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MacroEcon Ch 7 notes

by: Alikhan Ladhani

MacroEcon Ch 7 notes ECON 2105

Alikhan Ladhani
GPA 3.2

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About this Document

these notes are from ch7
Principles of macroeconomics
Brian A. Hunt
Class Notes
25 ?




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This 7 page Class Notes was uploaded by Alikhan Ladhani on Sunday February 14, 2016. The Class Notes belongs to ECON 2105 at Georgia State University taught by Brian A. Hunt in Spring 2016. Since its upload, it has received 182 views. For similar materials see Principles of macroeconomics in Economcs at Georgia State University.


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Date Created: 02/14/16
• UNEMPLOYMENT • 07 • Previously • Gross Domestic Product (GDP) – The market value of all final goods and services produced in a specific period of time – GDP = C + I + G + NX – To find real GDP, we must adjust nominal GDP for inflation • Business cycle – Short-run fluctuations in economic activity that can cause output to be above or below the long-run trend • Big Questions 1. What are the major reasons for unemployment? 2. What can we learn from unemployment data? • U.S. Recession of 2008–2009 • Why so much unemployment after recession? • Certain industries hit hard – Housing • Adjustment lags – Corrections take time, not instant • Government policy – Unintended consequences lengthened unemployment • How unemployment is measured – If you’re not looking for a job, you’re not counted as unemployed. If you start looking again, you’re unemployed. • U.S. Unemployment Rate 1960–2012 • Three Types of Unemployment • Is it practical to have zero unemployment? – Generally, unemployment is a drain on society and very difficult for certain individual households – However, as our economy changes and progresses, certain jobs are destroyed. • Three types of unemployment – Structural – Frictional – Cyclical • Structural Unemployment • Structural unemployment – Unemployment caused by changes in the industrial makeup (structure) of the economy – Joseph Schumpeter: “creative destruction” – New industries are created, and old ones are destroyed • Examples: – Borders (bookstore) bankrupt in 2011. Job losses in the book industry. Why? – U.S. steel industry: • 1980: 500,000 laborers • 2010: 150,000 laborers • More automated equipment, safer and more efficient • Structural Unemployment • Changes in American economy over time – Agricultural (working in fields) – Manufacturing (working in factories) – Service (working in offices, online) – Today: United States = “service economy” • Structural Unemployment • What can structurally unemployed people do? – Undesirable to save obsolete or inefficient jobs – Workers must retrain, reeducate, relocate, or change expectations about work and pay – Government can help with training programs or relocation subsidies • Growing and Changing Economies • Luddites • Luddites – Nineteenth-century English textile workers – Destroyed automated looms that could be operated cheaply to produce clothing • Goal – Trying to protect themselves from structural unemployment • Question to think about – The industrial revolution may have left many people structurally unemployed. What are the trade-offs of technological progress and structural unemployment? • Frictional Unemployment • Frictional unemployment – Unemployment caused by time delays in matching available jobs and workers – People don’t instantly take a new job, and they might not want to take the first available job – Firms don’t always hire the first applicant • Example: – Recent college grads – Spouse of a person who moves for a new job • Frictional Unemployment • Length of frictional unemployment – Internet has decreased time and costs of job searching – Can also be affected by government regulations that make it difficult to hire or fire • Unemployment insurance – Benefits the worker by reducing consequences of being laid off and provides time to find a new job – Helps macroeconomy by stopping economic problems from spreading to other industries – Unintended consequence: reduces incentives to quickly find another job. It may increase the amount of time people are unemployed. • Hiring and Firing Regulations Increase Unemployment • Cyclical Unemployment • Cyclical unemployment – Caused by economic downturns – The “worst” kind of unemployment – Occurs for an unknown length of time – 2008: 18 months, 10% unemployed • Natural rate of unemployment (u*) – Typical rate of unemployment in a healthy economy – Actual employment rate denoted by (u) • Full employment output (Y*) – Output by an economy with no cyclical unemployment – Actual output denoted by (Y) • Three Types of Unemployment • Natural Rate of Unemployment and Output • Economics in Bronze Age Orientation • Mitchell and Webb – This clip illustrates two cavemen facing possible structural unemployment during the movement from the Stone Age to the Bronze Age • Looking at the Data • Labor force – People who are employed or actively seeking work • Who is not in the labor force? – Jobless people not actively seeking employment (no efforts made in four weeks) – Retirees – Students – Institutionalized • Measuring Unemployment in the United States, April 2012 • Historical U.S. Unemployment Rates • Shortcomings of the Unemployment Rate • Discouraged workers – People who want a job but get discouraged and give up looking for work – Are not included in the labor force and not considered unemployed • Underemployed workers – Part-time workers who want full-time jobs – Workers who are very overqualified at their job – Considered employed • Unemployment Game Show • The video features four jobless workers – Which of them are considered unemployed? – The video illustrates the shortcomings of how we measure unemployment • Historical U.S. Unemployment Rates • Shortcomings of the Unemployment Rate • Unemployment timeline – Unemployment rate lags behind economic activity – Recovery happens, people re-enter the labor force, and the unemployment rate can actually increase! • Who is unemployed? – Do not know who is unemployed – Do not know how long they have been out of work – Short-run unemployment may not be a big concern, but long-term unemployment is a big concern – Lagging versus Leading Indicators • A leading indicator – Helps us predict what’s coming, and they usually change before the economy as a whole does – Example: Average weekly hours for manufacturing – Example: Building permits • A lagging indicator – Usually changes after the economy as a whole changes, so it doesn’t have much predictive power. – Example: Average duration of unemployment – Example: Change in the price index • Duration of Unemployment, End of 2007, 2011 • Animated Unemployment • “Geography of Jobs” – An interactive map which shows recession rates changing across America during the Great Recession which began in December 2007 • Other Labor Market Indicators • Labor Force Participation Rate • Other Labor Market Indicators • People tend to leave the labor force in bad times and re-enter in good times – Causes unemployment rate to lag economic conditions – Secondary indicators include nonfarm employment • Total employment figures – Reported each month – Helps evaluate cyclical effects • Trends in Labor Force Participation • Labor Market Data Race and Gender • Two Similar Recessions: Real GDP Growth • Two Similar Recessions: Unemployment Rate • Case Study: How Bad was the Recession of 2008? • Conclusion • Unemployment rates – Monitored as indicators of macroeconomic health – Help us gauge labor market conditions – Indicator can also be misleading and incomplete, since it lags behind economic activity and doesn’t account for underemployment and discouraged workers – Different types of unemployment, some worse than others – Government policy can also influence unemployment rates and seems to have played a big part in propping up rates in the aftermath of the 2008 recession • Summary • Frictional and structural unemployment explain why unemployment is naturally greater than zero • Cyclical unemployment explains changes in the rate across the business cycle • The unemployment rate is the percentage of the labor force that would like to work who are unemployed • Summary • The official unemployment rate understates the overall level of underemployment in society since it does not account for discouraged workers nor does it tell us anything about the duration of unemployment • The labor force participation rate and nonfarm employment changes are additional helpful labor market indicators. • The 2008 recession in the United States is historically comparable to the 1982 recession • Practice What You Know Which of the following is an example of structural unemployment? A. Alfred the VCR repairman is unemployed because there are very few people that still own VCRs B. Bernie the construction worker is unemployed because no one is building houses right now C. Carl the restaurant chef is unemployed because he and his wife recently moved to a new city • Practice What You Know Which of the following is an example of frictional unemployment? A. Alfred the VCR repairman is unemployed because there are very few people that still own VCRs B. Bernie the construction worker is unemployed because no one is building houses right now C. Carl the restaurant chef is unemployed because he and his wife recently moved to a new city • Practice What You Know Who is considered unemployed? A. Jean, a college student who is currently not working B. Zoe, a recent college graduate who sent out job application, but has yet to hear back from the businesses C. Michael, a stay-at-home dad D. All of the above • Practice What You Know If a discouraged worker re-enters the labor force and begins searching for jobs but doesn’t find one, the unemployment rate will: A. Go down because our economy is on the right track with more people wanting to work B. Stay the same because the number of people with jobs didn’t change C. Stay the same because the worker isn’t counted in the labor force until he finds a job again D. Increase because the percentage of labor force participants with jobs decreased • Practice What You Know What is a possible unintended consequence of unemployment insurance? A. It hurts the unemployed by giving them benefits B. It may increase the length of unemployment since it decreases the cost of being unemployed C. It angers hard-working people D. It lasts as long as you want it to, so you can get paid and never have to work


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