EC 202 Ch 7: UnemploymentReal GDP is now approximately twenty times larger than in 1923 and totalemployment has grown from about 30 million jobs to more than 150 million- Much employment is caused by economic declines (Great Recession)After GDP, the unemployment rate is the second most important indicator ofeconomic healthWha ar th major reason for unemploymen?Unemployment occurs when a worker who is notcurrently employed is searching for a job withoutsuccess- Unemployment rate: percentage of the laborforce that is unemployed1. Structural UnemploymentUnemployment is a burden on households and on the whole economy: resources arewasted when idle workers sit on the sidelines→ Creative Destruction: when the introduction of new products andtechnologies lead to the end of other industries and jobs- As some jobs become obsolete, the result is structural unemployment→ An evolving economy has led to drastic changes in the type of workAmericans do- The structure of the economy evolves, leading to different types of jobsWhile structural unemployment can’t be eliminated, it can be reduced- Workers must often retrain, relocate or change their expectations in some waybefore they can work elsewhere- Government can also enact policies to alleviate the pain of structuralunemployment2. Frictional UnemploymentEven when jobs are available and qualified employees live nearby, it takes time forworkers and employers to find one another and agree to termsFrictional unemployment: caused by delays in matching available jobs and workers- Is another type of natural employment→ no matter how healthy, the economy is, there is always somefrictional unemploymentFrictional unemployment occurs even in the healthiest economy- There are incentives for employees to keep searching for the perfect job andfor employers to search longer for the best employees→ information availability- Any factors that shorten job searches also decrease frictionalunemployment, making the internet a dramatic example→ government policies- Any factors that lengthen the job search process increase frictionalunemployment- ex. Government policies such as unemployment compensation,and regulations related to the hiring and firing of employees→ regulations on hiring and firing- Regulations on hiring include restrictions on who can and must beinterviewed, paperwork that employers must complete for new hires,and additional tax documents- Regulations on firing include mandatory severance pay, writtenjustification, and government filesUnemployment insurance: guarantees that unemployed workers receive a percentage oftheir former income while unemployed- Governments provide unemployment insurance for many reasons→ the benefit cushions the economic consequence of being laid off, andit provides workers time to search for new employment→ unemployment insurance can help contain macroeconomicproblems before they spread to other industriesUnemployment insurance creates unintended consequences- Receiving the cushion of unemployment benefits makes some less inclined tosearch for and take a job3. Cyclical UnemploymentCyclical unemployment: caused by recessions, or economic downturns- Generates the greatest concern among economists and policymakers→ most serious type of unemployment because it means that jobs arenot available for many people who want to workThe root cause of cyclical unemployment is an unhealthy economy- Not considered a natural type of unemployment Natura Rat of UnemploymenStructural and frictional unemployment is always present, even when the economyis healthy and growing- During these healthy periods, cyclical unemployment disappears- During recessionary periods, cyclical unemployment emergesIt is also possible for structural and frictional unemployment to increase ineconomic slowdowns- Structural unemployment might increase if theslowdown leads to changes in the structure of theeconomy→ some jobs or industries may shrinkpermanently- Frictional unemployment might increase ifgovernment policies or other factors increase thejob search time for unemployed workersDue to natural unemployment from structural andfrictional factors, zero unemployment is not attainableThe natural rate of unemployment: a typical unemployment rate that occurs when theeconomy is growing normallyFull employment output: the output level produced in the economy when theunemployment rate is equal to the natural rate- We measure the economic output with real GDPWhen the economy is in recession, cyclical unemployment materializes and theunemployment rate rises above the natural rate- At this point, the economy is producing at less than full-employmentA member of the labor force is defined as someone who is already employed oractively seeking work- If a jobless person has not sought a job in four weeks, that person is notcounted in the labor force- Only work-elgiible people are countedMarginally attached workers: those who are not working, have looked for a job in the past12 months and are willing to work, but have not sought employment in the past fourweeksUnderemployed workers: workers who have part-time jobs but who would like to havefull-time jobs- Not counted as unemployedA second shortcoming of the official measurement of unemployment is that it doesnot specify who is unemployed or how long they have been out of workLabor force participation rate: portionof the work-elgilbe population that isin the labor forceThe unemployment rate is a primary economic indicator- Measures a level of hardship that is not necessarily conveyed in GDP