1. Chapter 10: Unemployment Issues

2. Cost of Unemployment Economic Cost: –Loss of income for the individual –Cost of searching for new jobs –Loss of goods and services for the society The economy drops off the PPC and ends up at a combination inside the production possibilities space –Payment of unemployment benefit

3. Cost of Unemployment Social Cost: –Loss of self-esteem and confidence –Family problems (violence and divorce) –Health problems (hart attacks and suicide) –Criminal activities

4. Labor Force Individuals between 16 and 65, who are employed for pay or unemployed Individuals in prisons or mental hospitals, children, and retired are excluded

5. Unemployment Members of the labor force who are: –16 years of age or older –out of work –actively looking for work Unemployment rate = Unemployed Workers as a % of Labor Force

6. Discouraged Workers Members of the labor force who quit looking for jobs (e.g., the homeless) Unemployment rate is underestimated by 2 to 3% because discouraged workers are excluded

7. Frictional Unemployment Unemployment of individuals who are searching for jobs or waiting between jobs Example: college graduates entering the labor market Supply-side effect and transitional. Need information about job openings.

8. Structural Unemployment Unemployment due to fundamental economic changes that eliminate some jobs, while creating other jobs for which qualified workers may not be readily available Example: the occupation of “typing” is disappeared by introduction of personal computers Normal due to technological advancement and changes in consumer preferences

9. Cyclical Unemployment Unemployment caused by contraction in economic activities Example: companies lay-off workers during a recession Needs public policy to increase employment

10. Full Employment Unemployment Rate of unemployment: Taking into account frictional and structural unemployment Consistent with price stability Usually 3-5 percent

11. Unemployment Trend During the expansion of the 1960s, UR fell from 6.7% in 1961 to 3.5% in 1969 In energy crises of the 1970s, UR rose to as high as 8.5% in 1975 and 9.7% in 1981 After 1981-82 recession, UR fell to as low as 8.3% in 1989 Since 1991-92 recession where UR rose to 7.4%, it has declined to about 4% Since 9/11/01, UR has gone up to about 5.7%

12. Circular Flow of Income & Product Two sectors: households, businesses Two markets: product, labor Households sell labor to make income and buy good & services from businesses Businesses buy labor to produce good & services and sell to households

13. Simple Model Businesses Households Labor Resources Income Payments Goods & Services Consumption Expenditures Product Market Labor Market

14. Model with Injections & Leakages Businesses Households Labor Resources Income Payments Goods & Services Consumption Expenditures Gov’t Exp. Exports Investment Savings Taxes Imports

15. Total Expenditures Aggregate Demand: –Consumption Expenditures, C –Investment Expenditures, I –Government Expenditures, G –Exports less Imports, X-M

16. Aggregate Demand: C+I+G+X-M Price Level Output of Goods & Services D D 105 110 A B 200400

17. Total Income Aggregate Supply: –Consumption Expenditures, C –Personal Savings, S –Income Taxes, T

18. Aggregate Supply: C+S+T Price Level Output of Goods & Services 105 110 200400 S S Full Employment

19. Aggregate Equilibrium Aggregate Demand = Aggregate Supply C + I + G + X - M = C + S + T I + G + X = S + T + M Injections = Leakages

20. Equilibrium at less than Full Employment Price Level Output of Goods & Services 105 110 200400 S S D D Full employment output Equilibrium output

21. Demand Side Fiscal Policy To increase Aggregate Demand Fiscal Policy: –Increase government expenditures –Reduce income taxes

22. Expansionary Demand Policy Output of Goods & Services 105 110 200400 S S D D Full employment output D’ Price Level Full employment Higher price

23. Supply Side Fiscal Policy To increase Aggregate Supply, –Reduce personal and corporate tax rate to increase savings, investment, employment, and tax revenues –Lower government spending to balance the budget

24. Expansionary Supply Policy Output of Goods & Services 105 110 200400 S S D D Full employment output S’ 95 Price Level Full employment Lower price

25. Accommodating Policy Output of Goods & Services 105 200400 S S D D Full employment output D’ Price Level S’ Full employment Price stability