Chapter 20 Macroeconomics- Unemployment

Chapter 20 Macroeconomics- Unemployment Basics of Unemployment Unemployment occurs when a worker who is not currently employed is searching for a job without success. • Why people leave their jobs: o Voluntarily: return to school, switching jobs, unhappy at their job, caring for children o Involuntarily: downsizing, bad performance • Unemployment rate (u); the percentage of the labor force that is unemployed • Natural employment: unemployment that occurs even when the economy is doing well (structural and frictional) • Three types of unemployment: structural, frictional, and cyclical o Structural unemployment: caused by changes in the industrial makeup (structure) of the economy ▪ Creative destruction: occurs when the introduction of new products and technologies leads to the end of other industries and jobs (leads to structural unemployment) ▪ Can cause transitional problems ▪ Often a sign of a growing economy ▪ affected by information availability and government policies ▪ Ex: Borders workers being laid off as the company closed due to growth of online retail ▪ Reduced by education/training and subsidies for relocation o Frictional unemployment: caused by delays in matching available jobs and workers ▪ Natural unemployment (regardless of how well the economy is doing) ▪ affected by information availability, government policies, and unemployment benefits ▪ Reduced by increasing severance pay and making hiring easier ▪ Ex: if one business has lay-offs due to the expansion of another, there will likely be some shift in the workforce ▪ Even if there is a perfect job available for every worker, it will still take time to match workers and jobs. These time lags create friction in the labor market ▪ Unemployment insurance: (aka federal jobless benefits) a government program that reduces the hardship of joblessness by guaranteeing that unemployed workers receive a percentage of their former income while they are unemployed o Cyclical unemployment: caused by recessions, or economic downturns (way more concerning) • ▪ Downsized businesses and closed businesses contribute ▪ Root cause: unhealthy economy ▪ Appears in recessionary periods Natural rate of unemployment: is the typical unemployment rate that occurs when the economy is growing normally (structural average + frictional average) o around 5% for the US o when the rate is at the natural rate, there is little to no cyclical unemployment o full-employment output: the output level produced in an economy where the unemployment rate is at its natural rate (Y*) aka potential GDP, represents an economy’s maximum sustainable output • Variables and meanings: Employment Data • Employment rate: • Labor force member: someone who is already employed or actively seeking work o If a jobless person has not sought a job in four weeks, that person is not counted o Only work-eligible people are counted o Work-eligible: civilians with the potential to work Shortcomings of the Unemployment Rate • Discouraged workers: those who are not working, have looked for a job in the past 12 months and are willing to work, but have not sought employment in the past 4 weeks. (not counted in unemployment rate) • Underemployed workers: workers who have part-time jobs but who would like to have full-time jobs (not properly accounted for) • the official unemployment rate includes only workers who have no job and who are actively seeking work o excludes both discouraged and underemployed workers, groups that increase during economic downturns Other Labor Market Indicators • Labor force participation rate: the portion of the work-eligible population that is in the labor force, calculated by: • Gender and race labor statistics o More women are working (from 32% in 1948 to 56.7% in 2015) o male labor force participation has fallen dramatically (from over 87% to just 69% in 2015) ▪ Men are living longer, acquiring more education, and spending more time helping to raise families Relation to GDP: • Unemployment is above natural rate: Actual GDP is below potential GDP • Unemployment is below natural rate: Actual GDP is above potential GDP • Unemployment equals the natural rate: actual GDP equals potential GDP • Cyclical unemployment is zero: actual GDP equals potential GDP Big Ideas: • The unemployment rate, one of the most reliable indicators of an economy’s health, reflects the portion of the labor force that is not working and is unsuccessfully searching for a job. • The labor force participation rate reflects the portion of the work-eligible population that is working or searching for work. • Unemployment data enable economists to examine economic trends and identify where the labor market conditions are particularly strong or weak. • Unemployment data also help to evaluate current conditions in a long-run historical perspective. o For example, the case study in this chapter helps us view the recent Great Recession in the context of earlier economic downturns. • Structural: change, frictional: time, cyclical: recession • When the economy is at full employment, cyclical unemployment is 0 and unemployment rate=natural unemployment rate