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EC140 (417)

21. Unemployment.docx

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Rizwan Tahir

Chapter 21 - Unemployment Facts  In 2008, 17 million had jobs, which was 3 million more than 1998, and 7 million more than 1978  Not everyone who wants a job can find one. Every day, over 1 million are unemployed  During a recession, unemployment rate rises, and during a boom it falls  At its worst, during the Great Depression, 1/5 workers was unemployed  Employment and unemployment depends on the total number of jobs available and on the number of people competing for them. Unemployment is a problem 1. Lost production and incomes  Employment benefits do not fully replace lost wages, and not everyone receives these benefits. 2. Lost human capital  Prolonged unemployment permanently damages job prospects by destroying human capital Labor force survey  Statistics Canada conducts a monthly population survey to determine the status of labor force  The population is divided into 2 groups 1. The working age population: the number of people aged 15 years and older A) People in the labor force: sum of employed and unemployed, willingness of people of working age to take jobs employed = full/part time B) People not in the labor force 2. People too young to work (under 15 years of age) 4 labor markets indicators 1. Unemployment rate: % of labor force that is unemployed - Number of unemployed / labor force x 100 - Fluctuates over business cycle: Reaches its peaks during recessions, decreases in recovery - Highest rate among teenagers - Average rate from 1960-2007 was 7.6% 2. Involuntary part time rate: % of the labor force who work part time but want full time jobs. - number of involuntary part time workers / labor force x 100 - In 2007, it was about 3.8% 3. Labor force participation rate: % working age population who are in labor force (want to work) - Labor force / working age population x 100 - About 67.6% 4. Employment-to-population ratio: % of working age population who have jobs - Number employed / working age population x 100 - In 2007, it was 63.5% (50% rise from 1960s) - Falls in recession and rises in an expansion  The labor force participation rate + employment to population ratio both rose before 1990 and then flattened after 1990  currently falling for males and rising for females Unemployment A) Has made efforts to find a job within the previous 4 weeks B) Waiting to be called back to a job from which he has been laid off C) Waiting to start a new job within 30 days  Purpose of unemployment rate is to measure the underutilization of labor resources  It is an inaccurate measure for 2 reasons 1. Excludes some underutilized labor A) Marginally attached workers: neither working nor looking for work, but has indicated that he wants/available for a job, and has looked for work in recent past  Very small number - discouraged worker: stopped looking because of repeated failure B) involuntary part-time workers: Part-time workers who want full-time jobs (1.7% 2007) 2. natural unemployment: some unemployment is unavoidable  unemployment arises from job search activity  churning economy  due to new firms, firms growing/shrinking, graduating, retiring… Sources of unemployment 1. job losers: Lose jobs and search for another job  largest and most cyclical/fluctuating group 2. job leavers: Leave their jobs and search for another job  smallest group 3. entrants/reentrants: or reenter the labor force to search for a job  Entrants are mainly people who have just left school.  Reentrants are those who have previously withdrawn from the labor force. Sources of employment 1. They are hired or recalled 2. Withdraw from the labor force Types of unemployment 1. Frictional unemployment: arises from normal labor market turnover; healthy - Creation and destruction of jobs requires that unemployed workers search for new jobs - Increases in those entering and reentering labor force, and increases in unemployment benefits raises frictional unemployment 2. Structural unemployment: arises from changes in technology and foreign competition that change the skills needed to perform jobs or the locations of jobs - Lasts longer than frictional unemployment - Efficiency wage: set above going market wage creates unemployment like minimum wage 3. Cyclical unemployment: fluctuating unemployment over the business cycle 4. Natural unemployment: unemployment rate at full employment - Full employment: occurs when there is no cyclical unemployment (real=potential GDP) - natural unemployment rate was high during the early 1980s but has gradually decreased Unemployment and Output  our macro models focus on output rather than employment  closely related  when output is above trend, unemployment falls, and vice versa - unemployment rate < natural unemployment: real GDP > potential GDP, positive output gap  unemployment rate lags the output gap between real GDP and potential GDP  potential GDP: quantity of real GDP at full employment Price level and inflation  Price level: average level of prices and the value of money  Inflation rate: annual percentage change in the price level  Helps us measure inflation rate, and distinguish between real and nominal values of economic variables Why inflation is a problem  Hyperinflation: inflation rate so fast that workers are paid twice/day as money loses value fast  Redistributes income and wealth between employers and workers, borrowers and lenders - Some gain and some lose due to unpredictable changes in the value of money  Diverts resources from production to inflation forecasting  cost of inflation Consumer price index  measures the average of prices paid by urban consumers for a fixed basket of goods and services  defined to equal 100 for the reference base period (2002)  average CPI over 2002 = 100  in September 2008, CPI = 115.7  the average of the prices paid by urban consumers for a fixed basket of goods was 15.7% higher on average in 2008 than 2002  the value of the CPI for any other period is calculated by taking the ratio of the current period (t) cost of a market bask
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