Business Cycle & Unemployment

1. Business Cycle & Unemployment The economy in flux.

2. Examining the Economy Need to address two Time Horizons • Long-Run • Over the Course of Several Years, what is GDP’s Trend? • Short-Run • What are GDP’s month-to-month or quarter-to-quarter fluctuations?

3. A Closer Look at Real GDP http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&width=1000&height=600&preserve_ratio=true&s[1][id]=GDPC96

4. Real GDP: 1990 to Today http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&width=1000&height=600&preserve_ratio=true&s[1][id]=GDPC96

5. Terminology • Business Cycle • Alternating periods of economic growth and contraction, measured by %GDP. • Avg. Cycle last about 8 - 10 years. • Trend Line • Shows Long-run GDP trend. • Economic Growth • Increase in national output measured by a positive %GDP.

6. Trend Peak GDP Trough Peak Real GDP Trough Time Recession Recovery Business Cycle Phases of the Business Cycle • 4 Phases • Peak • Point where Real GDP reaches a local Max. • Recession • Period during which real GDP declines • (2 consecutive Quarters) • Trough • Point where real GDP reaches a local min. • Recovery/Boom • Period during which real GDP increases

7. Growth rates can tell us the same info about the business cycle Recovery/Boom Growth Rate > 0 Recession Growth Rate < 0 Peak Growth Rate = 0 & moving from + to - Trough Growth Rate = 0 & moving from - to + Growth Rate Recovery Recovery Peak %GDP Trough Time Easier to look at Growth Rates Recession

8. Growth Rate of Real GDP

9. Growth Rate: 1990 to today

10. Forecasting the Business Cycle • Takes time to collect data on GDP. • 1 month lag for initial quarterly report • 6 month or longer for revised estimates • We need to know faster: • Use Indicators • Leading Indicators: Inventories, Avg. Work Week… • Coincidental Indicators:Industrial Production, Non-Ag. Payroll • Lagging Indicators: Unemployment, Duration of UE, Prime Rate

11. Economic Goals • Maintain Growth Trend • Minimize Size of Economic Fluctuations • Try to keep Business Cycle as close to Trend line as Possible • Why? • Economy potentially experiences problems when away from trend: • Below Trend: Unemployment Concerns • Above Trend: Inflation Concerns

12. Unemployment • Unemployment Rate: • The % of people in the labor force who are without jobs and are actively looking

13. Working Age Population Anyone over 16 years old Not in Labor Force Civilian Labor Force Unemployed Employed Armed forces, household workers, volunteers, students, retirees, disabled, Institutionalized workers, Discouraged Workers Member of working age population not listed to left No job, but looking within last 2 weeks: New entrants, re-entrants, lost or quit last job & laid-off Paying job or self-employed Population Break Down Discouraged Worker: a person who wants work, would take a job if found, but has given up looking.

14. Employment Statistics • Unemployment Rate • UE% = # of Unemployed/(# in Labor Force) =UE / (LF) =UE / (UE + E) • Ex: Unemployed = 100; Employed = 900; • UE%= 100/(100+900) = 100/1000=.1=10% • Labor Force Participation Rate (LFPR) • LFPR = LF / Working Age Pop • Employment Ratio • ER = Employed / Working Age Pop

15. Unemployment History Avg. UE% = 5.6%

16. Employment Ratio History

17. Problems w/ Unemployment Measure • UE% Overstated because: • No Black Markets • People lie to get Unemployment Compensation • UE% Understated because: • Discouraged Workers • Underemployed: Part-time workers who want full time work

18. To Fix UE need to know the cause • Types of Unemployment: • Frictional Unemployment • People who are in between jobs or just entered the job market: • Seasonal Unemployment • UE related to changing seasons: ex. Winter UE in agriculture or construction • Technically a sub category of frictional

19. To Fix UE need to know the cause • Structural Unemployment • No longer have skill demanded by employers • Mismatch of skills • Cyclical Unemployment • Unemployment caused by economic fluctuations. Caused by the cycle.

20. Unemployment: Natural? Good Sign? • Frictional, Seasonal & Structural • We expect these 3 types of UE will always exist • Maybe even good: • Frictional: • People leave jobs to find better ones, or graduate from school…Good. • Seasonal: • Necessary for the type of work, so expected. • Structural: • Implies new technology, more skills need. Good sign for the economy, not for the individual

21. Full Employment • If we expect these types of UE, then we don’t worry when we have UE. • Full Employment Implies • UE% = Seasonal% + Structural% +Frictional % • NOTE: FULL EMPLOYMENT DOES NOT MEAN UE = 0%

22. Natural Rate of Unemployment • The unemployment rate that exists at Full employment. • Estimated to be between 4% & 6%, so… aprox: 5%

23. Unemployment Goal • Keep Economy at Full Employment • Maintain the Natural Rate of UE • Keep Cyclical Unemployment = 0 • Stay near trend line

24. Cost of Unemployment • GDP Gap = Potential real GDP – actual Real GDP • Potential Real GDP • What GDP would have been if we were at Full Employment • Actual Real GDP • Real GDP actually produced • GDP Gap measures lost production caused by unemployment • “How Far Inside the PPC are we?”