Lecture 15Outline of Last Lecture I. GDP per Capita MeasurementsII. Economic GrowthA. What Drives Economic Growth?B. Human and Physical CapitalIII. The Aggregate Production Function Outline of Current Lecture I. UnemploymentII. Three Categories of UnemploymentIII. Unemployment Rate EquationA. Critiques of the ModelIV. Labor MarketCurrent LectureThis lecture starts with chapter 8, which focuses on unemployment. Unemployment is usually given as a rate in the form of a percentage. In order to properly understand the concept of unemployment, we first need to define the term workforce. We can’t include children, the elderly, people with disabilities, parents whostay home, and some students in the workforce. These groups of people are in the group that is “out of the workforce.” The population as a whole can be broken down into three categories. People who are employed, people who are unemployed, and the afore-mentioned out of the workforce. Next we need to define what being unemployed means. To be classified as unemployed, a person has to meet three general criterion. 1. Be out of a job2. Be available to work3. Be actively looking for work within the last 4 weeksThe unemployment rate can be found using the following equation:Unemployment rate= (number of unemployed people/number of people in the labor force) X 100Below is an example of the breakdown of the labor force in the United States in 2012.Working age population (16+) = 243.2 Million PeoplePeople in the labor force= 154.9 Million, which is approx. 63.7%Number of employed people= 142.4 MillionNumber of unemployed people= 12.5 MillionNumber of out of labor force people= 88.3 Million AGEC 217 1nd EditionTherefore the unemployment rate for this data would be:(12.5 million people/ 154.9 million people) X 100 = 8.1%There are critiques to this model though. The factor of hidden unemployment is factored in. This refers to part-time workers who want to work full-time. People who are over-qualified for the job they are working atalso fall into this category. In the unemployment rate model above, these people would be counted as employed. Another critique is about the so-called discouraged workers. These are people who were actively seeking work, but couldn’t find anything and have given up. These people are counted as not in the labor forcein the above model. Some things to also note: the unemployment rate will never be 0%. In the United States, the unemployment rate has been around 6% over time. The unemployment rate follows short-run change. That is, it can be seen to follow the business cycle. This is called cyclic unemployment.To visualize these changes, we need to look at the labor market. This is composed of labor “supply” from people. The labor “demand” comes from companies looking to hire. The important thing is that supply will always be fixed and will not shift in the short run ( a few weeks to a few months). An example graph is shown below when the labor demand shifts. If the demand curve shifts to the right, the wages and quantity labor demanded will both increase. When the demand curve shifts to the left, the wages and quantity of labor demanded will both decrease. The graph below shows: S= supply curve, D= demand curve, W=wages paid in dollars, Q= quantity of labor demanded in hours, and E=market equilibrium.Wages($) S E1 E2 D1 D2 Q labor