Chap 8 - Unemployment

Is it possible to be out of work and not unemployed at the same time? Explain!

Yes - If you are not looking for work or if you are not part of the labor force

If the unemployment rate rises from 5% to 7% calculate the economic cost in terms of Okun's Law? Assume that the natural rate of unemployment is 5%. Assume now that the GDP is 21 trillion dollars. What would the GDP be if the unemployment were at the natural rate of 5%?

- 2x2% = 4% loss of GDP - 21/(100-4) x 100 = $21.875 trillion GDP

List and briefly describe the shortcomings of the unemployment rate.

- It is the national average, so it can very greatly depending on region - Does not show the UR in diff sectors and b/ween diff grps : gender, age, race, - Doesn't include part time workers who seek to work full time - UR is different in each state and region - it does not represent the gravity of what being unemployed means for a person, ex. a head of household being unemployed will be worse than a 16 year old who can't find work

If the unemployment goes down show mathematically and explain why this might not be such good news.

- Means ppl left labor force (increase in discouraged workers). - This would cause the denominator(labor force) and numerator to shrink, but since the numerator is a smaller amount, an impact in the size of the numerator would have a greater effect than that of the denominator.

What must be true for someone to be unemployed?

- Must be 16 or older - Must not be institutionalized ( in prison, military, or hospital) - Must have looked for job in last 4 weeks

What is the natural rate of unemployment, what other name does it go by and what are its characteristics?

- Natural rate of U is 5% aka full employment Characteristics: - it is a point inside the PPC, - the inflation rate is assumed to be constant , so it is the level of U below which inflation is rising and above which inflation is falling - at the natural rate of unemployment there is only structural and frictional unemployment. Cyclical unemployment is ZERO.

If the unemployment rate goes up is that necessarily bad news? why or why not?

- No bc u cannot judge based on this sole info. It could mean that there is an increase in the labor force, an increase in people looking for jobs, showing economic growth.

What is the significance of the labor force in the definition and calculation of the unemployment rate?

- You have to be in the labor force to be counted as unemployed - If labor force increases, unemployment rate automatically goes up (even if tech. # of unemployed didn't increase) - Labor has major impact of rate- The labor for determines the denominator of the fraction, if more people join the labor force the unemployment rate will go up and if people leave the labor force the unemployment rate will go down.

What is Okun's Law?

- translates the diff b/ween the natural rate of unemployment and ACTUAL rate of unemployment into the dollar value of the loss of GDP - Okuns law says for every 1% of unemployment above natural rate of U, there's a 2% loss of GDP

Give an example of each of the three types of unemployment.

1) Frictional - when ppl are part of labor force but unemployed bc of frictions in economy like time it takes to find job, being where jobs are and knowing ab job opportunities. Ex: recent grads, 2) Cycliclal- workers who are laid off due to fluctuations in business cycle aka a recession. Ex- workers laid off bc of bust in in economy 3) Structural-ppl whose job/skills or education level no longer useful. Happens when new tech replaces worker w machine.

What government bureau calculates the unemployment rate? How often?

The Bureau of Labor Statistics (BLS) calculates the unemployment rate every month and releases the information the first Friday of every month.

How is the unemployment rate calculated?

number of unemployed/labor force x 100