1. Business Cycles and Unemployment

2. Business Cycle Alternating periods of economic growth and contraction, which can be measured by changes in real GDP Four phases of a business cycle Peak Recession Trough Recovery

3. Peak the phase of the business cycle during which real GDP reaches its maximum after rising during a recovery Economic growth an expansion in national output measured by the annual percentage increase in a nation’s real GDP Why is growth an economic goal? It increases our standard of living - it creates a bigger “economic pie”

4. Trough the phase of the business cycle in which real GDP reaches its minimum after falling during a recession Recession a downturn in the business cycle during which real GDP declines Government Recession Definition at least two consecutive quarters in which GDP declines

5. The Depression The term depression is primarily an historical reference to the extreme deep and long recession of the early 1930’s Recovery An upturn in the business cycle during which real GDP rises

6. Hypothetical Business Cycle Peak RecessionRecovery Real GDP Growth trend line Trough

7. Post-World War II Recessions Recession DatesDuration% Decline in GNPPeak Unemployment Rate Nov 1948-Oct 194911-1.77.9% July 1953 – May 195410-2.75.9 Aug 1957 – Apr 19588-1.27.4 Apr 1960 – Feb 196110-1.66.9 Dec 1969 – Nov 197011-0.65.9 Nov 1973 – Mar 197516-3.18.6 Jan 1980 – July 19806-2.27.8 July 1981 – Nov 198216-2.910.8 July 1990 – Mar 19918-1.36.8 Mar 2001 – Nov 20018-0.55.6 Mar. 2001 - Nov. 2001 16-3.59.5 Average11-1.97.6

8. Business Cycles in the U.S. 1929-2010 `29 `30 `35 `40 `45 `50 `55 `60 `65 `70 `75 `80 `85 `90 `95 `00 `05 `10 20 15 10 5 3.5 0 -5 -10 -15 Year Annual Real GDP Growth Rate (percent) Annual real GDP growth Long-term average growth Zero growth

9. Three types of economic indicators Leading Coincident Lagging Leading Indicator Variables that change before real GDP changes Changes in business and consumer credit New orders for plant and equipment New consumer goods orders Unemployment claims Delayed deliveries New business formed Average workweek New building permits Changes in inventories Material prices Stock prices Money supply

10. Coincident Indicator Variables that change at the same time that real GDP changes Nonagricultural payrolls Personal income Industrial Production Manufacturing and trade sales Lagging Indicator Variables that change after real GDP changes Unemployment rate Duration of unemployment rate Labor cost per unit of output Inventories to sales ratio Outstanding commercial loans Commercial credit to personal income ratio Prime interest rate

11. Civilian Labor Force People 16 years or older who are either employed or unemployed, excluding members of the armed forces and people in institutions Who is considered employed? Anyone who works at least one hour a week for pay or at least 15 hours per week as an unpaid worker in a family business

12. Primary Cause of Unemployment When total spending falls, businesses will find it profitable to produce a lower volume of goods and avoid unsold inventory Who is considered unemployed? Anyone who is 16 years of age and above who is actively seeking employment

13. Total Population age 16 and over Armed forces Household workers Students Retirees Persons with disabilities Institutionalized Discourage workers Civilian labor force Employed Employees Self-employed Unemployed New entrants Re-entrants Lost last job Quit last job Laid off Not in Labor Force

14. Unemployment rate The percentage of people in the labor force who are without jobs and are actively seeking jobs Unemployment rate unemployed civilian labor force X 100 = Calculated 60,000 households are surveyed each month Where to find current unemployment rate? http://www.bls.gov

15. Year Civilian non- institutional populationLabor ForceUnemployed Unemployment Rate Not in Labor Force 2000212,577142,5835,6924.069,994 2001215,092143,7346,8014.771,359 2002217,570144,8638,3785.872,707 2003221,168146,5108,7746.074,658 2004223,357147,4018,1495.575,956 2005226,082149,3207,5915.176,762 2006228,815151,4287,0014.677,387 2007231,867153,1247,0784.678,743 2008233,788154,2878,9245.879,501 2009235,801154,14214,2659.381,659 2010237,830153,88914,8259.683,941 Current Population Estimates Unemployment rate unemployed civilian labor force X 100 = 9.6% 14,825 153,889 X 100 =

16. Discouraged Worker a person who wants to work, but who has given up searching for work Underemployment people working at jobs below their level of skills Criticisms of the Unemployment Rate Does not include discouraged workers Includes part-time workers Does not measure underemployment

17. U.S. Unemployment Rate 1929-2009 Year 1930 1940 1950 1960 1970 1980 1990 2000 2009 25 20 15 10 5 0 U.S. Unemployment Rate (percent)

18. Types of Unemployment Seasonal Frictional Structural Cyclical Seasonal Unemployment Unemployment caused by recurring changes in hiring due to changes in weather conditions

19. Frictional Unemployment Normal search time required by workers with marketable skills who are changing jobs, entering, or re-entering the labor force Structural Unemployment A mismatch of the skills of workers out of work and the skills required for existing job opportunities Cyclical Unemployment Unemployment caused by the lack of jobs during a recession

20. Full Employment Unemployment equals the sum of seasonal, frictional, and structural unemployment What is considered full employment? The natural rate of unemployment changes over time, but today it is considered to be about 3% - 5% GDP Gap The difference between full-employment real GDP and actual real GDP

21. Cost of Unemployment GDP Gap - the gap between actual and potential real GDP measures the monetary losses of real goods and services when at less than full employment `97 `98 `99 `00 `01 `02 `03 `04 `05 `06 `07 `08 `09 `10 14,000 13,500 13,000 12,500 12,000 11,500 11,000 10,500 10,000 9,500 GDP GAP (positive) Actual real GDP Potential real GDP GDP GAP (negative)