ECON 1115 Chapter 6

List the shortcomings of the unemployment rate.

- not the same everywhere and for everyone - not the same for males and females, people of color, nationalities, and the young and the old - part time workers who would rather be working full time who are not counted as unemployed - people whom you might call under-employed based on their level of education or qualifications - people who have been unemployed for a few weeks and others for several years - There are heads of households and single parents who are unemployed which is generally a much more serious case than a 16 year old high school student who can't find work - discouraged workers who are no longer even in the labor force even though they would work if they could find a job

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%.

4% loss of GDP, 7%-5%.....

What government bureau calculates the unemployment rate? How often?

Bureau of Labor Statistics on the first Friday of every month

List the economic and social costs of unemployment?

Economic costs: Okun's law Social: drugs, crime, depression, unrest, wider spread between the wealthy and poor, serious illnesses

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

Frictional: people who meet all three criteria but are special in that they may be between jobs, first time entrants into the work force, or newly graduated from high school or college and have just started looking for work. Usually unemployed because of normal frictions in the economy: the time that it takes to find a job; being where the jobs are; and knowing about job opportunities are all normal frictions in the job market that must be dealt with. Cyclical: workers who are laid off due to fluctuations in the business cycle—recession. As the economy follows the business cycles of boom and bust people are hired and laid off just because of these fluctuations in the economy. Structural: people whose job skills or education level are no longer useful. This type of unemployment is created when the structure of the economy changes or when new technology replaces some workers with machines. Structural unemployment is perhaps the most serious kind of unemployment because it will take time to gain the needed skills to get re-employed which may not be so bad if you're 24, but much more serious if you're 54.

What are the three criteria necessary to be part of the labor force?

Has to be 16+, not institutionalized, and actively looking for work in the previous 4 weeks (or working) to be considered part of the labor force

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

It almost always is bad news (if the labor force does not change, but lots of people lose their job) It can be good (lots of people joining the labor force, but don't start working yet, so both the # of people unemployed and the labor force goes up, so the ratio gets bigger, but it just means that the economy is growing, or people have hope they can find jobs) It works the opposite for the unemployment rate going down (people giving up on finding jobs, etc.)

How is the unemployment rate defined?

It is the percentage of the labor force that is not working. Has to be 16+, not institutionalized, and actively looking for work in the previous 4 weeks (or working) to be considered part of the labor force Just because ur not working doesn't mean you are unemployed

What is the natural rate of unemployment, and what kind and how much unemployment exists at the natural rate of unemployment?

It stands as a ....

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

Just because ur not working doesn't mean you are unemployed. Many who don't meet the criteria of 16+, not institutionalized, and actively looking for work in the previous 4 weeks, are not working but also aren't part of the labor force (because they don't meet the criteria), so they aren't unemployed.

What is Okun's Law?

Okun's Law translates the difference between the natural rate of unemployment and the actual rate of unemployment into the dollar value of the loss of GDP. Okun's law says that for every 1% of unemployment above the natural rate of unemployment, there is a 2% loss of GDP. Eg. unemployment is 10% (5% greater than full employment) it will lower the GDP by 10% (if the GDP is 20 trillion, the GDP you could have had a 22 trillion GDP) [20 trillion / (100%-10%) x 100] Eg. unemployment is 3% (2% less than full employment) it will raise the GDP by 4%

How is the unemployment rate calculated?

Unemployment rate = number of unemployed/labor force x 100

Using the BLS website, http://www.bls.gov/news.release/empsit.a.htm find the current size of the labor force and the current number of unemployed and calculate the unemployment rate. Compare this to the previous month's unemployment rate and determine if this change in the unemployment rate is good news or bad news? On what basis did you make your decision?

good news, the labor force increased, but the number of unemployed decreased, so the unemployment rate stayed the same but

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

if the labor force shrinks, both the numerator and the denominator decrease, so the ratio decreases, but it is just because of discouraged workers

Is it possible to be not working and not unemployed at the same time? Explain!

if you are retired, institutionalized, if you are a stay at home parent, etc.

What are several ways in which you can refer to the natural rate of unemployment?

the full employment line the natural rate of unemployment line the line where inflation is constant the line where the unemployment is 5% potential GDP Potential output