Chapter 6 Econ Final

"Natural" unemployment

unemployment is the unemployment that arises from frictions and structural change when there is no cyclical unemployment—when all the unemployment is frictional and structural.

At the business cycle peak

cyclical unemployment is negative.

At the business cycle trough

cyclical unemployment is positive.

Discouraged worker

is a marginally attached worker who has not made specific efforts to find a job within the previous four weeks because previous unsuccessful attempts were discouraging.

marginally attached worker

is a person who does not have a job, is available and willing to work, has not made specific efforts to find a job within the previous four weeks, but has looked for work sometime in the recent past.

Cyclical unemployment

is the fluctuating unemployment over the business cycle that increases during a recession and decreases during an expansion. For example, during the recession of 2008-2009, many workers were laid off as business activity declined.

Natural unemployment rate

is the natural unemployment as a percentage of the labor force.

Labor force

is the number of people employed plus the number unemployed

Unemployment rate

is the percentage of people in the labor force who are unemployed. (Number of people unemployed/Labor force)*100

Labor force participation rate

is the percentage of the working-age population who are members of the labor force. =(Labor force/Working-age population) * 100

Working-age population

is the total number of people aged 16 years and over who are not in a jail, hospital, or some other form of institutional care or in the U.S. Armed Forces

At full employment

there is no cyclical unemployment.

Two Main Labor Market Indicators

1) The unemployment rate 2) The labor force participation rate

A Closer Look at Part-Time Employment

A part-time job is attractive to workers because they Balance family with work Part-time jobs are attractive to employers because Benefits are not paid to part-time workers Less government regulation of part-time workers People who choose part-time jobs are part time for noneconomic reasons. People who take part-time jobs because they can't find full-time jobs are part time for economic reasons.

Great Depression

A period of high unemployment, low incomes, and extreme economic hardship that lasted from 1929 to 1939. The unemployment rate increases in recessions and decreases in expansions.

The unemployment rate fluctuates around the natural unemployment rate:

Falling below the natural rate when cyclical unemployment is negative. Rising above natural rate when cyclical unemployment is positive.

The key reason why there is always some unemployment

New jobs are created and old jobs die; and some people move into the labor force and some move out of it. This churning creates unemployment. We distinguish among three types of unemployment: Frictional unemployment Structural unemployment Cyclical unemployment

Alternative Measures of Unemployment

The official definition of unemployment omits two types of labor: -Marginally attached workers -Part-time workers The official measure of unemployment does not include marginally attached workers and people who work part time for economic reasons.

Population Survey Criteria

The survey counts as employed all persons who, during the week before the survey: 1. Worked at least 1 hour in a paid job or 15 hours unpaid in family business. 2. Were not working but who had jobs from which they were temporarily absent. The survey counts as unemployed all persons who, during the week before the survey: 1. Had no employment, 2. Were available for work, and either: 1. Had made efforts to find employment during the previous four weeks, or 2. Were waiting to be recalled to a job from which they had been laid off.

Full-time workers

are people who usually work 35 hours or more a week.

Part-time workers

are people who usually work less than 35 hours a week.

Part-time for economic reasons

are people who work 1 to 34 hours per week but are looking for full-time work. (Also called involuntary part-time workers)

Output gap

equals real GDP minus potential GDP, expressed as a percentage of potential GDP.

Frictional unemployment

is the unemployment that arises from normal labor turnover—from people entering and leaving the labor force and from the ongoing creation and destruction of jobs. For example, a graduate interviewing for his first job.

Structural unemployment

is the unemployment that arises when changes in technology or international competition change the skills needed to perform jobs or change the locations of jobs. For example, when banks introduced the automatic teller machine in the 1970s, many bank-teller jobs were destroyed.

Potential GDP

is the value of real GDP when the economy is at full employment. Because the unemployment rate fluctuates around the natural unemployment rate, real GDP fluctuates around potential GDP: When the unemployment rate is above the natural rate, real GDP is below potential GDP. When the unemployment rate is below the natural unemployment rate, real GDP is above potential GDP.

When the unemployment rate is below the natural unemployment rate

real GDP is above potential GDP and the output gap is positive.

When the unemployment rate is above the natural rate

real GDP is below potential GDP and the output gap is negative.

The Bureau of Labor Statistics (BLS)

now provides three broader measures of the unemployment rate, known as U-4, U-5, and U-6, that include these wider groups of the jobless. The official unemployment rate is called U-3 and there are two narrower measures U-1 and U-2. U-1 Unemployed for 15 weeks or more U-2 People laid off or had a temporary job U-3 Total (official) unemployment U-4 U-3 plus discouraged workers U-5 U-4 plus other marginally attached workers U-6 U-5 plus part time for economic reasons

Full employment

occurs when the unemployment rate equals the natural unemployment rate. At full employment, all the unemployment is frictional or structural—and not cyclical unemployment. The major influences on natural unemployment are: Age distribution of the population The pace of structural change The real wage rate Unemployment benefits

When the economy is at full employment

real GDP equals potential GDP and there is no output gap.