Unemployment Flashcards
Long-run & Short-run Movements
- In analyzing changes in GDP (or GDP per capita) over time, it is useful to distinguish between short-run and long-run movements.
- It can be done by decomposing GDP movement into a trend (i.e. long-run movement) and fluctuations around the trend (i.e. short-run movement).
(Note: Unless stated otherwise, GDP means real GDP.)
Potential GDP:
- A country’s long-run trend GDP value is called potential GDP.
- A country’s potential GDP is not its maximum GDP.
- Maximum GDP is attained when firms operate as long as they can and use as many workers as they can hire.
- Potential GDP is attained when firms operate on their normal hours using a normal workforce.
- Actual GDP can be bigger or smaller than potential GDP.
Output Gap:
- If there is an economic boom:
- actual GDP > potential GDP
- positive output gap
- If there is an economic slump:
- actual GDP < potential GDP
- negative output gap
Positive Output Gap and Inflation:
- When actual GDP is larger than potential GDP, the economy is producing beyond its normal capacity.
- This means higher demand for workers and materials.
- This then may cause wages, material prices and eventually output prices to rise faster, i.e. higher inflation.
- The opposite is true when there is a negative output gap.
Negative Output Gap and Unemployment:
- When actual GDP is smaller than potential GDP, the economy is producing below its normal capacity.
- This means lower demand for workers.
- This then may cause laying off of workers, i.e. higher unemployment.
- The opposite is true when there is a positive output gap.
Introduction:
- Unemployment and inflation are two problems constantly concerning economists and policymakers.
- Arguably, the discipline of macroeconomics was invented (by J. M. Keynes) in the 1930s as a response to the Great Depression of the time – when unemployment rates around the world rose above 20%.
Impacts of Unemployment:
- Unemployment has negative personal impacts as well as negative social impacts.
- The size of the impacts depends on the duration of unemployment.
- The longer people are unemployed, the more they lose their skills and workplace contact, and thus the harder it is for them to get a job.
- Long-term unemployed people are more likely to suffer health, family and other personal problems.
Unemployment/Underemployment, Australian Example:
Who is Unemployed?
The Australian Bureau of Statistics (ABS) surveys 0.33% of the population who are aged 15 or above.
- A person is classified as unemployed if the person
- worked for less than one hour in a paid employment in the week before the interview; and
- actively looked for work in the previous four weeks;
- and is currently available to start work.
The employment status of the population, Australia, March 2014:
Unemployment Rate =
The unemployment rate measures the percentage of the labour force that is unemployed.
The labour force does not include active- duty military personnel or institutionalized people, such as prison inmates.
The Labour Force Participation Rate =
The labour force participation rate measures the percentage of the working age population that is in the labour force.
Employment Rate =
Employment rate measures the percentage of the working age population that is employed.
Note: employment rate + unemployment rate is not equal to 100!
Cyclical Unemployment:
Cyclical unemployment is caused by business cycles
- Economic contraction => job destruction => higher unemployment
- Economic expansion => job creation => lower unemployment
However, unemployment changes with business cycles with a long lag.
Frictional Unemployment =
- Frictional unemployment is caused by the fact that it takes time for workers to find the “right job” and for firms to find the “right employer”.
- The longer the searching process, the longer the unemployment duration of a worker.
Full Unemployment :
An economy is said to attain full employment when there is zero cyclical unemployment.
- At full unemployment, there is still some ‘natural’ unemployment due to frictional and structural unemployment.
- When real GDP reaches its potential level, the economy attains full employment or, in equivalent, its natural rate of unemployment.
- Terminology: The natural rate of unemployment is also known as the non-accelerating inflation rate of unemployment (NAIRU).
Workforce of the Future:
- Computer power is increasing at an exponential rate.
- Combining artificial intelligence, advanced sensors technology and robotic technology leads to smart machines that can do many works previously can only be done efficiently by humans.
