Econ 1100 ch16- ch17

Structural unemployment

Structural unemployment occurs when there is a mismatch between the skills or location of people looking for work and the skill requirements or location of available jobs. Technological change may cause some job skills to become obsolete, causing structural unemployment, while creating demand for workers with different skills These workers often need education and training before they can find work because their skills are no longer in demand If a certain amount of structural unemployment is normal indicating that the economy is growing and changing due to, for example, technological improvement.

Three reasons that make aggregate demand downward

1) the real balance, or wealth, effect - as the price level decreases, the purchasing power of money balances increases and people can purchase more goods and services; at a higher price level, the purchasing power of wealth declines, causing quantity demanded to decline. Real wealth increases as the price level decreases, ceteris paribus. 2) the interest rate effect - the interest rate is the price of money and tends to follow the price level. As the price level decreases, interest rates tend to fall, and business and household spending tied to the interest rate increases; a higher price level leads to higher interest rates, which in turn reduces the quantity of real GDP demanded. 3) the international trade effect - as the domestic price level decreases, assuming no change in foreign prices, the U.S. tends to export more and import less, and spending on domestic output increases; if U.S. prices rise relative to foreign prices, the opposite occurs.

In A Recession

1. The unemployment rate is higher than the natural rate because there are more people who are unemployed. 2. Business sales are weak in a number of industries and employers are laying off workers or allowing their workforce to shrink through attrition by choosing not to replace workers who have retired or left voluntarily.

Aggregate demand (AD)

Aggregate demand (AD) is the relationship between the quantity demanded of all goods and services and the price level, holding other things that influence quantity demanded fixed.

Cyclical unemployment

Cyclical unemployment is associated with unemployment above the natural rate and is considered a symptom of economic downturn or recession

Discouraged workers

Discouraged workers are people who are willing and able to work, but have given up actively seeking employment due to la ck of success. This problem is especially significant during recession when the economy is w eak and jobs are scarce. They are not included in the labor force

Frictional unemployment

Frictional unemployment occurs when there are jobs available, and there are qualified workers who are willing and able to accept those jobs, but the process of looking at job vacancies (a job that is available for sb to do), applying for positions, interviewing, and being hired takes some time. Frictional unemployment is not considered to be a sign of economic troubles, but is instead regarded as normal or natural.

The difference between potential GDP and actual GDP

GDP gap, which is a measure of output lost due to excessive unemployment.

Underemployed

If they often continue to search for employment, the rate of unemployment understates how many workers are engaged in job search. If someone is underemployed, they have not got enough work to do or their work does not make full use of their skills or abilities.

Employed

If they worked as little as one hour for pay during the survey week or if they did at least 15 hours of unpaid work in a family-operated enterprise. If they are overqualified for the work they are performing.

Labor force

Includes people over the age of 16 who are working or actively seeking employment, and excludes members of the military and those who have been institutionalized (institutionalized: lacking the ability to live and think independently because they have spent so long in an institution).

Decreases in the unemployment rate

Increases in real GDP

Unemployment

The inability of labor force participants to find a job

Natural rate of unemployment

The rate of unemployment that occurs when the economy achieves full employment is called the natural rate of unemployment.

Phantom unemployment

There are also people who claim to be unemplo yed (actively seeking work), when in fact they are not; this is sometimes referred to as phantom unemployment . The motivation for making a false claim may be that these indi viduals are currently receiving unemployment benefits. They are collecting benef its, but not really seek ing work, and so they may provide inaccurate information if included in the BLS survey.

Types of Unemployment

Those who are unemployed each month can be classified as frictionally, structurally, or cyclically unemployed.

Cyclical unemployment is zero

When the economy is at full employment, the actual rate of unemployment is equal to the natural rate of unemployment

LFPR

labor force participation rate The labor force consists of the employed plus the unemployed.

actual rate of unemployment is higher than the natural rate

the unemployment rate is higher than the natural rate, a recessionary gap is associated with a surplus in the labor market, implying that the wage rate is above equilibrium