9/12/20141Chapter 7 (20) – UnemploymentIn 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)y 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)y Some industries hit harder.y Some government policy may have had the (unintended) consequence of lengthening the duration and level of unemployment.US Unemployment Rate9/12/20142Three Types of Unemploymenty 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 economyy Three types of unemployment:Structural Unemploymenty 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:x Manufacturing employment dropped 32% (5.8 million jobs lost)x Textiles and apparel employment dropped 76.5 percent (1.2 million jobs)y Changes in American economy over time◦ Agricultural◦ Manufacturing◦ Servicey 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 _________________9/12/20143Ludditesy Luddites◦ 19thcentury English textile workers◦ Destroyed automated looms that could be operated cheaply to produce clothingy Goal:◦ Protect themselves from structural unemploymenty Question◦ The industrial revolution left many structurally unemployed. What are the trade-offs between technological progress and structural unemployment?Frictional Unemploymenty 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 job9/12/20144y 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 ity 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 UnemploymentCyclical Unemploymenty Cyclical unemployment:◦ Text: ‘caused by economic downturns’◦ Prof. Laury: fluctuations in unemployment caused by the business cycle.◦ Length of cyclical unemployment depends__________________________y Natural rate of unemployment (u*)◦ Typical rate in a healthy economy◦ Actual unemployment rate denoted by (u)y Full employment output (Y*)◦ Output in an economy with no cyclical unemployment◦ Actual output denoted by (Y)9/12/20145Three types of unemploymentFrictionalStructuralFrictionalStructuralCyclicalUnemployment Rate during RecessionUnemployment Rate during Normal Macroeconomic ConditionsNatural UnemploymentNatural Rate of Unemployment and OutputHealthy EconomyRecession Exceptional Expansionu = u* u > u* u < u*Y = Y* Y < Y* Y > Y*Cyclical unemploymentis zeroCyclical unemploymentis positiveCyclical unemploymentis negative(Un)Employment Statisticsy Data on unemployment are compiled by the Bureau of Labor Statistics, based on a survey of households.y Individuals are classified as:◦ In the Labor Forcex Employedx Unemployed◦ Not in the Labor Forcey Note: Unemployed ≠ Not Employed9/12/20146y Labor Force◦ People who are employed or actively seeking work◦ Employedx Worked for pay at least 1 hour per weekx Also includes working (15+ hours/week) without pay in a family-owned business or farmx Also includes those temporarily absent from a job◦ Unemployedx Not employed, actively looked for work in the past 4 weeks, and is currently available for workx Just reading about job openings is not considered active search.y Not in the Labor Force◦ Not Employed and not actively seeking work◦ This includes:x Those who have not made specific efforts to find work in the past 4 weeksx Retireesx Studentsx Institutionalizedy Labor force statistics include those aged 16+Unemployment Rate = u = number unemployedlabor force× 100Measuring Unemployment in the USRelevant Population:- Noninstitutionalized- Civilian- Aged 16+Not in Labor Force:- Students- Homemakers-Retirees- OthersLabor Force:Employed: Unemployed:9/12/20147Shortcomings of the Unemployment Ratey 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)y Under-employed workers◦ Part-time workers who want full-time jobs◦ Workers who are very over-qualified for their job◦ Considered employedy 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?y 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 unemployment.Other Labor Market Indicatorsy Labor Force Participation Rate◦ The proportion of the population that is in the labor force◦ Tells us the fraction of people who are working or looking for worky Unemployment by Race, Gender, Educational Attainment◦ There are large variations in labor force participation and unemployment.we want to measure the problem of joblessness(things that are missed from looking only at unemployment rate)This causes the unemployment rate to underestimate the true problems of joblessness. - not considered part of unemployment rate. This leads to under- estimate problems in the economy. - discouraged workers start looking. At first they are unemployed . Labor Force/Population 16+ (X) 1009/12/20148Case Study: The 2008 Recession2008“Great Recession”1982Recession1929Great DepressionLength 18 months 16 months 10 to 11 yearsChanges in GDP-6.8% growth in