Chapter 10: Unemployment Issues

1
Chapter 10 Unemployment Issues
2
Cost of Unemployment

• Economic Cost
• Loss of income for the individual
• Cost of searching for new jobs
• Loss of goods and services for the society
• The economy drops off the PPC and ends up at a
  combination inside the production possibilities
  space
• Payment of unemployment benefit

3
Cost of Unemployment

• Social Cost
• Loss of self-esteem and confidence
• Family problems (violence and divorce)
• Health problems (hart attacks and suicide)
• Criminal activities

4
Labor Force

• Individuals between 16 and 65, who are employed
  for pay or unemployed
• Individuals in prisons or mental hospitals,
  children, and retired are excluded

5
Unemployment

• Members of the labor force who are
• 16 years of age or older
• out of work
• actively looking for work
• Unemployment rate Unemployed Workers as a of
  Labor Force

6
Discouraged Workers

• Members of the labor force who quit looking for
  jobs (e.g., the homeless)
• Unemployment rate is underestimated by 2 to 3
  because discouraged workers are excluded

7
Frictional Unemployment

• Unemployment of individuals who are searching for
  jobs or waiting between jobs
• Example college graduates entering the labor
  market
• Supply-side effect and transitional. Need
  information about job openings.

8
Structural Unemployment

• Unemployment due to fundamental economic changes
  that eliminate some jobs, while creating other
  jobs for which qualified workers may not be
  readily available
• Example the occupation of typing is
  disappeared by introduction of personal computers
• Normal due to technological advancement and
  changes in consumer preferences

9
Cyclical Unemployment

• Unemployment caused by contraction in economic
  activities
• Example companies lay-off workers during a
  recession
• Needs public policy to increase employment

10
Full Employment Unemployment

• Rate of unemployment
• Taking into account frictional and structural
  unemployment
• Consistent with price stability
• Usually 3-5 percent

11
Unemployment Trend

• During the expansion of the 1960s, UR fell from
  6.7 in 1961 to 3.5 in 1969
• In energy crises of the 1970s, UR rose to as high
  as 8.5 in 1975 and 9.7 in 1981
• After 1981-82 recession, UR fell to as low as
  8.3 in 1989
• Since 1991-92 recession where UR rose to 7.4, it
  has declined to about 4
• Since 9/11/01, UR has gone up to about 5.7

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Circular Flow of Income Product

• Two sectors households, businesses
• Two markets product, labor
• Households sell labor to make income and buy good
  services from businesses
• Businesses buy labor to produce good services
  and sell to households

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Simple Model
Income Payments
Labor Resources
Labor Market
Households
Businesses
Product Market
Goods Services
Consumption Expenditures
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Model with Injections Leakages
Savings
Income Payments
Taxes
Labor Resources
Imports
Households
Businesses
Investment
Goods Services
Govt Exp.
Consumption Expenditures
Exports
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Total Expenditures

• Aggregate Demand
• Consumption Expenditures, C
• Investment Expenditures, I
• Government Expenditures, G
• Exports less Imports, X-M

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Aggregate Demand CIGX-M
Price Level
D
A
110
B
105
D
200
400
Output of Goods Services
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Total Income

• Aggregate Supply
• Consumption Expenditures, C
• Personal Savings, S
• Income Taxes, T

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Aggregate Supply CST
Price Level
S
110
105
Full Employment
S
200
400
Output of Goods Services
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Aggregate Equilibrium

• Aggregate Demand Aggregate Supply
• C I G X - M C S T
• I G X S T M
• Injections Leakages

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Equilibrium at less than Full Employment
Price Level
S
D
110
Equilibrium output
105
Full employment output
S
D
200
400
Output of Goods Services
21
Demand Side Fiscal Policy

• To increase Aggregate Demand
• Fiscal Policy
• Increase government expenditures
• Reduce income taxes

22
Expansionary Demand Policy
Price Level
Full employment Higher price
S
D
D
110
105
D
Full employment output
S
D
200
400
Output of Goods Services
23
Supply Side Fiscal Policy

• To increase Aggregate Supply,
• Reduce personal and corporate tax rate to
  increase savings, investment, employment, and tax
  revenues
• Lower government spending to balance the budget

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Expansionary Supply Policy
Price Level
S
Full employment Lower price
D
110
105
Full employment output
S
D
95
S
200
400
Output of Goods Services
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Accommodating Policy
Price Level
S
Full employment Price stability
D
D
105
Full employment output
D
S
D
S
200
400
Output of Goods Services