Jobs and Unemployment Business Cycles

Chapter 23 Jobs and Unemployment/Business Cycles

A. Unemployment/Labor Market Indicators

-this represents underutilization of resources and hence an inefficient economy.  If we lose output from someone not working it can never be retrieved.

-US Census Bureau collects monthly data from HH to obtain an estimate for unemployment in the US, while the BLS actually uses the data to perform the estimation.  Around 1600 field interviewers survey about 60,000 households in what is called the current population survey.

In the survey they ask questions on:
(1) Working at least 1 hour per week or 15 or more for family business
(2) Were they not working, but considered temporarily absent from their job?
(3) Makes sure previously had a job and are currently available for work.
(4) Must be actively seeking work or waiting to be recalled for a job.
1. Labor Force – those deemed unemployed and employed.  To be considered unemployed you must not be working but have been looking for work in the last 4 weeks.

2.  Labor Force Participation Rate – The percentage of working age population that is actually in the work force.

Participation Rate = labor force / working age population

3.  Unemployment Rate – the ratio of those who are unemployed to the entire labor force

Unemployment rate = unemployed / (unemployed + employed)
= unemployed / labor force

Note: the unemployment rate has typically hovered around 6 % in the last 40 years or so.  It has been as high as 10 and as low as 4.

4.  Discouraged Workers – people who have suffered the psychological effects of unemployment.  They are available for work, but have not sought work due to perception that there are no jobs. 

- Other problems with unemployment are that it does not affect all groups equally.  It disproportionately affects minorities, young, females, and the elderly.

5. Types of workers:

a. Full-Time Workers – those who work greater than 35 hrs a week.  Not a hard and fast rule.

b. Part-Time Workers – those who work less than 35 hrs a week.  There are two groups.  Those who work less than 35 hrs based on (i) economics reason or (ii) non-economic reasons.  Those who are in category (ii) are also called involuntary part-time workers because they would like to work full-time hours.

6.  Problems with Measuring Unemployment:

• It is difficult to determine who is unemployed and who is not any longer in the labor force.
• Part-time workers who are not really achieving FE levels are counted as employed.  Many of these workers would like to be working f/t, but are not.
• There is no verification of the data that is received.

7.  Types of Unemployment
a. Seasonal – this is due to variations in unemployment that occurs predictably due to changing in the seasons.  Examples include farming, mountain sports, Christmas employment, etc…
b. Frictional– this is unemployment that results from changing from one job to another.
c. Structural – when there is a change in the business or sector that now causes a mismatch of skills. 
d. Cyclical – this is unemployment that occurs due to a swing in the economy.  This is the only macro level unemployment and therefore we define FE based on this level of unemployment.

Note: sources of unemployment come from:
i) job losers – people laid off permanently or temporarily
ii) job leavers – someone who leaves their job for another job, to look for another job, or to leave the labor force all together.
iii) job re-entrants – someone who previously had a job and left the labor force and is now coming back.
iv) hires and recalls- a hire is someone previously unemployed and is then fired.  A recall is someone who was temporarily laid off and then recalled.
v) withdrawals – someone who decides after looking for a job to withdraw from the labor force.  Many times these are discouraged workers.

8.  Full-Employment – FE - this is when there is no cyclical unemployment.  All the other levels of unemployment are bound to occur at one time or another, but cyclical unemployment would not occur if the economy were operating well.  Also called the natural rate of unemployment.

9.  Other Employment Issues/Terms

a. minimum wage laws - these are laws that mandate a minimum that must be paid to workers.  This is the example we used as a price floor.  It may cause unemployment by forcing firms to pay higher than market wages.

b. Labor Unions – groups of workers that collectively bargain for rights in the workplace.  There are only about 9% of current workers in unions, so although some industries pay higher wages due to these groups, overall it is not an issue.

c. Efficiency wages –wages paid above market in order to retain skilled workers as well as to motivate workers.  It might artificially create an excess supply, but in some industries it is normal to receive these extra wages. 

d. Aggregate Hours – the total number of hours worked by those employed f/t and p/t during  a year.  We can then multiply this by the average work week and number of weeks worked to get the total aggregate hours.
Note: aggregate hours overall have trended upward, while average hours worked per week has gone down.

Note: these are also seen in chapter 24.

10. Practice Problems for Unemployment

1.  Unemployment Rate:
Given that there are 5 million unemployed and 150 million people in the labor force calculate the unemployment rate.

Unemployment rate = unemployed / (unemployed + employed) = 5 / 150 = about 3.3 %
2.  Labor Force Participation
Given that the working age population is 225 million, use the previous labor force to calculate the participation rate.

Participation Rate = labor force / working age population = 150 / 225 = 66.7 %

B.  Business Cycles

Recall from before our look at GDP over time where we have:

(i) Potential GDP  (this is what the economy should be operating at if it were at efficient or FE levels.  Machines are utilized at normal rates and the amount of people working and the time that they are normal rates.
(ii) Actual GDP – This is what the GDP measurement is that is actually taking place in the economy.
-Trough – when GDP is at a minimum
-Recession – decline in GDP.
-Boom/expansion – when GDP is growing
-Peak – when GDP has reached a maximum

-GDP gap – this is the difference that we see between potential GDP and actual GDP

GDP gap = potential GDP – actual GDP

**this is important to note because it details that we are NOT always operating as efficiently as we would like in the economy.  Just as you can have a down week or month where you feel like you could have done more, the economy also has periods of sluggishness when we collectively are not producing, selling, and operating as well as we would like.

1. Business Cycle – this is a full swing in GDP from a trough to a peak. 

**One thing to note is that during recoveries/expansions we have a lower unemployment rate and during a contraction/trough/recession we tend to get higher rates of unemployment.

2. Economic Growth – When there is an increase in GDP from one year to the next.  This is due to an expansion of the economy.  We generally measure it in percentage increases.

3. Leading Indicators – These are things that economists and government monitor in order to assess whether or not they think an expansion or contraction may occur in the near future.  Some of the main ones are:

-Average Work Week
-New orders for K (plants and equipment) à capital spending
-Consumer Spending and their Expectations (Consumer Confidence Index)
-Money Supply
-Stock Prices
-Interest Rates

4. Coincident Indicators – these are variables that generally change right as real GDP is about to change.   Some examples are:
-Personal Income
-Manufacturing/Trade Sales
-Industrial Production

Note:  real GDP has a (+) relationship with these variables.  So as GDP increases we expect them to increase or if it were a decrease we expect a decrease.

5. Lagging Indicators – these are variables that change after real GDP has changed. 
-unemployment rate
-duration of unemployment à this is the average time workers tend to be unemployed
-Labor costs per unit of production (i.e. Unit costs from labor)
-Amount of commercial and industrial loans
-Prime Interest Rate