Chapter 10: Unemployment IssuesChapter 10: Unemployment Issues
Cost of Unemployment
Economic Cost:
– Loss of income for the individual– Cost of searching for new jobs– Loss of goods and services for the society
• The economy drops off the PPC and ends up at a combination inside the production possibilities space
– Payment of unemployment benefit
Cost of Unemployment
Social Cost:
– Loss of self-esteem and confidence– Family problems (violence and divorce)– Health problems (hart attacks and suicide)– Criminal activities
Labor Force
Individuals between 16 and 65, who are employed for pay or unemployed
Individuals in prisons or mental hospitals, children, and retired are excluded
Unemployment
Members of the labor force who are:– 16 years of age or older– out of work– actively looking for work
Unemployment rate = Unemployed Workers as a % of Labor Force
Discouraged Workers
Members of the labor force who quit looking for jobs (e.g., the homeless)
Unemployment rate is underestimated by 2 to 3% because discouraged workers are excluded
Frictional UnemploymentFrictional UnemploymentUnemployment of individuals who are searching for jobs or waiting between jobs
Example: college graduates entering the labor market
Supply-side effect and transitional. Need information about job openings.
Structural UnemploymentUnemployment due to fundamental economic changes that eliminate some jobs, while creating other jobs for which qualified workers may not be readily available
Example: the occupation of “typing” is disappeared by introduction of personal computers
Normal due to technological advancement and changes in consumer preferences
Cyclical Unemployment
Unemployment caused by contraction in economic activities
Example: companies lay-off workers during a recession
Needs public policy to increase employment
Full Employment Unemployment
Rate of unemployment:
Taking into account frictional and structural unemployment
Consistent with price stability
Usually 3-5 percent
Unemployment Trend
During the expansion of the 1960s, UR fell from 6.7% in 1961 to 3.5% in 1969In energy crises of the 1970s, UR rose to as high as 8.5% in 1975 and 9.7% in 1981After 1981-82 recession, UR fell to as low as 8.3% in 1989Since 1991-92 recession where UR rose to 7.4%, it has declined to about 4%Since 9/11/01, UR has gone up to about 5.7%
Circular Flow of Income & ProductTwo sectors: households, businesses
Two markets: product, labor
Households sell labor to make income and buy good & services from businesses
Businesses buy labor to produce good & services and sell to households
Simple Model
Businesses Households
Labor Resources
Income Payments
Goods & Services
Consumption Expenditures
Product Market
Labor Market
Model with Injections & Leakages
Businesses Households
Labor Resources
Income Payments
Goods & Services
Consumption Expenditures
Gov’t Exp.
Exports
Investment
Savings
Taxes
Imports
Total Expenditures
Aggregate Demand:
– Consumption Expenditures, C– Investment Expenditures, I– Government Expenditures, G– Exports less Imports, X-M
Aggregate Demand: C+I+G+X-M
Price Level
Output of Goods & Services
D
D
105
110A
B
200 400
Total Income
Aggregate Supply:
– Consumption Expenditures, C– Personal Savings, S– Income Taxes, T
Aggregate Supply: C+S+T
Price Level
Output of Goods & Services
105
110
200 400
S
S
Full Employment
Aggregate Equilibrium
Aggregate Demand = Aggregate Supply
C + I + G + X - M = C + S + TI + G + X = S + T + MInjections = Leakages
Equilibrium at less than Full Employment
Price Level
Output of Goods & Services
105
110
200 400
S
S
D
D
Full employment output
Equilibrium output
Demand Side Fiscal Policy
To increase Aggregate Demand
Fiscal Policy:– Increase government expenditures– Reduce income taxes
Expansionary Demand Policy
Output of Goods & Services
105
110
200 400
S
S
D
D
Full employment output
D’
D’
Price Level
Full employmentHigher price
Supply Side Fiscal Policy
To increase Aggregate Supply,
– Reduce personal and corporate tax rate to increase savings, investment, employment, and tax revenues
– Lower government spending to balance the budget
Expansionary Supply Policy
Output of Goods & Services
105
110
200 400
S
S
D
D
Full employment output
S’95
Price Level
Full employmentLower price
Accommodating Policy
Output of Goods & Services
105
200 400
S
S
D
D
Full employment output
D’
D’
Price Level
S’
Full employmentPrice stability
Top Related