Slide 1OVERVIEW / Questions of the DayBusiness cyclesBUSINESS CYCLESU.S. Historical Chained Real GDPDefining Business Cycles: StagesU.S. Historical Chained Real GDPWhat Is a ‘Recession’?Business Cycles: CausesunemploymentUNEMPLOYMENT DEFINEDHousehold SurveysSurvey ResultsSurvey Results: EmployedSurvey Results: UnemployedSurvey Results: Not in the Labor ForceDividing up the U.S. PopulationEmployment DefinitionsEmployment RatesPracticeHistorical Labor Force Participation RateHistorical Labor Force Participation RateU.S. Annual Unemployment (1950-2013)U.S. Historical Monthly Unemployment RateU.S. Number of UnemployedThousands of jobs created (or lost)What does it mean to be ‘unemployed’?TYPES OF UNEMPLOYMENTUnemployment Types: Natural RateNatural Rate of UnemploymentNatural Rate of UnemploymentU.S. Historical and Natural Unemployment RateU.S. Unemployment and Real GDP (1980-2013)BIG IDEA IN ECONOMICSUnemployment Types: NaturalU.S. Real and Potential GDP (2009 = base)SHORTCOMINGS WITH U-RATEUnemployment and UnderemploymentU.S. Unemployment Rate by EducationKEY TERMS AND CONCEPTSPracticeSlide 42Europe and its unemploymentTOPIC XI:BUSINESS CYCLES &UNEMPLOYMENTOVERVIEW / Questions of the Day•What are “business cycles”?•What do they mean for me?•What exactly does it mean to be ‘unemployed’?•How does the government calculate the unemployment rate?•Who counts as unemployed? Who doesn’t?•How many people do you think ‘should be’ unemployed?•That is, how many people are unemployed normally?•What is meant by the ‘natural rate of unemployment’? •What do we mean by ‘full employment’?•What are some of the shortcomings of the U-rate?2BUSINESS CYCLESThe Never Ending Roller Coaster Ride of the EconomyBUSINESS CYCLES“The economy”, or real GDP, moves in cycles•Some periods real GDP grows quickly•Some periods it grows slow•Sometimes, it goes backward•This is occasional and rare but it goes happen Why does this matter?•One reason is that it affects the employment of millions of people •Growth in real GDP and unemployment are negatively related•When real GDP is growing steadily, unemployment tends to fall•When real GDP grows slowly or falls, unemployment tends to rise 4U.S. Historical Chained Real GDP1930 1940 1950 1960 1970 1980 1990 2000 2010 2020$0$2,000$4,000$6,000$8,000$10,000$12,000$14,000$16,000Source: U.S. Bureau of Economic Analysis; www.bea.gov, numbers in billions, 2009 $’sReal size of economy 45 years agoReal size of the economy todayDefining Business Cycles: Stages1. Expansion•period where economy (real GDP) is ‘growing’•growing at potential rate or faster2. Peak•Turning point in cycle, from expansion to contraction •high point before a downturn3. Contraction (Recession)•period where economy is contracting •growing at rate less than potential rate, or even decreasing•If a contraction is so bad you call it a recession, if it’s even worse you call it a depression 4. Trough•turning point in cycle, from contraction to expansion•low point before an upturn6U.S. Historical Chained Real GDP1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996$5,000$6,000$7,000$8,000$9,000$10,000$11,000Trough One cycle Source: U.S. Bureau of Economic Analysis; www.bea.gov, numbers in billions, 2009 $’sPeakContraction Expansion PeakWhat Is a ‘Recession’?National Bureau of Economic Research (www.nber.org) has the official word on U.S. economic recessions•“A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales”Some business cycle numbers•The U.S. has experienced 33 business cycles since 1854•11 cycles since WWII•The latest recession lasted 18 months from Dec 2007 – June 2009•The longest recession since Great Depression•Longest recession on record was from 10/1873 – 03/1879•Duration of 5 years and 5 months!Business Cycles: CausesQ: What causes real GDP to grow ‘unevenly’?A: We don’t know!•The general consensus today is changes in spending •Conditions arise that cause spending (C, I, G, NX) to go up•Conditions arise that cause spending to go downUNEMPLOYMENTUNEMPLOYMENT DEFINEDThe unemployment rate (U) is another indicator that measures of the overall health of the economy•It makes up the big 3 along with output (real GDP) and inflation (CPI)The Bureau of Labor Statistics (www.bls.gov), under the Department of Labor, is in charge of calculating and reporting the official rateBLS uses data from monthly surveys called Current Population SurveysHousehold SurveysSurveys consist of many questions, but BLS uses the answers from 3 main questions to calculate the unemployment rate1. Did you work at all last week?2. Have you looked for work during the last 4 weeks?3. Are you currently available for work?Survey ResultsALL civilian, non-institutionalized adults, 16 and over, are placed into 3 categories based on their answers to the household surveys1. Employed2. Unemployed3. Not in the labor forceEveryone (non-military) in this room is in one of these categoriesWhich are you?Survey Results: Employed Employed: •E 1. Did you work at all last week?2. Have you looked for work during the last 4 weeks?3. Are you currently available for work?•If you answered “yes” to the 1st question, then you are officially considered gainfully employed by the governmentSurvey Results: Unemployed Unemployed: •U1. Did you work at all last week?2. Have you looked for work during the last 4 weeks?3. Are you currently available for work?•If you answered “no” to the 1st question and “yes” to the 2nd and 3rd questions, then the government considers you unemployedTherefore, you are officially unemployed if and only if you:•didn’t work at all last week•looked for work in the last 4 weeks•are available for workYOU HAVE TO BE LOOKING FOR SOMETHINGSurvey Results: Not in the Labor ForceNot in the Labor Force: • NILF!1. Did you work at all last week?2. Have you looked for work during the last 4 weeks?3. Are you currently available for work?If you are neither employed nor unemployed, then you are a NILF •Includes• Retires• Full-time students• Stay-at-home moms and dads•Homeless•Anyone not working and also not looking!Dividing up the U.S. PopulationEntire U.S. PopulationEmployed Unemployed Not in the Labor ForceNot