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Modules 12 and 13 ~ Unemployment.notebook February 12, 2016 Warm Up Basket: Apples and Oranges 2009 (base year) 2010 2011 Q apples = 100 P apples = 0.60 P apples = 0.8 P apples = 0.50 P oranges = 0.8 P oranges = 1.00 Q oranges = 200 P oranges = 0.75 1. Calculate the Index for 2009, 2010, 2011. 2. What is the rate of inflation from 2010 to 2011? Modules 12 and 13 ~ Unemployment.notebook February 12, 2016 Modules 12 and 13 ~ Unemployment.notebook February 12, 2016 Modules 12 and 13 ~ Unemployment.notebook February 12, 2016 Modules 12 and 13 ~ Unemployment.notebook February 12, 2016 Module 12: Calculating Unemployment 1) Meaning of "Unemployed" 2) How Unemployment rate is calculated 3) relationship between unemployment and economic growth Modules 12 and 13 ~ Unemployment.notebook Unemployment hits home! February 12, 2016 Modules 12 and 13 ~ Unemployment.notebook February 12, 2016 Definitions Employed ~ those working for pay Unemployed ~ jobless, actively looking, and available for work Labor Force = employed + unemployed (16 and over) Not in Labor Force ~ 16 and over who have quit looking (4 weeks), retired, disabled Labor Force participation rate ~ share of 16 and older citizens who are in the labor force. Modules 12 and 13 ~ Unemployment.notebook Equations: Modules 12 and 13 Labor Force Participation Rate = Unemployment rate = *Currently 4.9% February 12, 2016 Labor Force population 16 and over Unemployed Labor Force x 100 x 100 Modules 12 and 13 ~ Unemployment.notebook February 12, 2016 2013 Numbers: (in millions) Population = 320 Population 16 and older = 245 16 and over employed = 144 16 and over unemployed = 11 Not in Labor force = 90 Labor Force = 155 (144 + 11) Labor Force participation rate = 63.2 % (155/245) Unemployment rate = 7.1% (11/155) Modules 12 and 13 ~ Unemployment.notebook February 12, 2016 Unemployment rate is overstated... If a lot of people are taking their time finding a new job Modules 12 and 13 ~ Unemployment.notebook February 12, 2016 Unemployment rate is understated: If you are a "marginally attached worker" and not considered a part of unemployment. Marginally attached worker has a few categories 1. Would like to have a job, but haven't been looking (inactive) 2. Discouraged worker, doesn't believe the current economy will ever give them a job (given up) 3. Underemployed worker (takes a parttime job, but wants a fulltime) Modules 12 and 13 ~ Unemployment.notebook U6 February 12, 2016 Unemployment numbers that include the marginally attached worker Marginally attached + unemployment U6 = Labor Force *Currently 9.9% Modules 12 and 13 ~ Unemployment.notebook February 12, 2016 Current stats from the Bureau of Labor Statistics Modules 12 and 13 ~ Unemployment.notebook February 12, 2016 Growth and Unemployment Recession: unemployment rate increases Expansion: unemployment rate declines The Growth Function Y = f (K, N, A) Real GDP is a function of the quantity and quality of Capital (K), Labor (N), and technology (A) Modules 12 and 13 ~ Unemployment.notebook February 12, 2016 The Growth Function *In the short run, K and A are constant Real GDP Labor Y = f(K, N, A) Modules 12 and 13 ~ Unemployment.notebook Module 13: Causes and categories of unemployment 0) cyclical unemployment 1) Frictional Unemployment 2) Structural Unemployment 3) Why we have a "Natural Rate of unemployment" 4) Why the Natural Rate of unemployment changes February 12, 2016 Modules 12 and 13 ~ Unemployment.notebook February 12, 2016 The natural rate of unemployment is currently 4.8% But it changes over time. It has never been lower than 2.9%. Two questions we will answer today: 1) Why, even during the best of times, does unemployment still exist? 2) Why does the natural rate of unemployment change over time? Modules 12 and 13 ~ Unemployment.notebook February 12, 2016 The Tank of unemployed (voluntary) New entrant in labor force Find a new job (voluntary) Personal transitions (Involuntary) Job Destruction (industry change) leave labor force (give up) Job Creation (Involuntary) Fired Modules 12 and 13 ~ Unemployment.notebook February 12, 2016 Cyclical Unemployment: Unemployment caused by the business cycle, a recession. Aggregate output is down, so firms hire less workers. Modules 12 and 13 ~ Unemployment.notebook February 12, 2016 Consumers are changing their preferences all the time. (anyone remember myspace?) When preferences change, the firm's require different skills from their labor force, which leads to: 1) Job Creation 2) Job Destruction Modules 12 and 13 ~ Unemployment.notebook February 12, 2016 2 Reasons why a Natural Rate of Unemployment exists The natural "churning" of the economy leads to: 1) Frictional Unemployment ~ unemployment caused by the time workers spend in job search Frictional unemployment is inevitable because: A) constant process of job creation and destruction B) New workers are always being added to the labor force *No surplus of labor, voluntary unemployment! Modules 12 and 13 ~ Unemployment.notebook Low unemployment February 12, 2016 High unemployment During the good times, frictional unemployment accounts for a large portion of unemployment. During bad times, unemployment is caused mostly by structural unemployment. Modules 12 and 13 ~ Unemployment.notebook February 12, 2016 2 Reasons why a Natural Rate of Unemployment exists 2) Structural Unemployment: caused when more people are seeking jobs at the wage rate than jobs available at the wage rate. Inefficiency in the labor market. Changes in demand for products. A disconnect between skills of the labor force and the demanded skills of the firms. *Persistent Surplus of labor due to higher than equilibrium wage rates Modules 12 and 13 ~ Unemployment.notebook February 12, 2016 4 reasons why structural unemployment always exists, explaining why the natural rate of unemployment isn't zero. 1) Efficiency wages ~ firm's pay people a little more than equilibrium wage rate to get a more loyal and stable work force. Reason why Surplus of labor exists: Labor is more expensive for firms, so less people are hired. 2) Union Wage Contracts. For reason, see above. 3) Minimum Wage. see above 4) Government Policies, most notably, unemployment insurance Government pays unemployed for 26 weeks in U.S. (this is mostly frictional unemployment) Modules 12 and 13 ~ Unemployment.notebook February 12, 2016 Natural Rate of Unemployment = Frictional + Structural unemployment Modules 12 and 13 ~ Unemployment.notebook February 12, 2016 Cyclical Unemployment = Actual Natural unemployment Cyclical unemployment is the deviation of actual unemployment from the natural rate of unemployment. The share of unemployment explained by the current business cycle. A recession causes cyclical unemployment. Example: Current estimations Actual Unemployment = 4.9% Natural unemployment = 4.8% Cyclical unemployment = 0.1% Modules 12 and 13 ~ Unemployment.notebook Actual Unemployment = February 12, 2016 Cyclical + Structural + Frictional U3 Natural rate of unemployment Modules 12 and 13 ~ Unemployment.notebook February 12, 2016 The Natural Rate of Unemployment has changed over the years. 1950 ~ 5.3% 1970 ~ 6.3% Today ~ 4.8% Why? 1) Labor Force Characteristics. Younger workers or more experienced workers change. Frictional changes. 2) Institutional changes: more unions, less unions. Better Internet searches for jobs. 3) Changes in government policy: higher minimum wage, job training programs, etc. Modules 12 and 13 ~ Unemployment.notebook February 12, 2016 Modules 12 and 13 ~ Unemployment.notebook February 12, 2016 Modules 12 and 13 ~ Unemployment.notebook Homework: BMR #2 http://usat.ly/1TchExF Due Wednesday after break. 1. Read both Modules 12 and 13 2. Answer questions at the end of each module. 3. Activity 26 February 12, 2016 Modules 12 and 13 ~ Unemployment.notebook February 12, 2016
