Econ 201 1st EditionFinal Exam Study Guide Lectures: 29 - 38Lecture 29 (April 1)Labor Force StatisticsLabor force statistics are statistics produced by the Bureau of Labor Statistics (BLS) in theUnited States Department of Labor. It is based on a regular survey of the “adult population” (16 years or older) of 60,000 households. The total population does not include minors, the military, institutionalized persons, or incarcerated persons. It divides the population into three groups: employed, unemployed, and not in labor force. The employed category includes paid employees, self-employed, and unpaid workers in a family business. The unemployed category includes people not working who have looked for work during the previous four weeks (actively seeking work). The not in labor force category constitutes everyone else, including retirees, stay-at-home parents, and college students. The labor force consists of all potential workers, working (employed), and not working. Unemployment Rate and Labor Force Participation RateThe unemployment rate is the percent of unemployed in the labor force and is represented by the equation below.U – rate = ¿ of UnemployedLabor Force×100The labor force participation rate is the percent of the adult population in the labor force and is represented by the equation below. Labor Force Participation Rate = Labor ForceAdult Population× 100We have these different rates because not all unemployment is the same, so we categorize unemployment by certain characteristics, such as duration. It is a basic truth that there is always some unemployment in an economy.Labor Force Statistics Example ProblemUse the statistics in the table below to calculate the total labor force, unemployment rate, adult population, and labor force participation rate. Labor Force Statistics of Adult PopulationEmployed 139.7 millionUnemployed 13.7 millionNot in Work Force 85.7 millionTotal Labor Force = employed + unemployed = 139.7 + 13.7 = 153.4 millionUnemployment Rate =¿ of UnemployedLabor Force×100 = 13.7153.4×100 = 8.9%Adult Population = 139.7 + 13.7 + 85.7 = 239.1 million (table says “adult population”)Labor Force Participation Rate = Labor ForceAdult Population× 100 = 153.4239.1×100 = 64.2%Natural Rate of UnemploymentThe natural rate of unemployment is the normal rate of unemployment around which the actual unemployment rate fluctuates. It is the long run “average” of unemployment and is made up of frictional and structural unemployment. Frictional unemployment (also known as search unemployment) is the unemployment when workers spend time searching for the jobs that best suit their skills or tastes. It is a short-term state for most workers. Structural unemployment is when the skills of the workers are not those valued by the market; this occurs when there are fewer jobs than workers. Note that there may be nothing wrong with the economy at this time, just simply a shortage of jobs. This is usually long-term for workers, and can be the result of “sticky wages” (when the market does not adjust). It occurs when wage (the $5 orange line) is above the equilibrium, as shown on the employment graph below. Unemployment InsuranceUnemployment insurance is a government program that provides some income to workers when unemployed. The benefits are that it reduces uncertainty about income and gives the workers more search time to find a better job match, which leads to greater productivity. The cost is that it increases frictional unemployment. Lecture 30 (April 6) Structural UnemploymentThe three primary reasons for structural unemployment are minimum wage laws, unions, and efficiency wages. Unions are worker associations that practice collective bargaining with employers over wages, benefits, and working conditions. Efficiencywages occur when firms voluntarily pay above equilibrium wages to boost worker productivity.Cyclical UnemploymentCyclical unemployment is the deviation of unemployment from its natural rate and is associated with the short run business cycle. The reason it happens is because there is notenough demand for goods and services (deficient demand). Fiscal and monetary policy can fix this type of unemployment.Definitions of WorkersMarginally attached workers are those “neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime inthe past 12 months”. Discouraged workers are workers that would like to work but have given up looking “giving a job-market related reason”. Discouraged workers are classifiedas “not in the labor force”. Example Unemployment Rate ProblemDetermine how the following situations affect the unemployment rate and if they accurately represent the unemployment rate. i. Sue lost her job and is looking for a new one. ii. Jon has been out of work since last year, has become discouraged and hassince stopped looking for work.iii. Sam lost his $80,000 job and takes a part time job at McDonald’s until he finds a new one. Answers:i. The unemployment rate increases and accordingly; Sue lost her job and this contributes to unemployment.ii. This decreases the unemployment rate, but it is a false impression; though the rate declines, the labor market has not improved.iii. The unemployment rate remains unchanged; Sam lost a job and has found a new one. However, the unemployment rate fails to show the under-employment here, as Sam is working below his skill level. Lecture 31 (April 8)Unemployment Rate FallacyThe unemployment rate fallacy is the belief that if unemployment is decreasing, the economy is doing better. Unemployment rate is a poor measure of health of the current labor market. Costs of UnemploymentThe economic costs of unemployment are present output and future output. The social costs are increased crime rate, lower standard of living, and the effects on people when they lose their job. People identify with their jobs, and when their jobs are taken awaythey may suffer from depression, substance abuse, and other health issues; suicide ratesalso increase along with money invested in government aid. Economic FluctuationsThere are three main facts to know about economic fluctuations:i. Economic fluctuations are irregular and unpredictable. ii. Most macroeconomic quantities fluctuate together.iii. As output falls, unemployment rises. Model of Aggregate Demand and Aggregate Supply (Short-Run)The following diagram displays the short run effects of the