ECON 141 Ch. 2 Dr. Mohammed Alwosabi

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1 Notes on Chapter 2 POPULATION SURVEY AND LABOR MARKET Dr. Mohammed Alwosabi BUSINESS CYCLE: As mentioned before, we study macroeconomics to describe, analyze, and predict the economic activity. But economic activity is not constant. It fluctuates ups and downs for different reasons. s These ups and downs are called business cycle (or economic cycle). To understand the business cycle we must distinguish between RGDP and potential GDP (PGDP). 2 Real GDP is the market value of the total production measured at the constant (base year) prices. RGDP eliminates the influence of inflation and determines how much production has grown from one year to another. Potential t GDP is st the RGDP when all country s resources are fully employed. Since resources are not always fully employed, RGDP fluctuates around PGDP. Business Cycle can be defined as periodic but irregular short run upward and downward movements (fluctuations) in production and employment (in RGDP around the PGDP). Every business cycle has two phases: expansion and recession and two turning points: peak and trough. 3 4 RGDP Peak Recession Trough Expansion PGDP RGDP Expansion: An expansion period in which there is a significant increase in RGDP lasting for at least two quarters. During expansion, production of goods and services increases and unemployment decreases. eases An expansion begins just after the economy reaches its trough of activity and ends as the economy reaches its peak. Time 5 6

2 Recession: A recession is a period in which is a significant decrease in RGDP of the country that occurs for at least two quarters. A recession begins just after the economy reaches its peak of activity and ends as the economy reaches its trough. peak: A peak is the point at which the real GDP stops increasing (an expansion ends) and begins its decline (a recession begins). It is the highest point. At the peak, employment, consumer spending, and production hit their highest levels. When the peak lasts for a long time, we are in a period of prosperity. One of the dangers of peak periods is that of inflation. 7 8 Trough: The trough is the time at which the real GDP stops its decline (a recession ends) and starts expanding (an expansion begins). It is the lowest point. When the trough lasts for a long time, we are ae in ape period odo of depression. ess POPULATION SURVEY: The Population of a country can be divided into two groups:. Working-age population: the total number of people aged over 5 years who are not in jails, hospitals, or some other form of institutional tut care such as people e in full-time education. 2. Not in the working-age population such as those who are too young to work or who are at institutional care and unable to work (dependents). 9 0 The working-age population is divided into two groups:. Those in the labor force 2. Those not in the labor force The labor force is all people who are able and willing to work and divided into two groups: Those who are employed Those who are unemployed but actively seeking work The employed person is the one who have a full time job or a part-time time job. The unemployed is the person who is without work and is actively trying to find job or waiting to be called back to a job from which he or she has been laid off or waiting to start a new job. 2

3 Not in the labor force includes any person who is in the working-age population but is neither employed nor unemployed such as a person who is not working but is not looking for a job, a full-time student or a retired person. LABOR MARKET INDICATORS: There are three labor market indicators. The unemployment rate is the percentage of the labor force that is unemployed. Unemployed Unemploy ment rate = 00 Labor force This is an indicator of the extent to which people want jobs but can t find jobs. The unemployment rate increases during recessions. 3 4 Example: Suppose the working age population is 220 million, the labor force is 50 million, and the number of employed is 35 million. What is the unemployment rate? 2. The Labor Force Participation Rate is the percentage of the working-age population that is in the labor force. Labor force Labor force participation rate = 00 Working - age population This is an indicator of the willingness of people of working-age to take jobs. If the labor force participation rate is rising and the working-age population remains the same, then the number of the labor force is rising. 5 6 Exercise: Suppose there are currently 00 people unemployed, 500 people employed, and 2000 people in the working age population. What is the labor force participation rate? 3. The employment-to-population ratio is the percentage of working-age people who have jobs. employed Employment to populationratio = 00 Working age population This is an indicator of availability of jobs. It falls during recession and increases during an expansion. 7 8

4 Discouraged workers Discouraged workers are people available and willing to work but have not made an effort to find work within the last month. These workers often leave the labor force temporarily during a recession and re- enter during an expansion and become e active job seeker. Discouraged workers are not considered unemployed and not included in the labor force because they are not actively seeking work. Aggregate Hours: The three labor market indicators are useful sign of the health of the economy and directly measure jobs. But they don t tell us the quantity of the labor used to produce RGDP. We cannot use them to calculate the production of labor. Jobs are not all the same. The number of hours worked by the part-time time workers is less than full-time workers. And some people work over time Example: A 24-hour mini-mart mart might hire 6 students to work for 4 hours a day each, or might hire 3 full-time workers who work 8 hours a day each. The total hours worked is the same in both cases. To determine the total amount of labor used to produce RGDP we measure labor in hours rather than number of workers in jobs. Aggregate hours are the total number of hours worked by all the people employed, both full-time and part-time time during a year. Money (nominal) wage rate is the actual money paid per period of time. Real wage rate is the quantity of goods and services that an hour s work can buy. It is equal to the money wage rate divided by the price level- the GDP deflator or CPI. If money wage rate is constant but price level rises, the real wage decreases and the quantity of goods and services that an hour of work can buy decreases If money wage rate increases but price level remains constant, the real wage increases and the quantity of goods and services that an hour of work can buy increases. Category Number (millions) Total population 500 Working full-time 200 Working gpart-time 80 Not working and looking for work 40 Want to work but no longer looking for work 20 Retired

5 Answer the following questions based on the information from the above table,. What is the number of people unemployed? 2. What is the size of the labor force? 3. What is the number of discouraged workers? 4. What is the number of people not in the labor force? 5. What is the working-age population?. What is the number of population 6 years or over? 2. What is the number of people under 6? 3. What is the unemployment rate? 4. What is the labor force participation rate? 5. What is the employment-to-population ratio? TYPES OF UNEMPLOYMENT: Unemployment exists because of people loosing their jobs or people leaving their jobs. Job losers are people who are laid off permanently or temporarily and are searching for new jobs. Job leavers are people who quit their jobs to look for something better. Unemployment is classified mainly into the following types:. Frictional Unemployment: Frictional unemployment is unemployment associated with the changing of jobs (or normal labor market turnover). It is transitional unemployment due to the short run movement of people between jobs and the first time job seekers e s such as new university graduates. It exists because of the ongoing creation and destruction of jobs which result in people searching for jobs and firm searching for workers There is a friction between when you decide to get a job and when you actually find a job (i.e., between the old and the new job) and that is why it is called frictional unemployment. Increases in the number of young people entering the labor force and increases in unemployment benefit payments raise frictional unemployment. Frictional unemployment is temporary unemployment for a specific individual but it is permanent phenomenon in a dynamic and ongoing economy and cannot be eliminated from the economy

6 Examples:. A student after getting his/her degree starts looking for a job. The time between looking for a job and getting it, the student is counted as part of the frictional unemployment in the country. 2. A person may quit his job to search for a better offer or may be fired. He is looking for a new job. During the time between the old and the new job this person is counted as part of the frictional unemployment Structural Unemployment: Structural unemployment is a result of.the economy's structural and technological changes that result in a mismatch between people s skills and the requirements of the new job opportunities. 2. international competition that changes the location of jobs which leads to a mismatch between the location of jobs and the location of the labor force. 3. the general decline of specific industries which result in laying off their workers. 32 Structural unemployment usually lasts longer than frictional unemployment because workers must re-train and possibly re-allocate to find a job. Most countries go through structural changes which result in structural unemployment that cannot be eliminated. Structural unemployment is painful especially for old workers who might find the best option may be to retire early or take lower skilled, low-paying jobs. Structural unemployment cannot be eliminated from the economy. 33 Examples of Structurally Unemployed: Assembly line workers who have been replaced by robots. are The individual that has no required skills or training for the job. Replacing paper work by automated computer system which results in the loss of jobs for those who cannot deal with computerized systems. Workers who lost their jobs because of re-allocation of their factories into cheaper labor countries Cyclical Unemployment: Cyclical unemployment (also called involuntary unemployment) is the unemployment that fluctuates over the business cycle due to a fall in aggregate demand for goods and services which results in a contraction in output across many industries. During the recession, RGDP decreases which results in an increase in cyclical unemployment because of plant closures and worker lay-offs. During the expansion, RGDP increases and cyclical unemployment decreases. RGDP Zero CU -CU + CU RGDP Time 35 36

7 Unlike frictional and structural unemployment, cyclical unemployment could be zero or negative. RGDP = PGDP, CU = zero. RGDP < PGDP, CU > zero. RGDP > PGDP, CU < zero Note that negative unemployment means more than full employment (over employment). Example of Cyclical Unemployment: An autoworker that is laid off because the economy is in a recession and then re-hired when the expansion begins has experienced FULL EMPLOYMENT: Full employment occurs when there is no cyclical unemployment and the only unemployment that exists is the frictional and /or structural. The unemployment rate at full employment is sca called edt the natural a rate of unemployment. e Over the business cycle, RGDP fluctuates around PGDP and the unemployment rate fluctuates around the natural rate of unemployment When RGDP < PGDP that means UR > NRU, so CU is positive When RGDP > PGDP that means UR < NRU, so CU is negative When RGDP = PGDP that means UR = NRU, so CU equals zero Exercise: Suppose the economy has unemployment rate equal to 3%. If the natural rate of unemployment of the country is 8%. What type of unemployment exists in the economy? What is the size of this unemployment? Exercise: Suppose the economy is experiencing frictional unemployment of 2 percent, structural unemployment of 3 percent and cyclical unemployment of 5 percent. What is the natural rate of unemployment?

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