ECON-002 Lecture Notes - Lecture 20: Unemployment, Unemployment Benefits, Real Interest Rate

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5 Jun 2017
April 6th Lecture Slides
Jobless Recoveries: people come out of jobs after recession
Non-jobless recoveries: recoveries in which people went back to
work after a recession
Why does unemployment rate rise right after the end of a
recession? Because originally discouraged are now returning to the
labor force.
What accounts for the “jobless” recoveries?
1. Over-hiring: in 1990 (construction), 2000 (IT personnel), 2007 (construction)
2. Mismatch: between jobs and workers (constrained by skills and geography)
3. Unemployment benefits: early 2009, extended up to 99 weeks
4. Uncertainty: employers less likely to hire additional workers
5. Manufacturing jobs are going overseas: hard to document the scale and most trade economists
do not think is a major reason for unemployment
6. Productivity growth and new technologies: you need fewer labors to produce the same output.
Human labor replaced by robots.
The Natural Rate of Unemployment
3 Types of Unemployment:
1. Frictional: firms do not hire the first person they meet. Job candidates do not accept the first offer
they receive
Note: frictional unemployment is necessary for proper functioning of the labor market
The Search Theory attempts to explain frictional unemployment
2. Structural: jobs lost to machines, to China, to switch towards producing more services
3. Cyclical: unemployment that is due to recessions (not just recessions because in theory cyclical
unemployment could be negative). Could be reduced via macroeconomic policies
“Natural Rate” = Frictional + Structural
Overall Unemployment rate = Natural Rate + Cyclical Unemployment
“Full Employment” means there is no cyclical unemployment
Understanding Recessions: The Economic Fluctuation Model (EFM)
Peak: the starting date
Trough: the ending date
-Between peak and trough is recession. Expansion lasts all the way from the trough to the next peak
-A business cycle = 1 expansion + 1 contraction
Q: What is meant by “Aggregate Economic Activity”?
A: GDP, real income, employment, industrial production, and wholesale-retails sales
Investment is pro cyclical
Unemployment rate is countercyclical
US Business Cycles have looked better (longer expansions, shorter recessions) since WWII.
Possible explanations:
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