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Okun's Law. Arthur Okun quantified the relationship between the shortfall in real output ... people seeking full-time paid employment work only part time or are employed at jobs ... – PowerPoint PPT presentation

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Title: Unemployment

ECON 151 Macroeconomics Instructor Bob
Chapter 6
Materials include content from McGraw-Hill/Irwin
which has been modified by the instructor and
displayed with permission of the publisher. All
rights reserved.
  • This chapter focuses on
  • When is a person unemployed?
  • What are the costs of unemployment?
  • What is an appropriate policy goal for full

The Labor Force
  • The labor force includes all persons over age
    sixteen who are either working for pay or
    actively seeking paid employment.
  • People who are not employed or are not actively
    seeking work are not considered part of the labor
  • The labor-force participation rate is the
    percentage of the population working or seeking

The Labor Force, 2000
Out of the labor force (133,086,000)
In civilian labor force (142,286,000)
Under age 16 (62,541,000)
Civilians employed(135,208,000)
Armed forces (1,423,000)
In school (9,130,000)
Retired (29,813,000)
Sick and disabled (7,142,000) Institutionalized
(3,628,000) Other (489,000)
A Growing Labor Force
Growth of Production Possibilities
  • Production possibilities are the alternative
    combinations of final goods and services that
    could be produced in a given time period with all
    available resources and technology.
  • Production is limited by two factors
  • The availability of factors of production.
  • Technological know-how.

Institutional Constraints
  • Production possibilities in any year depend on
    available resources and technology and on how we
    choose to restrict their use.
  • The size of labor force is limited by
    participation rates and social regulation.

Institutional Constraints
  • Preventing small children, students, and others
    from working reduces the size of the labor force
    and potential output.
  • Constraints are also imposed on the use of
    material resources and technology.

Labor Force Growth
  • As the labor force grows, the production
    possibilities curve shifts outward.
  • This outward shift illustrates the increased
    capacity to produce goods and services given
    available technology and institutional

Labor Force Growth
Labor-force growth increases production
Investment Goods (units per year)
Consumption Goods (units per year)
Okuns Law
  • Arthur Okun quantified the relationship between
    the shortfall in real output and unemployment.
  • Okuns Law asserts that 1 more unemployment is
    estimated to equal 2 percent less output.
  • The 2 to 1 ratio puts a dollar value on the
    aggregate cost of unemployment.

Okuns Law
  • High unemployment in 1992 left the U.S. 240
    billion short of its production possibilities a
    loss of 920 of goods and services for every

Measuring Unemployment
  • Unemployment is the inability of labor-force
    participants to find jobs.
  • U.S. Census Bureau surveys about 60,000
    households a month to determine how many people
    are actually unemployed.
  • A person is considered unemployed if he or she is
    not employed and is actively seeking a job.

The Unemployment Rate
  • The unemployment rate is the proportion of the
    labor force that is unemployed.

Who Are the Unemployed?
Duration of Unemployment 2000
  • When the economy is growing, both unemployment
    rates and the average duration of unemployment

Reasons for Unemployment
  • How long a person remains unemployed is affected
    by the nature of the joblessness.
  • Job leavers
  • Job losers
  • Reentrants
  • New entrants

Reasons for Unemployment
Discouraged Workers
  • When unemployment persists, job seekers become
    increasingly frustrated in their efforts to
    secure employment and give up looking.
  • A discouraged worker is an individual who is not
    actively seeking employment but would look for or
    accept a job if one were available.
  • Discouraged workers are not counted as part of
    the unemployment problem after they give up
    looking for a job.

  • Some people are forced to take any job available.
  • These people are excluded from the count of
    unemployed, but not from the condition of
  • Underemployment exists when people seeking
    full-time paid employment work only part time or
    are employed at jobs below their capability.
  • Underemployed workers represent labor resources
    that are not being fully utilized.

The Phantom Unemployed
  • Some of the people who are counted as unemployed
    probably should not be.
  • Many people report that they are actively seeking
    work when they have little interest in finding a
  • Public policy encourages this behavior by
    requiring most welfare and unemployment benefit
    receivers to provide evidence that they are
    looking for work.

Europes Unemployment Woes
  • Unemployment levels in Europe are much higher
    than those of the U.S.
  • Generous unemployment benefits cushion personal
    losses from joblessness, but also discourage
    European workers from accepting new jobs.

CIA World Fact Book
The Human Costs
  • The most visible impact of unemployment on
    individuals is loss of income
  • Over a long period, such losses can spell
    financial disaster.
  • The human cost of unemployment includes social,
    physical, and psychological costs as well.

Seasonal Unemployment
  • Seasonal unemployment is the unemployment due to
    seasonal changes in employment or labor supply.
  • At the end of each season, thousands of workers
    must go searching for new jobs, experiencing
    seasonal unemployment in the process.
  • Statistical adjustments are made for seasonal

Frictional Unemployment
Frictional unemployment is the brief periods of
unemployment experienced by people moving between
jobs or into the labor market.
  • Frictional unemployment differs from other
    unemployment in three ways
  • There is an adequate demand for the labor of the
    frictionally unemployed.
  • The frictionally unemployed have the skills
    required for existing jobs.
  • The job-search period will be relatively short.

Structural Unemployment
  • Structural unemployment is the unemployment
    caused by a mismatch between the skills (or
    location) of job seekers and the requirements (or
    location) of available jobs.
  • Periods between jobs will be lengthened when the
    unemployed lack the skills that employers require.

Cyclical Unemployment
  • Cyclical unemployment is the unemployment
    attributable to the lack of job vacancies i.e.,
    to an inadequate level of aggregate demand.
  • Cyclical unemployment occurs when there are
    simply not enough jobs to go around.
  • The Great Depression is the most striking example
    of cyclical unemployment.
  • The economy must grow at least as fast as the
    labor force to avoid cyclical unemployment.

The Unemployment Record
The Full-Employment Goal
  • In the Employment Act of 1946, Congress committed
    the federal government to pursue a goal of
    maximum employment.
  • Congress didnt specify what the rate of
    unemployment should be.

The Full-Employment Goal
  • Full employment is not the same as zero
  • A full employment goal presumably means avoiding
    as much cyclical and structural unemployment as
    possible, while keeping frictional unemployment
    reasonably low.

Inflationary Pressures
  • The first attempt to define full employment more
    precisely was undertaken in the early 1960s by
    the Council of Economic Advisors.
  • They concluded that rising prices are a signal
    that employment is nearing capacity.

Inflationary Pressures
  • The Council placed full employment at 4 below
    that, prices begin rising.
  • 4 unemployment was regarded as an acceptable
    compromise of employment and price goals.
  • Later, however, during the 1970s and early 1980s
    the 4 unemployment goal was considered too high.

Changes in Structural Unemployment
  • Unemployment stayed far above 4 even when the
    economy expanded, and inflation began to rise at
    higher levels of unemployment.
  • Critics suggested that structural barriers to
    full employment had gotten worse.
  • More youth and women.
  • Liberal transfer payments.
  • Structural changes in demand.

Redefining Full Unemployment
  • In view of these factors, the Council of Economic
    Advisers later raised the level of unemployment
    thought to be compatible with price stability.
  • In 1983, the Reagan administration concluded
    that the inflation-threshold unemployment rate
    was between six and seven percent.

Declining Structural Pressures
  • The structural barriers that intensified
    inflationary pressures in the 1970s and early
    1980s receded in the 1990s, making it easier to
    lower unemployment rates without increasing
  • In 1991 full employment was equivalent to 5.5
  • In 1999, the Clinton administration suggested the
    full employment threshold might have dropped to
    5.3 percent.

The Natural Rate of Unemployment
  • The ambiguity about what rate of unemployment
    triggers an upsurge in inflation has convinced
    some analysts to abandon the inflation-based
    concept of full employment.
  • The natural rate of unemployment is the long-term
    rate of unemployment determined by structural
    forces in labor and product markets.

The Natural Rate of Unemployment
  • The natural rate of unemployment consists of
    frictional and structural components only.
  • If the structural determinants of unemployment
    change, so does the level of natural

Congressional Targets
  • The Full Employment and Balanced Growth Act of
    1978 (Humphrey-Hawkins Act) states our national
    goal is a 4 unemployment rate with a required
    goal of 3 inflation.
  • The escape clause is that in the event that
    both goals could not be met, the President could
    set higher provisional definitions of

The Historical Record
  • Although there is ambiguity about the specific
    definition of full employment, the historical
    record is clear on our failure to maintain it.
  • Our greatest failure occurred during the Great
    Depression, when as much as one-fourth of the
    labor force was unemployed.

The Historical Record
  • Unemployment rates fell dramatically during World
    War II the civilian unemployment rate reached a
    rock bottom 1.2 percent.
  • Since 1950, unemployment rate has fluctuated from
    a low of 2.8 percent during the Korean War (1953)
    to a high of 10.8 percent during the 1981-82
  • From 1982 to 1989, unemployment fell, but shot up
    again in the 1990-91 recession.

A Growing Skills Gap?
  • As the skills gap widens, structural unemployment
  • The skills gap is the gap between skills required
    for emerging jobs and the skills of workers.
  • The rapid pace of structural change represent a
    major challenge for the U.S. economy in the

New Jobs
  • Our success in achieving full employment in the
    economy of tomorrow will depend on both
    structural and cyclical forces.
  • Ninety-eight percent of all new jobs created in
    the next decade will be service jobs.
  • The new jobs of tomorrow will require increasing
    levels of education and skill.
  • Workers without the right skills will find
    themselves out of step with a fast-changing

Projected Employment Changes 1996-2006
End of Chapter 6
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