Transcript Chapter 10

Chapter 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 Unemployment
Unemployment 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 Unemployment
Unemployment 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 1969
In energy crises of the 1970s, UR rose to as high as
8.5% in 1975 and 9.7% in 1981
After 1981-82 recession, UR fell to as low as 8.3% in
1989
Since 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 & Product
Two 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
Income Payments
Labor Resources
Labor Market
Households
Businesses
Product Market
Goods & Services
Consumption Expenditures
Model with Injections & Leakages
Income Payments
Savings
Labor Resources
Taxes
Imports
Households
Businesses
Investment
Goods & Services
Gov’t Exp.
Exports
Consumption Expenditures
Total Expenditures
Aggregate Demand:
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–
–
–
Consumption Expenditures, C
Investment Expenditures, I
Government Expenditures, G
Exports less Imports, X-M
Aggregate Demand: C+I+G+X-M
Price Level
D
A
110
B
105
D
200
400
Output of Goods & Services
Total Income
Aggregate Supply:
– Consumption Expenditures, C
– Personal Savings, S
– Income Taxes, T
Aggregate Supply: C+S+T
Price Level
S
110
105
Full Employment
S
200
400
Output of Goods & Services
Aggregate Equilibrium
Aggregate Demand = Aggregate Supply
C+I+G+X-M=C+S+T
I+G+X=S+T+M
Injections = Leakages
Equilibrium at less than Full
Employment
Price Level
S
D
110
Equilibrium output
105
Full employment output
S
D
200
400
Output of Goods & Services
Demand Side Fiscal Policy
To increase Aggregate Demand
Fiscal Policy:
– Increase government expenditures
– Reduce income taxes
Expansionary Demand Policy
Price Level
Full employment
Higher price
S
D’
D
110
D’
105
Full employment output
S
D
200
400
Output of Goods & Services
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
Price Level
S
D
Full employment
Lower price
110
105
Full employment output
95
S
200
S’
D
400
Output of Goods & Services
Accommodating Policy
Price Level
S
Full employment
Price stability
D’
D
105
S
S’
D’
D
200
Full employment output
400
Output of Goods & Services