Unemployment and Inflation i.e. two evils of the economy will be discussed.
Component Parts GDP Consumption Investment Government Spending Exports- Imports (Net Exports) C+I+G+(X-M) = GDP
Why does growth matter? • Allows wages and incomes to rise. • Standard of living increases • Takes the pressure of scarce resources… (why?)
Main Sources of Growth Two ways that society can increase its real output and income: 1) increase inputs of resources 2) increase productivity of those inputs BLS Latest Numbers
Macroeconomic Problems • High inflation rate • High unemployment rate • High interest rates • Low economic growth or stagnation
Macroeconomic Policies • Fiscal Policy deals with changes in government expenditures and/or taxes. to achieve particular macroeconomic goals. • Monetary Policy deals with. changes in the money supply, or the rate of growth of the money supply, to achieve particular macroeconomic goals.
Different Views of How the Economy Works-Stable-Unstable • The economy is inherently stable and self-regulating.-Classical • The economy is inherently unstable and requires intervention to correct problems.-Keynesian
Macro deals with entire economySubject matter includes: • Macroeconomic problems – high unemployment • Macroeconomics theories – government spending • Macroeconomics policies- use fiscal policy • Different view on how the economy works- self-correcting, government stimulus
Consensus among Economists says swings due to: Changes in REAL levels of output and employment brought about by changes in levels of TOTAL SPENDING. Spending Businesses no longer produce at current level Output, employment and income fall In reverse… the opposite results.
Important economic fact: As the economy gets close to FULL EMPLOYMENT It is more difficult to obtain further gains in REAL OUTPUT. Continued increasing levels of spending bring about INFLATION
REAL GDP (as opposed to what???) • Real GDP • The value of the entire output produced annually within a country’s borders, adjusted for price changes.
REAL VS NOMINAL GDP What is the difference?? Inflation----------- Inflation is BAD!
What will we focus on? • This will focuses on economic growth, the business cycle, unemployment and inflation. • When is a person “unemployed”? • What are the costs of unemployment? • -When will money not buy as much?
What is the labor force? • The labor force includes all persons over age sixteen who are either working for pay or actively seeking paid employment. • People who are not employed or are not actively seeking work are not considered part of the labor force. • When is a person “unemployed”? • What are the costs of unemployment?
How is unemployment measured? • U.S. Census Bureau surveys about 60,000 households a month to determine how many people are actually unemployed. • This translates into approximately 110,000 individuals, a large sample compared to public opinion surveys which usually cover fewer than 2,000 people.
Sampling for unemployment • Every month, one-fourth of the households in the sample are changed, so that no household is interviewed more than 4 consecutive months. • Similarly, interviewers do not decide the respondents' labor force classification. They simply ask the questions in the prescribed way and record the answers. Based on information collected in the survey and definitions programmed into the computer, individuals are then classified as employed, unemployed, or not in the labor force.
Persons over 16 are considered employed IF: They worked at all for pay or profit even if for an hour Worked 15 hours or more w/out pay in a family-operated enterprise. Have a job which they did not work during (survey week) due to illness, vacation, industrial disputes, bad weather, time off or personal reasons. Bureau Labor Statistics determines perimeters for unemployment.
BLS Continued Persons are considered unemployed IF: (during the survey week) • Do not have a job • Are available for work • Have actively looked & looked for work during past four weeks (this requirement is very weak…)
Reason for unemployment • How long a person remains unemployed is affected by the nature of the joblessness. • Job leavers • Job losers • Re-entrants • New entrants
What happens if you can’t find work……. • If unemployment persists… workers often give-up looking. • Discouraged workers are not counted as part of the unemployment problem after they give up looking for a job. • Some people are forced to take any job available which means…no longer unemployed, but now “underemployed.”
How could one be underemployed? Underemploymentexists when people seeking full-time paid employment, work only part time, or are employed at jobs below their capability. Underemployed workers represent labor resources that are not being fully utilized.
Unemployment Cont. Seasonal unemployment is the unemployment due to seasonal changes in employment or labor supply. What would be an example? At the end of each season, thousands of workers must go searching for new jobs, experiencing seasonal unemployment in the process.
Three basic kinds of unemployment: 1. Frictional Unemployment • Frictional unemploymentis the brief periods of unemployment experienced by people moving between jobs or into the labor market. • Frictional unemployment differs from other unemployment in three ways: • Demand is there • Frictionally unemployed have the skills required • Job search relatively short
3 Kinds of Unemployment Cont. • 2. Structural Unemployment • Structural unemployment is the unemployment caused by a mismatch between the skills (or location) of job seekers and the requirements (or location) of available jobs. Periods between jobs will be lengthened when the unemployed lack the skills that employers require.
3 Kinds of Unemployment Cont. • 3. Cyclical Unemployment • Cyclical unemployment is the unemployment attributable to the lack of job vacancies – i.e., to an inadequate level of aggregate demand. • Cyclical unemployment occurs when there are simply not enough jobs to go around.
More Than a Century of Unemployment Source: U.S. Department of Labor, Bureau of Labor Statistics
OKUN’S Law • Okun’s Law • Arthur Okun quantified the relationship between the shortfall in real output and unemployment. • High unemployment in 1992 left the U.S. $240 billion short of its production possibilities — a loss of $920 of goods and services for every American.
Labor Force? Okun’s Law • Slow Growth…. • The economy must grow at least as fast as the labor force to avoid cyclical unemployment. • Relationship between the shortfall in output and unemployment. • When you have unemployment of any significance, your economy will have reduced output. Ratio accepted today is 1% of unemployment yields 2% less output. • A 2/1ratio then allows economists to put a $$$ amount on the cost of unemployment to the economy.
Think about this! Unemployment = 5% (NARU) Unemployment = 8% (x 2 = 16% less production) Unemployment = 25% (depression era x 2) = 50% less production! Today (2010) = 8.2 x 2 =16.4% less
So… what is full employment? Full employment is not the same as zero unemployment. The economy strives to reach its potential which means that full employment is essential. When the actual rate of unemployment exceeds thenatural rate, the actual output of the economy will fall below its potential. Resources are underutilized (inside production possibility curve.)
Full Employment • The condition that exists when the unemployment rate is equal to the natural unemployment rate.
Image Cylinder= Economy… Businesses, factories, economynot working at full capacity
Full Employment AD AS LRAS
Full Employment Act of 1946 • The Full-Employment Goal • In the Employment Act of 1946, Congress committed the federal government to pursue a goal of “maximum” employment. • Congress didn’t specify what the rate of unemployment should be.
Congress creates confusion First attempt to define “full employment” came about 1960- Council of Advisors decided that full employment meant “watching prices” ….. Rising prices they said would signal that full employment was being reached.*** believed inverse relationship unemployment/inflation In 1970-80 Full employment potential was considered overly optimistic. Unemployment rates stayed far above 4% even when the economy expanded. Inflation began to accelerate at higher levels of unemployment.
Confusion Continued • The redefinition of full employment goal needed to be addressed. • Needed to realize more youth and women in the labor force • Needed to acknowledge the increased transfer payments • Needed to acknowledge the structural changes in demand (for such things as technology and trade) old industries were not in such demand (steel, textiles, auto)\ • Most economists say 5% today
Humphrey-Hawkins Act of 1978 • This Act was passed to require the Federal Reserve to maintain a 4% rate of unemployment without inflation while holding the inflation to a goal of 3% by implementing monetary policy where needed. • Fiscal policy might undo this law, but it is still a focus of the Fed and the Fed has to report to Congress twice a year on the health of the American economy.
Natural Rate of UnemploymentNARU NARU = the difference between full employment and 100% employment. A level of unemployment that will not trigger inflation. i.e. this figure will not bid up wages. The natural rate of unemployment is not a temporary high or low… it is a rate that is sustainable into the future.
Depression Unemployment • Our greatest failure occurred during the Great Depression, when as much as one-fourth of the labor force was unemployed. The Historical Record • Unemployment rates fell dramatically during World War II — the civilian unemployment rate reached a rock bottom 1.2 percent. • Since 1950, unemployment rate has fluctuated from a low of 2.8 percent during the Korean War (1953) to a high of 10.8 percent during the 1981-82 recession.
From 1982 to 1989, unemployment fell, but shot up again in the 1990-91 recession. • In…2002…unemployment was circa 5.7% • In…2004…unemployment was circa 6.5% • February, 2005… 5.4% • September, 2005….5.1% • February, 2006….. 4.8% • January, 2007…….4.6% • October, 2007…….4.7% • October, 2008…….6.1% • February, 2009 …..7.6% • July, 2009 ………. 9.5% • September 2009….9.7% • October, 2009 – 10.1 • February. 2010 – 9.7 • May, 2010 – 9.3 • June, 2010- 9.7October, 2010 9.6
What about the other evil? Inflation