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Chapter 10: Unemployment Issues

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Title: Chapter 1: Human Misery Last modified by: agrammy Created Date: 1/8/1998 11:48:32 PM Document presentation format: Custom Other titles: Times New Roman Arial ... – PowerPoint PPT presentation

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Title: 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

12
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

13
Simple Model
Income Payments
Labor Resources
Labor Market
Households
Businesses
Product Market
Goods Services
Consumption Expenditures
14
Model with Injections Leakages
Savings
Income Payments
Taxes
Labor Resources
Imports
Households
Businesses
Investment
Goods Services
Govt Exp.
Consumption Expenditures
Exports
15
Total Expenditures
  • Aggregate Demand
  • Consumption Expenditures, C
  • Investment Expenditures, I
  • Government Expenditures, G
  • Exports less Imports, X-M

16
Aggregate Demand CIGX-M
Price Level
D
A
110
B
105
D
200
400
Output of Goods Services
17
Total Income
  • Aggregate Supply
  • Consumption Expenditures, C
  • Personal Savings, S
  • Income Taxes, T

18
Aggregate Supply CST
Price Level
S
110
105
Full Employment
S
200
400
Output of Goods Services
19
Aggregate Equilibrium
  • Aggregate Demand Aggregate Supply
  • C I G X - M C S T
  • I G X S T M
  • Injections Leakages

20
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

24
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
25
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
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