1. McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved Unemployment Chapter 6

2. 2 Unit 2 – Measuring Macro Outcomes Chapter 6 - Unemployment

3. 3 1.The Labor Force. 2.Measuring Unemployment. 3.The Human Costs of Unemployment. 4.Defining FULL Employment. 5.The Historical Record.

4. 4 1 – The Labor Force

5. 5 The Labor Force The labor force: ≥ age sixteen, working for pay, or … actively seeking paid employment. Not in the labor force: People who are not employed, and… not actively seeking work. “nonparticipants.” LO1

6. 6 Labor force participation rate = The percentage of the population working or seeking employment. Example:151 billion 300 billion The Labor Force LO1 = 50.3% Labor force population

7. 7 The Labor Force, 2006 LO1 (pg. 107)

8. 8 (pg. 108, figure 6.2) A Growing Labor Force

9. 9 Growth of Production Possibilities Production is limited by two factors: The availability of factors of production. Technological know-how. A growing labor force creates long- run economic growth.

10. 10 Labor Force Growth C H G F D Labor-force growth increases production possibilities Consumption Goods (units per year) B A Investment Goods (units per year) O (pg. 108, figure 6.3)

11. 11 Institutional Constraints Physical production possibilities: Dictated by available resources and technology only. Institutional production possibilities: dependent on available resources and technology, and … on how we choose to restrict their use. Ex: child labor, strip mining, pollution restrictions, land preservation.

12. 12 The Institutional Production Possibilities Curve Always falls within/up-to the physical production possibilities curve. Determined by the restrictions we impose.

13. 13 The Institutional Production Possibilities Curve

14. 14 Unemployment Unemployment: the inability of labor-force participants to find jobs. LO1

15. 15 Okun’s Law: Lost Output Okun’s Law: asserts that 1% more unemployment results in 2 percent less output.

16. 16 Warm-Up The Labor Force: Labor force: Labor force participation rate: Unemployment: Unemployment rate: Discouraged workers: Underemployment: The phantom unemployed:

17. 17 2 – Measuring Unemployment

18. 18 Measuring Unemployment The U.S. Census Bureau surveys about 60,000 households a month. A person is considered unemployed if he or she is: not employed, and … is actively seeking a job. LO1

19. 19 The Unemployment Rate Unemployment rate: the proportion of the labor force that is unemployed. 10,900,000 151,000,000 http://www.youtube.com/watch?v=u0-oinyjsk0&feature=related http://www.youtube.com/watch?v=daFb3J-cwLg&feature=related LO1 7.2% =

20. 20 And now… Some statistics on unemployment rates…

21. 21 Unemployment Isn’t Experienced Equally by Race or Sex (pg. 110, figure 6.4)

22. 22 Unemployment Isn’t Experienced Equally by Education (pg. 110, figure 6.4)

23. 23 Europe’s Unemployment Woes Unemployment levels in Europe are much higher than those of the U.S. Analysts blame: sluggish economic growth, and … high unemployment benefits.

24. 24 Europe’s Unemployment Woes (pg. 113, World View)

25. 25 Duration of Unemployment When the economy is growing: unemployment rates decline, and … the average duration of unemployment declines.

26. 26 Duration of Unemployment: (pg. 110, table 6.1)

27. 27 There are several categories of reasons for unemployment: Job leavers Job losers New entrants Reentrants The reason for unemployment can affect the length of unemployment. Reasons for Unemployment

28. 28 Reasons for Unemployment Job losers 47% Reentrants 32% New entrants 9% Job leavers 12% (pg. 111, figure 6.5)

29. 29 Discouraged Workers Discouraged worker: an individual who is : not actively seeking employment, but … would look for or accept a job if one were available. not counted as unemployed because they have given-up looking for a job. LO1

30. 30 Underemployment

31. 31 Underemployment Underemployment: exists when people seeking full-time paid employment work: only part time, or … are employed at jobs below their capability. Underemployed workers represent labor resources that are not being fully utilized. LO1

32. 32 The Phantom Unemployed Some of the people who are counted as unemployed probably should not be. Public policy may encourage people to report that they are actively seeking work when they really don’t want a job. -Vandaley Industries. LO1

33. 33 3. The Human Costs Of Unemployment

34. 34 The Human Costs The most obvious impact of unemployment is loss of income. Unemployment can be financially devastating.

35. 35 The Human Costs Less immediately visible impacts: Social: Crime, divorce, domestic violence, social withdrawal, etc. Psychological: Stress, anxiety, depression, confidence loss, suicide rates, etc. Physical health: 1 yr. of unemployment = 5 years of life span?

36. 36 The Human Costs (pg. 114, In The News)

37. 37 4. Defining FULL Employment.

38. 38 Warm-Up: Seasonal unemployment: Frictional unemployment: Structural unemployment: Cyclical unemployment: … Full employment: Natural rate of unemployment:

39. 39 Types of Unemployment There are four main types of unemployment: Seasonal Frictional Structural Cyclical LO3

40. 40 Seasonal Unemployment Seasonal unemployment: unemployment due to seasonal changes in employment or labor supply. The Labor Department reports seasonally adjusted unemployment rates for every month. LO2

41. 41 Frictional Unemployment Frictional unemployment: brief periods of unemployment experienced by people who are: moving between jobs, or … moving into the labor market. LO2

42. 42 Frictional Unemployment Frictional unemployment differs from other unemployment in three ways: There is adequate demand for the labor of the frictionally unemployed. The frictionally unemployed have the skills required for existing jobs. The job-search period will be relatively short. LO2

43. 43 Structural Unemployment Structural unemployment: caused by a mismatch between: the skills (or location) of job seekers, and … the requirements (or location) of available jobs. “Square pegs in a world of round holes.” A very serious form of unemployment. LO2

44. 44 Cyclical Unemployment Cyclical unemployment: unemployment that occurs due to a downturn in the business cycle (recession). i.e., due to a lack of job vacancies – an inadequate level of aggregate demand. LO2

45. 45 Cyclical Unemployment

46. 46 The Unemployment Record (pg. 116, figure 6.6)

47. 47 Slow Growth To avoid cyclical unemployment, the economy must grow at least as fast as the labor force. LO2

48. 48 The Full-Employment Goal Employment Act of 1946: Congress committed the federal government to pursue a maximum employment goal. Congress didn’t specify what the actual rate of unemployment should be. So, … why not set the goal at Zero unemployment??? LO3

49. 49 Inflationary Pressures Rising prices are a signal that employment is nearing capacity. Inflation can derail a growing economy. So… LO3

50. 50 Full-Employment “Full” employment :  zero unemployment. The lowest rate of unemployment compatible with price stability. Whatever that figure may be at any given time, it changes with changes in the structure of the economy. LO3

51. 51 Changes in Structural Unemployment During the 1960s, the Council of Economic Advisors placed full employment at 4% unemployment. During 1970s and early 1980s structural barriers to full employment had gotten worse. More youth and women. Liberal transfer payments. Structural changes in demand. In 1983, the Reagan administration concluded that the inflation-threshold unemployment rate was between 6 and 7 percent. LO3

52. 52 Declining Structural Pressures The structural barriers that intensified inflationary pressures in the 1970s and early 1980s receded in the 1990s. This made it easier to lower unemployment rates without increasing inflation. LO3

53. 53 The “Natural” Rate of Unemployment - A different view: The natural rate of unemployment: the long-term rate of unemployment determined by frictional and structural forces in labor and product markets. the economy will gravitate to the natural rate despite short-term price/employment fluctuations. LO3

54. 54 Congressional Targets The Full Employment and Balanced Growth Act of 1978 (Humphrey-Hawkins Act): set 4% unemployment rate, and 3% inflation as a national goal. LO3

55. 55 5. The Historical Record

56. 56 The Historical Record As many as one-fourth of the labor force was unemployed during the Great Depression. During World War II, the civilian unemployment rate fell to 1.2 percent.

57. 57 The Historical Record The unemployment rate has fluctuated from a low of 2.8 percent during the Korean War (1953) to a high of 10.8 percent during the 1981- 82 recession.

58. 58 The Historical Record From 1982 to 1989, unemployment fell, but shot up again in the 1990-91 recession. Unemployment fell steadily during the last half of the 1990s. The unemployment rate rose sharply in late 2001 but fell again through 2005. The “Great Recession” began in 2007

59. 59 The Historical Record

60. 60 The Historical Record (pg. 116, figure 6.6)

61. McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved Unemployment End of Chapter 6