Download Mr. Mayer AP Macroeconomics

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The Business Cycle and Unemployment
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Population
o Number of people in a country
Labor force
o Number of people in a country that are classified as either employed or unemployed
by the Bureau of Labor Statistics (BLS)
o Labor Force Participation Rate
• % of working age population in the labor force (U.S. is approx 66%) and is figured
by labor force / adult population x 100
Employed
o People 16 years and older that have a job.
o It doesn’t matter if it’s part-time or full-time, as long as they work at least 1 hour
every 2 weeks
Unemployed
o People 16 years and older that don’t have a job, but have actively searched for a job
in the last 2 weeks
o Unemployment rate = # of unemployed / # of people in labor force x 100
Not in Labor Force
o Kids, military personnel, retired people, stay at home Moms and Dads, full-time
students, your 40 year old uncle who sleeps on the couch all day, most of the
homeless.
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It is difficult to distinguish between a person who is
unemployed and a person who is not in the labor force.
Discouraged workers, people who would like to work but
have given up looking for jobs after an unsuccessful search,
don’t show up in unemployment statistics.
Other people may claim to be unemployed in order to
receive financial assistance, even though they aren’t
looking for work.
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Most spells of unemployment are short.
Most unemployment observed at any given time is longterm.
Most of the economy’s unemployment problem is
attributable to relatively few workers who are jobless for
long periods of time.
 Frictional
o “between jobs”, voluntary, good for individuals and society
 Structural
o Associated with lack of skills or declining industry (ex. High
school dropouts, type-writer repairmen, or when there are
more people seeking jobs in a labor market than there are
jobs available).
 Cyclical
o Associated with downturns in business cycle. Bad for society
and individuals.
 Seasonal
o Mall Santas, NRH20 Life-guards, Ride operators at Six Flags,
Golf-pros in Alaska during January.
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Structural unemployment occurs when there are more
people seeking jobs in a market than jobs available
Why is there Structural Unemployment?
o Minimum-wage laws
o Unions
o Efficiency Wages
Wage
Labor
supply
Surplus of labor =
Unemployment
Minimum
wage
WE
Labor
demand
0
LD
LE
LS
Quantity of
Labor
Copyright©2003 Southwestern/Thomson Learning
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By acting as a cartel with ability to strike or otherwise
impose high costs on employers, unions usually achieve
above-equilibrium wages for their members.
Union workers earn 10 to 20 percent more than nonunion
workers.
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Critics argue that unions cause the allocation of labor to be
inefficient and inequitable.
o Wages above the competitive level reduce the quantity of labor
demanded and cause unemployment.
o Some workers benefit at the expense of other workers.
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Advocates of unions contend that unions are a necessary
antidote to the market power of firms that hire workers.
They claim that unions are important for helping firms
respond efficiently to workers’ concerns.
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Efficiency wages are above-equilibrium wages paid by firms
in order to increase worker productivity.
The theory of efficiency wages states that firms operate
more efficiently if wages are above the equilibrium level.
o Workers will work harder if they are paid above equilibrium, but it
leaves a pool of workers who want jobs but can’t find them
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Unemployment Insurance
o Designed to help those who lose a job until they find a new one
o But it reduces the incentive to quickly find a new job and increases
both structural and frictional insurance
o Euroscloerosis: a term that describes the persistent unemployment
in many European countries
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Occurs when there is no cyclical unemployment present in the
economy
Associate with the Natural Rate of Unemployment (NRU).
o The level of unemployment experienced when the economy
is producing at its full potential.
o The United States’ NRU is approx. 4%-5%
o NRU=Frictional unemployment + Structural unemployment
o Actual unemployment=NRU+Cyclical unemployment
Associate Full Employment (FE) with the PPC, the long-run
aggregate supply (LRAS) and the long-run Phillips curve (LRPC)
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Okun’s Law- Every 1% increase in the u% causes a 2% decline in
Real GDP.
The burden of unemployment is not equally shared in society.
It causes social unrest and is hard on individuals and families.