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Chapter 12 Unemployment When more and more people are thrown out of work, unemployment results. —Calvin Coolidge(1930) 12.1 Employment and Unemployment Statistics Employed Persons Employed persons includes those 16 years of age and older who are either: employed by a private firm or a government unit self-employed had jobs but were not working because of illness, bad weather. 12.1 Employment and Unemployment Statistics Employment-Population Ratio 12.1 Employment and Unemployment Statistics Unemployed Persons Unemployed persons includes those 16 years of age and older, who are not working but are available for work, and either: (1) engaged in some job-seeking activity in the past 4 weeks. (2) were waiting to be called back to a job from which they were temporarily laid off. (3) would have been looking for job but were temporarily ill. (4) waiting to report for a new job within 30 days. 12.1 Employment and Unemployment Statistics Unemployment Rate 12.1 Employment and Unemployment Statistics Employment-Population Ratio 12.1 Employment and Unemployment Statistics Unemployment Rate 12.1 Employment and Unemployment Statistics Advantages of Household Survey The unemployment rate and employmentpopulation ratios come from a monthly household survey which has the following advantages: Time-consistent and large survey Time lag in obtaining data is short. Data is available on a disaggregated basis. The unemployment rate provides information about the business cycle. 12.1 Employment and Unemployment Statistics Disadvantages of Household Survey The monthly household survey has the following disadvantages: Part-time workers are counted as fully employed even if they wanted to work as a full-time worker. Unemployed persons must be actively seeking work. It does not measure persons who are subemployed. Persons may provide false information. 12.1 Employment and Unemployment Statistics Disadvantages of Household Survey All unemployed persons are counted equally. The data contain no information about minimum acceptable wages. 12.1 Employment and Unemployment Statistics Stock-Flow Model 12.1 Employment and Unemployment Statistics Determining Full Employment Some unemployment is voluntary and some unemployment is involuntary. The natural rate of unemployment is The unemployment rate at which there is neither excess demand nor excess supply in the labor market or The unemployment rate that will occur in the long run if he expected and actual rates of inflation are equal. The natural rate of unemployment changes over time. 12.2 Macroeconomic Output and Employment Determination Aggregate Demand Aggregate demand for goods and services indicates the total quantity of goods and services that domestic consumers, businesses, government, and foreign buyers will collectively desire to purchase at each price level. 12.2 Macroeconomic Output and Employment Determination Aggregate Demand The aggregate demand curve slopes downward because of the Interest rate effect A lower price level will reduce money demand and thus interest rates. The lower interest rate will increase spending on goods such as housing. Wealth or real balances effect A lower price level will increase the real value of assets whose value is fixed in nominal terms and thus raise spending. 12.2 Macroeconomic Output and Employment Determination Aggregate Demand Foreign purchases effect A lower price level will reduce the price of U.S. goods relative to foreign goods and so foreigners will increase their spending on U.S. goods. 12.2 Macroeconomic Output and Employment Determination Aggregate Supply Aggregate supply of goods and services is the relationship between the price level and total quantity of real output that firms are willing to produce and offer for sale. The aggregate supply curve is upward sloping below the natural rate of output. Since wages are inflexible downward, a decrease in demand will result in layoffs and reduce output. 12.2 Macroeconomic Output and Employment Determination Aggregate Supply The aggregate supply curve is vertical at the natural rate of output. Greater demand increases can’t increase output since the economy is at full-employment 12.2 Macroeconomic Output and Employment Determination Real Output Determination 12.2 Macroeconomic Output and Employment Determination Employment Determination 12.3 Frictional Unemployment Frictional Unemployment Frictional unemployment is unemployment due to voluntary quits, job switches, and new entrants or reentrants into the labor force. Sources of frictional unemployment: Search unemployment which is caused by individuals searching for the best wage offer and firms searching for workers to fill job openings. 12.3 Frictional Unemployment Wait unemployment which is caused by the excess supply of workers that results from non-market clearing wages. Temporary layoffs Union job queues Workers on temporary layoff usually don’t search for another job Workers may wait in a union job queue rather than take a nonunion job Efficiency wages Efficiency wages contribute to frictional unemployment since firms pay high wages to increase worker productivity. 12.4 Structural Unemployment Structural Unemployment Structural unemployment is unemployment due: Mismatch between the skills required for available job openings and the skills possessed by those seeking work. Geographic mismatch between the locations of job openings and job seekers. Workers losing jobs because of permanent plant closing or job cutbacks. 12.5 Demand-Deficient Unemployment Demand Deficient Unemployment 12.5 Demand-Deficient Unemployment Wage Rigidity Nominal wages are inflexible downward is unemployment due to: Unions Bias toward layoffs by firms Implicit contracts Insider-Outsider theories 12.6 The Distribution of Unemployment Distribution of Unemployment Unemployment rates are higher for: Less skilled workers Teenagers Blacks. Mean and women now have unemployment rates that are very similar. The percentage of persons unemployed for a long duration (15+ weeks) rises during recessions. 12.7 Reducing Unemployment: Public Policies Reducing Unemployment Expansionary fiscal and monetary policy can used to reduce demand-deficient unemployment. Complications arise from conducting stabilization policy. Time lags It takes time for changes in policy to affect the unemployment rate 12.7 Reducing Unemployment: Public Policies Reducing Unemployment Crowding out effect Higher government spending causes the government to borrow more funds and thus raise interest rates and reduce private spending. Tendency to create inflation.