UNEMPLOYMENTMisconceptionBig QuestionsU.S. Unemployment Rate 1960–2012Three Types of UnemploymentStructural UnemploymentGrowing and Changing EconomiesSlide 8Economics in Bronze Age OrientationFrictional UnemploymentSlide 11Hiring and Firing Regulations Increase UnemploymentCyclical UnemploymentSlide 14Natural Rate of Unemployment and OutputThe Skills GapAnimated UnemploymentLooking at the DataMeasuring Unemployment in the United States, April 2012Historical U.S. Unemployment RatesLagging versus Leading IndicatorsShortcomings of the Unemployment RateSlide 23Slide 24Duration of Unemployment, End of 2007, 2011Other Labor Market IndicatorsLabor Force Participation RateTrends in Labor Force ParticipationTwo Similar Recessions: Real GDP GrowthTwo Similar Recessions: Unemployment RateCase Study: How Bad was the Recession of 2008?ConclusionSummaryPractice What You KnowSlide 35Slide 36Slide 37Slide 38UNEMPLOYMENT07Misconception•Misconception: Policy makers should try to eliminate all unemployment–Unemployment is always bad for the economy–It is optimal for unemployment to be brought to zero•Some positive level of unemployment will always exist–A dynamic and evolving economy will always have some unemploymentBig Questions1. What are the major reasons for unemployment?2. What can we learn from unemployment data?U.S. Unemployment Rate1960–2012Three Types of Unemployment•Is it practical to have zero unemployment?–Generally, unemployment is a drain on society and very difficult for certain individual households–However, as our economy changes and progresses, certain jobs are destroyed.•Three types of unemployment–Structural–Frictional–CyclicalStructural Unemployment•Structural unemployment–Unemployment caused by changes in the industrial makeup (structure) of the economy–Joseph Schumpeter: “creative destruction”–New industries are created, and old ones are destroyed•Examples:–Borders (bookstore) bankrupt in 2011. Job losses in the book industry. Why?–U.S. steel industry:•1980: 500,000 laborers•2010: 150,000 laborers•More automated equipment, safer and more efficientGrowing and Changing EconomiesStructural Unemployment•What can structurally unemployed people do?–Undesirable to save obsolete or inefficient jobs–Workers must retrain, reeducate, relocate, or change expectations about work and pay–Government can help with training programs or relocation subsidiesEconomics in Bronze Age Orientation•Mitchell and Webb–This clip illustrates two cavemen facing possible structural unemployment during the movement from the Stone Age to the Bronze AgeFrictional Unemployment•Frictional unemployment–Unemployment caused by time delays in matching available jobs and workers–People don’t instantly take a new job, and they might not want to take the first available job–Firms don’t always hire the first applicant•Example:–Recent college grads–Spouse of a person whomoves for a new jobFrictional Unemployment•Length of frictional unemployment–Internet has decreased time and costs of job searching–Can also be affected by government regulations that make it difficult to hire or fire•Unemployment insurance–Benefits the worker by reducing consequences of being laid off and provides time to find a new job–Helps macroeconomy by stopping economic problems from spreading to other industries–Unintended consequence: reduces incentives to quickly find another job. It may increase the amount of time people are unemployed.Hiring and Firing Regulations Increase UnemploymentCyclical Unemployment•Cyclical unemployment–Caused by economic downturns–The “worst” kind of unemployment–Occurs for an unknown length of time–2008: 18 months, 10% unemployed•Natural rate of unemployment (u*)–Typical rate of unemployment in a healthy economy–Actual employment rate denoted by (u)•Full employment output (Y*)–Output by an economy with no cyclical unemployment–Actual output denoted by (Y)Three Types of UnemploymentFrictionalStructuralFrictionalStructuralCyclicalUnemployment Rate during RecessionUnemployment Rate during Normal Macroeconomic ConditionsNatural UnemploymentBad!Always occurring, denoted as u*Natural Rate of Unemployment and OutputHealthy Economy RecessionSuper-Normal Expansion (Temporary)u = u* u > u* u < u*Y = Y* Y < Y* Y > Y*Cyclical unemploymentis zeroCyclical unemploymentis positiveCyclical unemploymentis negativeThe Skills Gap•In 2012 there were approximately 3 million available jobs in the US–Over 500,000 in manufacturing along•How can there be so many vacant jobs when unemployment is high?–CBS-VideoAnimated Unemployment•“Geography of Jobs”–An interactive map which shows net job gains and losses overtimeLooking at the Data•Labor force–People who are employed or actively seeking work•Who is not in the labor force?–Jobless people not actively seeking employment (no efforts made in four weeks)–Retirees–Students–Institutionalized001 forcelabor unemployednumber uratent unemployme Measuring Unemployment in the United States, April 2012Relevant Population: 243 million - Noninstitutionalized - Civilian - Aged 16+Not in Labor Force: 89 million - Students - Homemakers -Retirees - OthersLabor Force: 154 million Employed: 142 million91.9% of labor forceUnemployed: 12 million8.1% of labor forceHistorical U.S. Unemployment RatesLagging versus Leading Indicators•A leading indicator–Helps us predict what’s coming, and they usually change before the economy as a whole does–Example: Average weekly hours for manufacturing–Example: Building permits•A lagging indicator–Usually changes after the economy as a whole changes, so it doesn’t have much predictive power.–Example: Average duration of unemployment–Example: Change in the price indexShortcomings of the Unemployment Rate•Discouraged workers–People who want a job but get discouraged and give up looking for work–Are not included in the labor force and not considered unemployed•Underemployed workers–Part-time workers who wantfull-time jobs–Workers who are veryoverqualified at their job–Considered employedHistorical U.S. Unemployment RatesShortcomings of the Unemployment Rate•Unemployment rate lags behind economic activity–Not good for predicting where the economy is going•The unemployment rate does not include:–Discouraged workers and Underemployed•Does