Lecture 10:Deficits and Unemployment

• Deficits

• Measures of Well-Being– unemployment– inflation

• Link back to Lecture 9

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Government Budget and International Deficits

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Deficits

• An international deficit exists if our imports exceed our exports.

• Current Account – Our exports minus our imports; but it also takes

interest payment paid to and received from the rest of the world into account.

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Government Budget and International Deficits

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Do Deficits Matter?

• Governments must borrow if it spends more than it earns in tax revenue.

• If the borrowed funds are used to purchase assets that earn a profit, the investment may be sound.

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Macroeconomic Policy Challenges and Tools

• Policy Challenges

1) Boost economic growth

2) Stabilize the business cycle

3) Reduce unemployment

4) Keep inflation low

5) Reduce the government and international deficits

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Macroeconomic Policy Challenges and Tools

• Policy Tools

1) Fiscal policy• Making changes in taxes and government spending

– Long term growth– Smooth the business cycle

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Macroeconomic Policy Challenges and Tools

• Policy Tools

2) Monetary policy• Changing interest rates and the amount of money in

the economy– Control inflation– Smooth business cycle

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Jobs and Unemployment

• Jobs– In 1996, 127 million people had jobs.

• An increase of 20 million over 1985 and 23 million over 1975

• On average, 1.8 million new jobs are created every year

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Jobs and Unemployment

• The type of job you will get when you graduate will depend, to some degree, on:– the total number of jobs available– the unemployment rate– what is the unemployment rate today?– ck out today’s WSJ

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Unemployment

• Unemployment is a condition in which there are qualified workers who are available for work at the current wage rate and who do not have jobs.– To be counted as unemployed, a person must

have made some effort to find a job during the previous four weeks.

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The Labor Force and the Unemployment Rate

• Unemployment plus employment equals the labor force.

• The unemployment rate is the percentage of the labor force that cannot find work.

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Part-Time Workers

• Part-time workers are counted as employed. However, some part-time workers would accept a full-time job if one were available.

• This group should be counted as “partially employed.” They are counted as fully employed by the Bureau of Labor Statistics.

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Unemployment inthe United States

• None of our recent experiences with high unemployment come close to the peak of 25% unemployment experienced at the depths of the Great Depression (1933).

• In recent years, the United States has experienced periods of high unemployment.

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Unemployment Around the World

• Since 1980, the U.S. unemployment rate has averaged 7 percent, compared with 8.1 percent in Europe and 2.5 percent in Japan.– U.S. unemployment fluctuates with the

business cycle.– Japanese unemployment barely fluctuates at all.– European unemployment has been rising

sharply.

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Why UnemploymentIs a Problem

• The value of training and education may be significantly reduced if people can’t find entry-level jobs.

• Higher unemployment rates are statistically associated with higher rates of crime, alcoholism, depression, suicide, and domestic violence.

• The unemployed lose self-esteem.

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Jobs and Unemployment

• Unemployment– On average, 7 million people are unemployed

in the U.S.

• Unemployed worker – One who does not have a job but is available

for work, is willing to work, and has made some effort to find work within the previous four weeks

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Jobs and Unemployment

• Labor Force– Sum of the people who are unemployed and the

people who are employed

• Unemployment Rate– The percentage of the labor force who are

unemployed

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Jobs and Unemployment

• Discouraged Worker– A person who does not have a job, is available

for work, and is willing to work but who has given up the effort to find work

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Jobs and Unemployment

• The unemployment rate may be misleading because:– Discouraged workers are excluded– Part-time workers who want full-time jobs are

considered employed

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Unemployment in theUnited States

• Important Features

1) The unemployment rate during the Depression peaked in 1933 at 25%.

2) After 1934, the unemployment rate overstated the true rate because

it counts the people who had make-work jobs.

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Unemployment in theUnited States

• Important Features

3) Unemployment rates have reached high levels in recent years during

recessions.

4) The unemployment rate never falls to zero.

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Unemployment in theUnited States

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Unemployment inIndustrial Economies

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Why Unemploymentis a Problem

• Lost Production and Incomes

• Lost Human Capital– Prolonged unemployment can hurt a person’s

job prospects.

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