9/9/14%1%Chapter 7 (20) – Unemployment In this chapter we study some of the reasons unemployment exists (and why ‘zero unemployment’ should not be our goal), how unemployment statistics are computed by the government, and some other labor market statistics. The Great Recession (Dec. 2007 – June 2009) ! The US unemployment rate: ◦ _______ in Dec. 2007, rose ______in June 2009 ◦ Increased to _____ in Oct. 2009 and only slowly fell after this (6.1% in August 2014) ! Some industries hit harder. ! Some government policy may have had the (unintended) consequence of lengthening the duration and level of unemployment. US Unemployment Rate 5.09.510%9/9/14%2%Three Types of Unemployment ! Should we strive for zero unemployment? ◦ Unemployment is a drain on society and creates hardship for those directly affected ◦ However, some unemployment is part of the normal functioning of the economy ! Three types of unemployment: Structural Unemployment ! Structural Unemployment ◦ Caused by changes in the industrial makeup (structure) of the economy ◦ Joseph Schumpeter: ‘creative destruction’ ◦ New industries are created, old ones are destroyed ◦ From 1990-2012: " Manufacturing employment dropped 32% (5.8 million jobs lost) " Textiles and apparel employment dropped 76.5 percent (1.2 million jobs) ! Changes in American economy over time ◦ Agricultural ◦ Manufacturing ◦ Service ! What can/should be done about structural unemployment? ◦ From a macro perspective it is not desirable to save _____________ ◦ Workers must retrain, reeducate, relocate, or change expectations about work and pay ◦ Government can help ____________or _________________ 1.Structural 2.Frictional 3. Cyclical -obsolete or inefficient jobs -with training programsrelocation susidies--MORE LONGTERM because skills dont match jobs. Training programs will help.9/9/14%3%Luddites ! Luddites ◦ 19th century English textile workers ◦ Destroyed automated looms that could be operated cheaply to produce clothing ! Goal: ◦ Protect themselves from structural unemployment ! Question ◦ The industrial revolution left many structurally unemployed. What are the trade-offs between technological progress and structural unemployment? Frictional Unemployment ! Frictional Unemployment is caused by time delays in matching ______________ and ______________. ◦ People may not want to take the first job offered to them (and firms don’t always hire the first applicant) ◦ Examples: recent college grad, spouse of a person who moves for a new job -Normal frictions in job market (not perfectly smooth)-available jobs- workers9/9/14%4%! Length of frictional unemployment ◦ The internet has __________ time and costs of job search ◦ Government regulations that make it difficult to hire/fire can also affect the length of it ! Unemployment Insurance ◦ Benefits workers by making unemployment less costly and provides time to find a new job ◦ Helps the macro-economy by stopping economic problems from spreading to other industries. Effects of Hiring and Firing Regulations on Unemployment Cyclical Unemployment ! Cyclical unemployment: ◦ Text: ‘caused by economic downturns’ ◦ Prof. Laury: fluctuations in unemployment caused by the business cycle. ◦ Length of cyclical unemployment depends__________________________ ! Natural rate of unemployment (u*) ◦ Typical rate in a healthy economy ◦ Actual unemployment rate denoted by (u) ! Full employment output (Y*) ◦ Output in an economy with no cyclical unemployment ◦ Actual output denoted by (Y) -decreased*cyclical is casued by business cycle -on the business cycle***actual output is also called potential outputnotation all semester*****9/9/14%5%Three types of unemployment Frictional!Structural!Frictional!Structural!Cyclical!Unemployment Rate during Recession!Unemployment Rate during Normal Macroeconomic Conditions!Natural Unemployment!Natural Rate of Unemployment and Output !Healthy Economy!!Recession!!Exceptional Expansion!u = u*! u > u*! u < u*!Y = Y*! Y < Y*! Y > Y*!Cyclical unemployment!is zero!Cyclical unemployment!is positive!Cyclical unemployment!is negative!(Un)Employment Statistics ! Data on unemployment are compiled by the Bureau of Labor Statistics, based on a survey of households. ! Individuals are classified as: ◦ In the Labor Force " Employed " Unemployed ◦ Not in the Labor Force ! Note: Unemployed ≠ Not Employed9/9/14%6%! Labor Force ◦ People who are employed or actively seeking work ◦ Employed " Worked for pay at least 1 hour per week " Also includes working (15+ hours/week) without pay in a family-owned business or farm " Also includes those temporarily absent from a job ◦ Unemployed " Not employed, actively looked for work in the past 4 weeks, and is currently available for work " Just reading about job openings is not considered active search. ! Not in the Labor Force ◦ Not Employed and not actively seeking work ◦ This includes: " Those who have not made specific efforts to find work in the past 4 weeks " Retirees " Students " Institutionalized ! Labor force statistics include those aged 16+ Unemployment Rate = u = number unemployedlabor force× 100Measuring Unemployment in the US Relevant Population:! - Noninstitutionalized! - Civilian! - Aged 16+!!Not in Labor Force:! - Students! - Homemakers! -Retirees! - Others!!Labor Force:!Employed:!!Unemployed:!9/9/14%7%Shortcomings of the Unemployment Rate ! Discouraged Workers ◦ People who want a job but get discouraged and give up looking for work. ◦ They are not in the labor force (and thus not unemployed) ! Under-employed workers ◦ Part-time workers who want full-time jobs ◦ Workers who are very over-qualified for their job ◦ Considered employed ! Unemployment timeline ◦ The unemployment rate lags behind economic activity (such as GDP) ◦ Why does the unemployment rate tend to rise even after a recession is over and GDP is increasing? ! Who is unemployed? ◦ We do not know who is unemployed. ◦ We do not know how long they have been out of work. ◦ Short-run unemployment is typically viewed as less of a problem than long-term