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EC140 (329)
Chapter 21

EC140 Study Notes - Chapter 21.docx

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Wilfrid Laurier University
Rizwan Tahir

Econ Study Notes – Chapter 21: Monitoring Jobs and Inflation Employment and Unemployment: Why Unemployment is a Problem: Two Main Reasons: 1. Results in lost incomes and production o Unemployment benefits create safety net, but don’t fully replace lost earnings 2. Results in lost human capital o Prolonged unemployment permanently damages person’s job prospects by destroying human capital o If someone is unemployed for a long time, it will be difficult to compete against new university grads  Will have to settle for lower paying job than before (lost human capital) How the Government Monitors Unemployment… Labour Force Survey: - Population divided into two large groups o Working-age population  Total number of people aged 15 years and over  Working age population is divided into two groups:  Labour Force o Employed  Part-Time  Voluntary Part-Time  Involuntary Part-Time (want full-time work)  Full-Time o Unemployed  Person must be available for work and in one of three categories:  Without work but has made specific efforts to find a job within the previous four weeks  Laid off from a job and waiting to be called back to work  Waiting to start a job within four weeks  Not in Labour Force o Others who are too young to work or live in institutions and are unable to work Four Labour Market Indicators: 1. Unemployment Rate 2. Involuntary Part-Time Rate 3. Labour Force Participation Rate 4. Employment-to-Population Ratio Unemployment Rate: - Percentage of people in the labour market who are unemployed Unemployment Rate = # of People Unemployed / Labour Force x 100 Labour Force = Employed + Unemployed - Unemployment rate increases as recession deepens, reaches a peak after recession ends, and decreases after recovery gets going Involuntary Part-Time Rate: - Percentage of people in the labour force who work part-time but want full-time jobs Involuntary Part-Time Rate = # of Involuntary Part-Time Workers / Labour Force x 100 Labour Force Participation Rate: - Percentage of working-age population that is in the labour force o Indicator of willingness of people working age to take jobs LFPR = Labour Force / Working-Age Population x 100 Employment-to-Population Ratio: - Percentage of people of working age who have jobs o Indicator of both availability of jobs and degree of match between people’s skills and jobs ETP Ratio = Number of people employed / Working-Age Population x 100 - ETP Ratio falls during recession and rises during expansion o If ETP is rising, it means that the Canadian economy is creating jobs at a faster pace than the working-age population is growing Other Definitions of Unemployment: - Unemployment rate does not include underutilized labour o People with part-time jobs who want full-time jobs o Marginally Attached Worker: A person who currently is neither working nor looking for work, but has indicated that he/she wants a job, is available, and has looked for work sometime in the recent past  Exclude marginally attached workers because they have not made specific efforts to find a job within the past four weeks o Discouraged Worker: A marginally attached worker who has stopped looking for a job because of repeated failure to find one Most Costly Unemployment: - Most costly type of unemployment is long-term unemployment o Fluctuates with business cycle - 60% of unemployment is short-term o For people over 25, short-term unemployment is about 4% - fluctuates only slightly over business cycle o For people under 25, short-term unemployment is high and fluctuates more strongly with business cycle Unemployment and Full Employment: Frictional Unemployment: - Unemployment that arises from normal labour turnover o People entering and exiting the labour force o The ongoing creation and destruction of jobs Structural Unemployment: - Unemployment that arises when: o Changes in technology or international competition change the skills needed to perform jobs or change the location of jobs - Lasts longer than frictional unemployment – this is because workers must retrain or possibly relocate to find job - Especially painful for older workers – best available option may be to retire early or take a lower-skilled, lower-paying job Cyclical Unemployment: - Higher than normal unemployment at a business cycle trough or lower than normal unemployment at a business cycle peak o Workers who get laid off during a recession and rehired several months later when expansion begins “Natural” Unemployment: - Unemployment that arises from frictions and structural change when there is no cyclical unemployment o Basically, all unemployment that is frictional and structural - Natural Unemployment Rate: o Expressed as a percentage of the labour force o However, there is no official estimate of the natural unemployment rate - Full Employment: Defined as a situation in which the unemployment rate equals the natural unemployment rate Factors that Influence the Natural Unemployment Rate: 1. Age Distribution of the Population o Economy with young population has large number of new job seekers every year  High level of frictional unemployment o Economy with aging population has fewer new job seekers  Low level of frictional unemployment 2. Scale of Structural Change o Amount of structural unemployment fluctuates with:  The pace and volume of technological change  The change driven by fierce international competition (especially fast- changing Asian economies) 3. Level of Real Wage Rate o Real wage rates that bring unemployment are a minimum wage and an efficiency wage o Efficiency Wage: A wage set above the going market wage to enable firms to attract the most productive workers, get them to work hard, and discourage them from quitting 4. Unemployment Benefits o Unemployment benefits increase natural unemployment rate by lowering opportunity cost of job search Real GDP and Unemployment Over the Cycle: Potential GDP: The quantity of real GDP at full unemployment - Over business cycle, real GDP fluctuates around potential GDP Output Gap: The gap between real GDP and potential GDP - As output gap fluctuates over business cycle, unemployment rate fluctuates around natural unemployment rate o When the output gap is negative (-)  Unemployment Rate > Natural Unemployment Rate  Real GDP < Potential GDP o When output gap is zero (0)  Unemployment Rate = Natural Unemployment Rate  Real GDP = Potential GDP o When the output gap is positive (+)  Unemployment Rate < Natural Unemployment Rate  Real GDP > Potential GDP - During an expansion, real GDP rises and unemployment rate falls o Unemployment rate falls below natural unemployment rate and output gap becomes positive - During a recession, real GDP falls and unemployment rate rises o Cyclical unemployment peaks and output gap becomes negative The Trend in the Natural Unemployment Rate: - Trended downward The Price Level, Inflation, and Deflation: Price Level: The average level of prices, and the value of money Inflation: A persistently rising price level Deflation: A persistently falling price level - Interested in price level and inflation for two main reasons 1. Want to measure annual percentage change of price level (inflation or deflation rate) 2. Want to distinguish between the money values and real values of economic variables (such as student loans and your parents’ savings) Why Inflation and Deflation are Problems: - Low, steady, anticipatory inflation/deflation is not a problem - However unexpected inflation/deflation has large costs Costs of Unexpected Inflation/Deflation: 1. Redistributes income 2. Redistributes wealth 3. Lowers real GDP and employment 4. Diverts resources from production Redistributes Income: - Workers and employers sign wage contracts that last for a year or more - If there is an unexpected burst of inflation, prices will raise but
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