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Chapter 21 - Monitoring Jobs and Inflation.docx

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ECON 1010
Steven Edwards

Chapter Twenty One – Monitoring Jobs and Inflation Intro Each month, we chart the course of unemployment as a measure of the health of the Canadian economy. How do we measure unemployment? What other data do we use to monitor the labour market? Having a job that pays a decent wage does not determine the standard of living; the cost of living also matters. So we also need to know: What the Consumer Price Index is? How it is calculated? Employment and Unemployment The Canadian economy is an incredible job-creating machine. In 2011, 17 million people had jobs, which was 2 million more than in 2001 and 6 million more than in 1981. But not everyone who wants a job can find one. On a typical day, more than 1 million people are unemployed, that’s equivalent to the population of Calgary. During a recession, this number rises; and during a boom year it falls. Unemployment results in lost incomes and production and lost human capital. The loss of income is devastating for those who bear it. Unemployment benefits create a safety net but don’t fully replace lost wages, and not everyone receives benefit. Prolonged unemployment permanently damages a person’s job prospects by destroying human capital. Every month, Statistics Canada conducts a Labour Force Survey in which it asks 54,000 households. The population is divided into two groups: The working-age population (the number of people aged 15 years and older) and people too young to work (under 15 years of age). The working-age population is also divided into two groups: people who are in the labour force and people not in the labour force. The labour force is the sum of employed and unemployed workers. To be counted as unemployed, a person must be in one of the following three categories: 1. Without work but has made specific efforts to find a job within the previous four weeks. 2. Waiting to be called back to a job from which he or she has been laid off. 3. Waiting to start a new job within four weeks. The four labour market indicators that statistics Canada uses are:  The unemployment rate  The involuntary part-time rate  The labour force participation rate  The employment-to-population ratio Unemployment rate - The unemployment rate is the percentage of the labour force that is unemployed. The unemployment rate is (Number of people unemployed ÷ labour force)  100. The unemployment rate increases in a recession and reaches its peak value after the recession ends. Involuntary part-time rate - The involuntary part-time rate is the percentage of the labour force who work part time but want full-time jobs. The involuntary part-time rate is (Number of involuntary part- time workers ÷ Labour force)  100. Labour force participation rate - The labour force participation rate is the percentage of the working- age population who are members of the labour force. The labour force participation rate is (Labour force ÷ Working-age population)  100. Employment-to-population ratio - The employment-to-population ratio is the percentage of the working-age population who have jobs. The employment-to-population ratio is (Employment ÷ Working- age population)  100. The purpose of the unemployment rate is to measure the underutilization of labour resources. Statistics Canada believes that the unemployment rate gives a correct measure. But the official measure is an imperfect measure because it excludes marginally attached workers and part-time workers who want full-time jobs. A marginally attached worker is a person who currently is neither working nor looking for work but has indicated that he or she wants and is available for a job and has looked for work sometime in the recent past. A discouraged worker is a marginally attached worker who has stopped looking for a job because of repeated failure to find one. All unemployment is costly, but the most costly is long-term unemployment that results from job loss. For those over 25, short-term unemployment is around 4 percent and fluctuates only slightly over the business cycle. For those under 25, short-term unemployment is high and fluctuates more strongly with the business cycle. Unemployment and Full employment Unemployment can be classified into three types: Frictional unemployment, structural unemployment and cyclical unemployment. Frictional unemployment - Frictional unemployment is unemployment that arises from normal labour market turnover. The creation and destruction of jobs requires that unemployed workers search for new jobs. Increases in the number of people entering and reentering the labour force and increases in unemployment benefits raise frictional unemployment. Frictional unemployment is a permanent and healthy phenomenon of a growing economy. Structural unemployment - Structural unemployment is unemployment created by changes in technology and foreign competition that change the skills needed to perform jobs or the locations of jobs. Structural unemployment lasts longer than frictional unemployment. Cyclical unemployment - Cyclical unemployment is the higher than normal unemployment at a business cycle trough and lower than normal unemployment at a business cycle peak. A worker laid off because the economy is in a recession and is then rehired when the expansion begins experiences cycle unemployment. Natural unemployment - Natural unemployment is the unemployment that arises from frictions and structural change when there is no cyclical unemployment. Natural unemployment is all frictional and structural unemployment. The natural unemployment rate is natural unemployment as a percentage of labour force. Full employment is defines as the situation in which the unemployment rate equals the natural unemployment rate. When the economy is at full employment, there is no cyclical unemployment or, equivalently, all unemployment is frictional and structural. The natural unemployment rate changes over time and is influenced by many factors. The key factors are: the age distribution of the population, the scale of structural change, the real wage rate, unemployment benefits. Potential GDP is the quantity of real GDP produced at full employment. Potential GDP corresponds to the capacity of
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