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Lecture 2

PM Lecture 2 Unemployment II

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Boston University
CAS EC 102
Jay Zagorsky

PM Lecture #2: Unemployment II Tuesday, March 18, 2014 3:21 PM Wall Street Journal - Food Prices Surge as Drought Exacts a High Toll - China Unveils Long Awaited Urbanization Plan Introduction - Number of people unemployedin most countries is usually not very large ○ In US, 10/310million people are unemployed ○ In USA, China and India combined, only 60 million/3.5billion people are unemployed - Unemploymentis important because when rate is high, there is often political unrest and gov't overturn Unemployment & Businesses - When unemploymentis high, hiring is easy, vice versa - Unemploymentrate impacts wages being offered - During times of unemployment,businesses hire talent to ensure they are ready for the next economicexpansion Unemployment & Traders - Inverse relationship between the unemploymentrate and business sales - When unemploymentis high, people cut back on spending Is Unemployment Measured Correctly? - 4 Important Groups ○ Discouraged workers:People who would like to work but have given up looking foe job  Does not count in unemploymentstatistics (about 6 million people) ○ Encouraged workers:People who when the economyheats up, suddenly start looking for a job ○ Added workers:People who enter the labor force when the primary earners loses their job  Much more important in the past when families were large and the male was the primary earner ○ Mislabeled workers: Some people claim to be unemployed to receive financial assistance, even though they are not interested in working These Groups Cause Strange Results in Unemployment - When economyimproves,we expect the unemploymentrate to fall ○ Occasionally, the number of encouraged workers rises quickly, causing the unemployment rate to rise  Example: UnemploymentRate = Unemployed/LaborForce □ Last year, assume there was 1 mil unemployedand labor force was 24 mil, which makes the unemploymentrate 4.2% □ This year, lots of people became encouraged workers,and began searching for jobs. Assume 1.5 mil unemployed and labor force is 24.5 mil, which makes the unemploymentrate 6.1% - When economydeclines, we expect the unemploymentrate to rise ○ Occasionally, the number of discouraged workersrises, causing the unemploymentrate to fall  Example using the same formula □ Last year, assume the unemploymentis the same 4.2% □ This year, lots of people became discouraged workers and stopped searching. Assume .5 mil unemployedand labor force is 23.5 mil, which makes the unemploymentrate 2.1% - There groups only cause strange results in the short run ○ Why month-to-monthchanges are not always predicable, but long run is fairly accurate What Causes Unemployment? - Key Idea: Unemploymentis a waste of a country's labor resources and is caused by multiple - Key Idea: Unemploymentis a waste of a country's labor resources and is caused by multiple reasons Arthur CecilPigou (1877-1959) - Replaced the retired Alfred Marshall - "Unemployment" ○ Sought to answer why unemploymentexists ○ Believed that if barriers that prevented the marketfrom lowering wages to a clearing level was removed,unemploymentwould vanish  Trade unions raised wages above the market clearing or equilibrium level  Min. wage laws raised pay and caused people to want jobs that were not available Types of Unemployment - Structural: Workerswho lost their jobs and want new ones because society's structure and type of jobs available has changed ○ Example: US steel workersand telegraph operators ○ Gov't programs such as public training helps reduce this type of unemploymentby retraining people - Cyclical/DemandDeficient: When people lose their jobs and seek work due to the up and down cycles in the overall economy ○ Example: After 9/11,many airlines laid off workersdue to lack of flying, but many were rehired after the industry recovered
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