Digression: Government Transfer Payments
Recall from Chapter 5:
•That total income, total expenditures and GDP are represented by Y and equal tp:
•Y = C + I + G +NX
•Government purchases of goods and services (G) exclude transfer payments
•Transfer payments are transfers of money to individuals and other levels of government
•Transfer payments do not represent government purchases of goods and services
•Above equation includes no taxes of transfer payments
Question: Government Transfers and Saving
•The country of Hibernia does not trade with any other country
•Its GDP is $20 billion. Its government collects 4 billion in taxes and pays out 3 billion to
households in the form of transfer payments. Consumption equals 15 billion and
investment equals 2 billion.
•What is public savings in Hibernia and what is government expenditures?
Unemployment and its Natural Rate--Chapter 9 Continued
How is Unemployment Measured?
Unemployment rate: ("u-rate)
% of the labour force that is unemployed
u-rate = 100 x (# of unemployed)/(labour force = (#unemployed + #employed)
Labour force participation rate:
Labour force of particpation rate = 100 x (labour force)/(adult population)
Q: What happens to U-rate?
A: Sue losses her job and begins looking for a new one.
•U rate rises--a rising unemployment rate gives the impression that the labour market is
worsening, and it is.
A: Sam losses his $80,000 job and takes a part time job at McDonald's until he finds a better
•U-rate does not change because a person is "employed" whetehr they work full or part
However, things are worse but the unemployment rate fails to show it.
A: Jon has been out of work since last year, becomes discouraged, stops looking for work.
•U rate falls because Jon is no longer counted as unemployed
•A falling u-rate gives the impression that the labour market is improving, but it is not.
•Would like to work but have given up looking for jobs
•Classified as "not in the labour force" rather than "unemployed" Does the unemployment rate measure what we want it to?
Sometimes difficult to distinguish between:
• Person who is unemployed and
Person who is not in labour force
Students at school because they cannot find a job (not in labour force but if they could find a job
they would be)
People may claim to be unemploted in order to receive financial assistance (counted in labour
force and unemployed even though they arent looking for work.
How long are the unemployed without work?
• Most spells of unemployment are short (3-4 months or less)
• However, about one-third of unemployed individuals are unemployed for more than 3-4
months; some for more than one year
• Greatest concern for policymakers are individuals suffering prolonged spells of
Why are there always some people unemployed?
• In an ideal labour market, wages would adjust to balance the supply and demand for
labour, ensuring that all workers would be fully employed.
• However this is not the case
o There is a natural rate of unemployment--the rate of unemployment to which the
economy tends to return in the long run
o In Canada, estimated at between 6 to 8 percent
What are determinants of the natural rate of unemployment?
Basically, two types of unemployment underlie the natural unemployment rate
• Frictional unemployment
• Structural unemployment
In addition, there is cyclical unemployment
• Not part of natural unemployment rate
• Unemployment that results from the time that it takes to match workers with jobs
• It takestime for workers to search for the jobs that best suit their tastes and skills
• Usually short term
• It is unavoidable and not necessarily bad
• Unemployment that results because the number of jobs available in some labour
markets is insufficient to provide a job for everyone who wants one
• Occurs when there are fewer jobs than workers
• It is often thought to explain longer spells of unemployment
• It is a problem and a concern to policy makers
• Arises as a result of short-run economic fluctuations due to the business cycle
• Not included as part of the natural unemployment rate
• Cyclical unemployment can be addressed by macro economic policies focused on
stimulating the economy Frictional and structural employment needs to be addressed through labour market policies
and programs (i.e. programs that target the problem)
Frictional Unemployment/Job Search
•Process by which workers try to find the most appropriate jobs for their tastes and skills
Public Policy and Job Search
•Government programs can affect the time it takes unemployed workers to find new jobs
•These programs include the following:
o Government run job agencies which give out information on job vacancies in
order to match workers and jobs more quickly
o Public training programs which aim to ease the transition of workers from
declining to growing industries and to help disadvantaged groups escape poverty
•EI program (provides benefits to unemployed) intended to ease burden of those who find
themselves unemployed by temporary providing them with income
•Economists believe that:
EI program has reduced incentive to work and has increased the natural rate of
unemployment (e.g. by increasing