WEEK 10 Flashcards
Relationship between unemployment and
- Recession
- Expansion
Always rises
Usually falls (but not always)
Unemployment rate
Percentage of total number of people in the labor force who are unemployed
Labor force
Number of all workers - employed and unemployed
Labor force participation rate
Number of all adults (people over 16) in the labor force
Issues with the unemployment rate
Good indicator of how easy it is to find a job BUT Can overstate the true level of unemployment (even if the labor market is healthy, still takes time to find a job and in the mean time is considered unemployed) Doesn’t measure the quality of jobs or how well people are matched to their jobs Can understate the the true level of unemployment because some people might give up on looking for a job because none are available and therefore leave labor force)
Discouraged workers
Non-working people who have given up looking for work Not considered unemployed Deeper the recession, the more discouraged workers
Marginally attached workers
Those who were available and actively looked for work recently but not currently looking (in past 12 months but not in the last 4 weeks)
Unemployed workers
People who work part time jobs because cannot find full-time jobs
Jobless recovery
Period in which real GDP growth rate is positive but unemployment rate still rising
What are the three types of unemployment?
Frictional, structural, cyclical
What happens in a healthy year job-wise?
Workers move in and out of employment and unemployment each month
Frictional unemployment
Unemployment due to time workers spend in job search Created by a scarcity of information Matching people to jobs takes time
Structural unemployment
More people are seeking jobs in a particular labor market than there are jobs available at the current wage rate even when the economy is at the peak of its business cycle
Causes of structural unemployment
Labor unions Efficiency wages Side effects of government policies Mismatches between employees and employers
Efficiency wages
Wages that employers set above equilibrium rate as an incentive for better employee performance
Labor union
Associate of workers that bargain collectively with employers over wages, benefits, working conditions, etc.
Cyclical unemployment
Unemployment correlated with business cycle Deviation from natural rate
Why is lower GDP growth associated with higher unemployment?
- When GDP falls, firms lay off workers 2. Idle labor and capital leads to economic growth not being maximized which decreases the ability of an economy to create more jobs
Natural unemployment
Frictional + structural always present
Actual unemployment
Natural and cyclical unemployment
Why do we need natural employment estimates?
To make forecasts and conduct policy analyses
What causes natural unemployment to change?
Changes in characteristics of LF/demographics Example: 1. Changes in labor market institutions: unions, temp agencies, new tech 2. Changes in government policy: job training programs
Shoe leather costs
Increased costs of transactions caused by inflation Because cash quickly loses value during high inflation, people waste time trying to spend it as fast as possible
Menu cost
Real cost of changing a listed price
Unit-of-account costs
Costs arising from the way inflation makes money a less reliable unit of measurement (e.g. during high inflation)
Interest rate
Price that a lender charges for the use of savings for a year
Nominal interest rate
Interest rate expressed in dollar terms
Real interest rate
Nominal IR - inflation rate
Disinflation
Process of bringing inflation rate down, usually increases unemployment
Labor force participation rate equation
Unemployment rate equation
Traditional structural unemployment minimum wage argument
- Minimum wage creates low-skilled unemployment
- Higher the wage, more structural unemployment
Real wage equation
real income equation
inflation rate
graph showing the natural rate of unemployment
