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EC 202 Ch 7 Unemployment Real GDP is now approximately twenty times larger than in 1923 and total employment 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 of economic health Wha ar th major reason for unemploymen Unemployment occurs when a worker who is not currently employed is searching for a job without success Unemployment rate percentage of the labor force that is unemployed 1 Structural Unemployment Unemployment is a burden on households and on the whole economy resources are wasted when idle workers sit on the sidelines Creative Destruction when the introduction of new products and technologies 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 work Americans do The structure of the economy evolves leading to different types of jobs While structural unemployment can t be eliminated it can be reduced Workers must often retrain relocate or change their expectations in some way before they can work elsewhere Government can also enact policies to alleviate the pain of structural unemployment 2 Frictional Unemployment Even when jobs are available and quali ed employees live nearby it takes time for workers and employers to nd one another and agree to terms Frictional 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 some frictional unemployment Frictional unemployment occurs even in the healthiest economy There are incentives for employees to keep searching for the perfect job and for employers to search longer for the best employees information availability Any factors that shorten job searches also decrease frictional unemployment making the internet a dramatic example government policies unemployment Any factors that lengthen the job search process increase frictional ex Government policies such as unemployment compensation and regulations related to the hiring and ring of employees regulations on hiring and ring Regulations on hiring include restrictions on who can and must be interviewed paperwork that employers must complete for new hires and additional tax documents Regulations on ring include mandatory severance pay written justi cation and government les Unemployment insurance guarantees that unemployed workers receive a percentage of their former income while unemployed Governments provide unemployment insurance for many reasons the bene t cushions the economic consequence of being laid off and it provides workers time to search for new employment unemployment insurance can help contain macroeconomic problems before they spread to other industries Unemployment insurance creates unintended consequences Receiving the cushion of unemployment bene ts makes some less inclined to search for and take a job 3 Cyclical Unemployment Cyclical 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 are not available for many people who want to work The 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 economy is healthy and growing During these healthy periods cyclical unemployment disappears During recessionary periods cyclical unemployment emerges It is also possible for structural and frictional unemployment to increase in economic slowdowns Structural unemployment might increase if the slowdown leads to changes in the structure of the economy some jobs or industries may shrink permanently Frictional unemployment might increase if government policies or other factors increase the job search time for unemployed workers Due to natural unemployment from structural and frictional factors zero unemployment is not attainable The natural rate of unemployment a typical unemployment rate that occurs when the economy is growing normally Full employment output the output level produced in the economy when the unemployment rate is equal to the natural rate We measure the economic output with real GDP When the economy is in recession cyclical unemployment materializes and the unemployment rate rises above the natural rate At this point the economy is producing at less than full employment A member of the labor force is de ned as someone who is already employed or actively seeking work If a jobless person has not sought a job in four weeks that person is not counted in the labor force Only work elgiible people are counted Marginally attached workers those who are not working have looked for a job in the past 12 months and are willing to work but have not sought employment in the past four weeks Underemployed workers workers who have part time jobs but who would like to have full time jobs Not counted as unemployed A second shortcoming of the of cial measurement of unemployment is that it does not specify who is unemployed or how long they have been out of work Labor force participation rate portion of the work elgilbe population that is in the labor force The unemployment rate is a primary economic indicator Measures a level of hardship that is not necessarily conveyed in GDP statistics

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UO EC 202 - EC 202 Ch 7: Unemployment

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