholism
Setbacks in achieving social goals
Fairness and equality

14. In-class exercise
Classify each of the following as employed, not employed or not in the labour force
1. Steve worked 40 hours last week in an office supply store.
2. Last week, Elizabeth worked 10 hours as a computer programmer for the National Video Company and attended night classes at the local college. She would prefer a full-time job.
3. Roger lost his job at the R-gone Manufacturing Company. Since then he has been trying to find a job at other local factories.
4. Linda is a homemaker. Last week she was occupied with her normal household chores. She neither held a job nor looked for a job.
5. Linda’s father is unable to work
6. Scott has a Ph.D. He worked full-time but does not like his job as a dishwasher. He has applied for jobs with three companies and five universities. As soon as he gets an offer, he will quit his current job.
7. Mary-Helen has been out of work for a full year. She would take a job if it was offered, but no local companies are hiring. She is not actively searching for work.

15. Take-Home Exercise
Use the table below to answer the ensuing questions.
How large is the labour force?
How many discouraged workers live in this economy?
How many of the citizens are not in the labour force?
Compute the unemployment rate
Population
60,000
Under 16
9000
Over 16
In military service
600
In hospitals 60
In prison
200
Worked one hr or more in previous week
46000
Searched for work during previous month
2140
Did not work in previous week, did not look for work, but would have taken a job if one was offered

16. The interest rate
Definition
Types; nominal versus real

17. The interest rate Definition Types; nominal versus real
Effects on businesses and economy

18. Real and Nominal Interest rates
The concept of interest rates involves comparing amounts of money at different time periods
When you deposit money in your account, you give the bank your money now, and the bank returns the money with some interest in the future.
Similarly, when you borrow money from the bank, you get the money now but you will repay the loan with interest in the future.
Interest is the payment made by individuals, firms and businesses for the use of money
Cost of borrowing money
In both cases, the two parties acknowledge the fact that future money could have a different value than today’s money and as such, transactions regarding future money must correct for the effects of inflation.

19. Scenario Ama puts Ghc1000 in the bank at beginning of the year
Receives Ghc1100 at end of year...
Annual rate of interest= 10%
Is Ama richer?

20. Scenario Depends on what her money can buy!
Changes in price level
Suppose Ama at the beginning of year could buy GTP cloth at Ghc10 per yard
Her Ghc1000 was equivalent to 100 yards
Is she richer?
Depends on price of GTP cloth

21. Scenario Zero inflation 6% inflation 10% inflation 12% inflation
If price remains at Ghc10, can buy 110 yards at end of year
6% inflation
If price of GTP cloth is Ghc10.60, she can buy 104 yards
10% inflation
If price rises from Ghc10 to Ghc11, she can buy same 100 units
12% inflation
If prices rise to Ghc11.20, she can only buy 98 yards

22. Scenario What if prices fall by 2%? Deflation Price is now Ghc9.80
Increase in her purchasing power from 100 to 112
These examples show that the higher the inflation rate, the smaller the increase in Ama’s purchasing power
If the rate of inflation exceeds the interest rate, the purchasing power falls and vice versa
How much a person earns ( in terms of purchasing power) on a saving’s account depends on the interest rate and the rate of inflation.

23. Real and Nominal Interest Rates
Interest rate as usually reported
Without a correction for the effects of inflation
Measures the change in dollar/cedi amounts
Real interest rate
Interest rate corrected for the effects of inflation
The nominal and real interest rate and inflation are related as:
Real Interest Rate= Nominal Interest Rate- Inflation Rate

24. Scenario Nominal Interest rate Inflation rate Real Interest rate 10%
Purchasing power increased 6% 4%
No change in purchasing power
12%
-2%
Purchasing power decreased

25. Nominal and real interest rate
The nominal interest rate tells you how fast the number of dollars in your bank account rises over time
The real interest rate tells you how fast the purchasing power of your bank account rises over time.

26. Real and Nominal Interest Rates
This figure shows nominal and real interest rates using annual data since The nominal interest rate is the rate on a 3-month Treasury bill. The real interest rate is the nominal interest rate minus the inflation rate as measured by the consumer price index. Notice that nominal and real interest rates often do not move together.

27. Interest rates in the U.S. Economy
Nominal interest rate
Always exceeds the real interest rate
U.S. economy has experienced rising consumer prices in every year
Inflation is variable
Real and nominal interest rates do not always move together
Periods of deflation
Real interest rate exceeds the nominal interest rate

28. Real and Nominal interest rates
Effect of Interest Rate on businesses
Business people borrow funds for businesses
Pay interest on those funds from profits
Effect of interest rate on profits?
Effect of interest rate on borrowing and investment?

29. Real and nominal interest rates
Effect of interest rates on economy
Effect of interest rate on investment?
Effect on production of goods and services...economic growth?

30. Next Class ECONOMIC GROWTH Economic growth defined
Potential GDP and the GDP gap
Growth in potential GDP
Determinants of economic growth
Benefits and costs of growth