Lesson 9: Unemploment

In the aftermath of the financial crisis, unemployment rate kept increasing:

1) Businesses are cautious about hiring (maybe only part-time jobs were offered). 2) Population keeps growing: more workers are entering the labor force.

Types of unemployment

1) Cyclical: unemployment caused due to recession. 2) Structural: unemployment that arises from mismatch of skills of workers out of work and the skills required for existing jobs. It can last for a long time (chronic). It requires re-training. eg: a lot of high school graduates were laid off during recession because: i) demand is low. ii) do not have the right skill set. typewriters replaced by computers, paper mills have been closed down. Causes: i) new technology (jobs are replaced by machines). ii) globalization (foreign competition). iii) lack of education or necessary skills. iv) shifts in government priorities. 3) Frictional: unemployment caused by the normal search time for workers with marketable skills to find work. It is temporary (short-term). Workers have marketable skills and are either: i) changing jobs ("I quit"). ii) initially entering the work force. iii) re-entering the work force. iv) seasonally unemployed. v) between jobs. eg: college grads, people changing jobs and so on.

How does the U.S. economy create and destroy millions of jobs each​ year?

1) Some businesses are​ expanding, while others are contracting. 2) In the market​ system, new firms are constantly entering and exiting various industries.

U is misleading:

1) Workers have dropped out (discouraged) of the labor force. 2) Some workers are taking part-time jobs because only part-time positions are available (really want full time).

The​ "normal" underlying level of unemployment in the economy is

1) the natural rate of unemployment. 2) the sum of structural unemployment and frictional unemployment. 3) the​ full-employment rate of unemployment

Unemployed

16 years or older, do not have a job and is looking work.

Participation Rate

= % of population in the labor force = (Labor force/WorkingAge population) * 100

U6 employment rate

= U + Marginally Attached Workers + Persons employed part-time for economic reasons where Marginally Attached Workers = neither working nor looking for work, but want a job (includes discouraged workers)

Discouraged workers

Available for work but have not looked for a job during the past month. One reason: they believe no jobs are available for them.

Unemployment is never zero

Because structural and frictional unemployment always exists.

When the economy is at potential output (full employment output):

Cyclical unemployment = 0 Unemployment = Structural + Frictional unemployment = natural rate of unemployment (doesn't = to 0).

Employed

If a person works at least 1 hour per week for pay.

Labor - force participation rate

Percentage of the​ working-age population in the labor force. = (labor force/ workingage population) * 100

Unemployment Rate (U)

Shows the percentage of the labor force that is considered unemployed. = [Number of people unemployed/Labor force] * 100

Bob Wesley believes that structural unemployment should be eliminated in order for an economy to be healthy. In making this​ argument, which of the following relevant issues is he​ ignoring?

Structural unemployment will exist in an economy that is innovative.

Employment - Population Ratio

The fraction of the population that has jobs. = (Number of people employed/WorkingAge Population) * 100

When an unemployed person drops out of the labor​ force:

The unemployment rate understates the true degree of joblessness in the economy. Doesn't affect the employment - population ratio.

How would it affect the unemployment rate if the Bureau of Labor Statistics counted as unemployed both​ (1) discouraged workers and​ (2) people who work​ part-time but would prefer to work​ full-time?

The unemployment rate would increase.

Labor force

Unemployed + Employed

Great Recession (12/2007 - 6/2009)

Unemployment rate peaked at 10%/ Real GDP growth fell to -4%. Why? 1) Housing bubble burst. 2) The housing market collapsed. 3) The financial system imploded. 4) There was a crisis of confidence. 5) Firms cut production and laid off workers. 6) Policy makers stepped in: Government stimulus and reaction in interest rates. Low-skilled teenagers (dropped out of high schools) suffered the brunt of the rise in the unemployment.

An increase in the number of job quits would suggest that it is becoming

easier to find jobs because employees who leave voluntarily are confident of finding another one.

Increases in the minimum wage will

increase unemployment among teenagers.

The type of unemployment most likely to result in hardship for the people who are unemployed is

structural because this type of unemployment requires retraining to acquire new job skills.