Download Fina 353-Lecture Slide Week 5

ECON203
Principles of Macroeconomics
Week 5
Topic: JOBS (EMPLOYMENT) versus
UNEMPLOYMENT
Dr. Mazharul Islam
1
Lesson Objectives
To learn about
After studying these topics you should be able to:
• Understand about labor force, employment,
unemployment, employed, unemployed, full
employment, sources of unemployment, types of
unemployment, potential GDP, output gap.
• Calculation unemployment
participation rate,
rate,
• Understand
the
relationship
unemployment and output gap
labor
force
between
Dr. Mazharul Islam
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Employment and Unemployment
The population is divided into two groups:
1. The
working-age
population—the
number of people aged 16 years and
older who are not in jail, hospital, or some
other institution.
2. People too young to work (under 16 years
of age) or in institutional care.
The working-age population is divided into
two groups:
1. People in the labor force
2. People not in the labor force
Labor Force, Employment and
Employed
• Labor Force refers all citizens 16 years of age
and older who are working or looking for
work.
Labor force = employed + unemployed
population
• Employment refers a simple term holding of a
job for which a wage is paid, or the operating
of one’s own business. A person in this
situation is said to be employed.
Dr. Mazharul Islam
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Unemployment and unemployed
Unemployment refers to the number or
proportion of people in an economy who are
willing and able to work but are unable to get
a job. A person in this situation is said to be
unemployed.
Unemployment rate refers the percentage of
those in the labor force who are unemployed.
It is equals the number unemployed divided
by the number in the labor force.
Dr. Mazharul Islam
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Other Definitions of Unemployment
Marginally Attached Workers
–A marginally attached worker is a
person who currently is neither working nor
looking for work but has indicated that he
or she wants and is available for a job and
has looked for work sometime in the recent
past.
–A discouraged worker is a marginally
attached worker who has stopped looking
for a job because of repeated failure to find
one.
Calculating Unemployment
Rate
Unemployme nt Rate 
Number of poeple unemployed
100
Labor force
Example: In Saudi Arabia, if the number of
people unemployed in 2010 was 5 million and
the labor force was 155 million , here :
Unemployment rate = (5/ 155) x 100 =3.2 %.
Dr. Mazharul Islam
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Labor Force Participation
Rate
Labor Force Participation Rate refers the
share of the population 16 years and older
working or seeking work.
Labor Force
100
Working - age population
In 2008, the labor force was 154.6 million and the
working-age population was 233.8 million.
Dr. Mazharul Islam
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Importance of Real GDP
•Labor force consists of
employed
and
unemployed persons
•Those not working
include 1) those not in
the working force, and
2) those unemployed
•The
population
includes the
•employed
•unemployed
•people not in the
labor force
Dr. Mazharul Islam
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Sources of Unemployment
People become unemployed if they are
1. Job losers
2. Job leavers
3. Entrants or reentrants
Dr. Mazharul Islam
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Sources of Unemployment
Job losers: A job looser is someone who is laid off
from a job, either permanently or temporarily.
People lose their jobs for many reasons ;
1. Some people are not a good match for their
jobs.
2. Firms fail, or a new technology destroys some
types of jobs.
A job looser who decided to look for a new job
remains in the labor force and becomes
unemployed.
Dr. Mazharul Islam
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Sources of Unemployment
Job leavers:
Few people quit their jobs because they want to
spend time looking for better one , these job
leavers become unemployed.
But a Job leaver is someone who voluntarily
quits a job because he or she has found a better
job or has decided to withdraw from labor force.
Neither of these two types of job leavers
becomes unemployed.
Dr. Mazharul Islam
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Sources of Unemployment
• Entrants or reentrants:
An entrant is someone who has just finish
school and is looking for a job. Many entrants
spend time looking for first job and during this
period they are unemployed.
A reentrant is someone who has previously had
a job, has been quiet and left the labor force,
and has now decided to look for a job again.
Dr. Mazharul Islam
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Types of Unemployment
Four types of unemployment
– Frictional unemployment
– Structural unemployment
– Seasonal unemployment
– Cyclical unemployment
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Types of Unemployment
Frictional Unemployment:
- It is the unemployment that arises from normal labor
turnover-from people entering and leaving the labor
force, from quitting jobs to find better ones.
- It is a permanent and healthy phenomenon in
dynamic and growing economy.
- Firms and workers spend time searching out what
they believe will be the best attainable match, while
these unemployed people are searching, they are
fractionally unemployed.
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Types of Unemployment
Structural Unemployment:
It is the unemployment that arises when there is
a mismatch of skills or geographic location.
Occurs because changes in tastes, technology, or
competition reduce the demand for certain skills
and increase the demand for other skills.
Structural unemployment
frictional unemployment.
lasts
longer
Dr. Mazharul Islam
than
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Types of Unemployment
Seasonal Unemployment:
Unemployment caused by seasonal changes in labor
demand during the year.
– For example, during the month of Ramadan and Eid festival,
the demand for labor increases and other months may
decrease.
To eliminate the impact of such changes, monthly
unemployment statistics are seasonally adjusted which
smoothest out these factors
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Types of Unemployment
Cyclical Unemployment:
It occurs because of business cycle fluctuations in
output that occurs during recessions. Cyclical
unemployment is the higher than normal unemployment at
a business cycle trough and lower than normal
unemployment at a business cycle peak.
Example: A worker laid off because the economy is in a
recession and is then rehired when the expansion begins
experiences cycle unemployment.
Government policies to stimulate aggregate demand
during recessions is aimed at reducing this type of
unemployment.
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Full Employment
Full employment occurs when unemployment
arises from frictions, seasons, and structural
change exist but there is no cyclical
unemployment. It is also called natural
unemployment.
The natural unemployment rate is natural
unemployment as a percentage of labor force.
Natural unemployment rate =
natural unemployment x 100
labor force
Dr. Mazharul Islam
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Potential GDP& Output Gap
Potential GDP is the value of the real GDP when
all the economy’s factors of production are
employed i.e. Potential GDP is the quantity of real
GDP produced at full employment.
The GDP gap or the output gap is the difference
between Real GDP (actual output) and Potential GDP
i.e. output gap = Real GDP - potential GDP.
The percentage of Output gap is the real (actual) GDP
minus the potential GDP divided by the potential GDP
which is always express in percentage.
[(Real GDP- Potential GDP)/Potential GDP]*100
Dr. Mazharul Islam
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The Relationship Between
Unemployment & the Output
Gap
• When unemployment rate exceeds full
employment rate (the natural unemployment
rate), the real GDP is below potential GDP and
the Output Gap is negative.
• When Unemployment rate is below full
employment rate (the natural unemployment
rate), the real GDP is above potential GDP and
the Output Gap is positive.
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Now it’s over for
today. Do you have
any question?
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