potential gdp time total production every year we produce more than the previous year full...

Potential GDP

Time

Total Production

Every

year w

e produce m

ore than th

e previous y

ear

Full Employment: z

ero

unemployment, no excess

capacity

Above Full employment

Below Full employment

At Full employment

Potential GDP

Potential GDP

2

Real GDP the economy produces when workers and factories are fully employed

GrowthIncreases in GDP come from:

More workers

More factories and/or

Better technology

More workers: Growth in the labor force

More factories: Growth in the country’s stock of capital

Improvements in technology

More workers: Growth in the labor force

More factories: Growth in the country’s stock of capital

Improvements in technology

Real GDP = Hours of work X Output per hour Real GDP = Hours of work x Labor productivity

Growth rate of potential GDP = Growth rate of labor force x Growth rate of labor productivity

44

ExampleHours of work per year = 250 BLabor productivity = $56 per hour.Real GDP= 250 B *$56 per hour =$14T

Real GDP = Hours of work x Labor productivity

Unemployment

A measure of wasted resources: Wasted Labor hours and/or wasted capital

04/19/23 (c) 2002 Claudia Garcia-Szekely 5

Measuring Unemployment Since 1940. Unemployment is measured by the

Bureau of Labor Statistics (BLS) part of the Department of Labor.

Data is compiled from monthly surveys (60,000 households) Current Population Survey

Data does not come from unemployment insurance (UI) records… UI is one of many factors used.


Employed Have a job: Full time, part time or

temporary work. Worked at least ONE hour or more

for pay or profit during the survey week.

Worked 15 hours or more without pay in a family business.

Temporarily absent from work Illness, vacation, labor dispute, etc.04/19/23 (c) 2002 Claudia Garcia-Szekely 7

Unemployed

Do not have a job. Available for work: Made specific

efforts to find a a job. Not working, waiting to be called

back to a job from which they were temporarily laid off.


Not in the Labor Force Those who have no job and are not

looking for a job. Retired Full time students Home makers. Volunteers

Institutional Population. Mental Institutions Prison Military

04/19/23 (c) 2002 Claudia Garcia-Szekely

04/19/23

>

04/19/23

>

LF = Employed + Unemployed

UnemploymentRate (Ur)

=Unemployed

Labor ForceX 100

=Labor Force

Active PopulationX 100

Labor ForceParticipation Rate

154M

14M9.09%

140M

14M

154M

154M

243.3M

65.7%

SEE PROGRESSIONUnemployment


http://www.youtube.com/watch_popup?v=hwWGzQ_FUtQ&vq=medium#t=27

Is Unemployment Measured Correctly?

No. There are three problems with the way we measure unemployment


1. Discouraged WorkersA discouraged worker is someone

who gave up looking for a job. NOT counted as unemployed Should be included as

unemployed: they are part of the active population and would work if a job was available.


1M give up looking for work

16

138Employed

Unemployed

LFLF = = 138138+16=+16=154154UUr r ==UUr r == 16/16/154154=10.4%=10.4%

New LF New LF = = 154154-1-1==153153New UNew Ur r ==New UNew Ur r ==1515//153153=9.8%=9.8%

Unemployed16-1=15

Discouraged Worker Effect.

The longer the recession lasts, the less accurate the Ur


Discouraged WorkersThousands

Is Unemployment Measured Correctly?

No. There are three problems with this statistic:1. The Discouraged Worker Effect

2. The treatment of part time work as full time.


Employed: Worked at least ONE hour or more for pay or profit

Some PT workers would work full time if a job was available.

They should be counted –at least partially- as unemployed.

Is Unemployment Measured Correctly?No. Three problems:1. The Discouraged Worker Effect 2. The treatment of part time work as full time.

3. Underemployment A person working on a job that does not use his/her full potential.

Underemployed individuals are counted as employed even though their skills are not.

There are no official statistics on underemployment Difficult to develop objective criteria.

Employed: Worked at least ONE hour or more for pay or profit

The Unemployment Rate:Three Misrepresentations


DiscouragedWorkers Not Unemployed

Underestimate trueUnemployment

Part TimeWorkers

Counted as employedInflate Number employedUnderestimate true Unemployment

Under-employedWorkers

Counted as employed

Employed? Unemployed? Not in the LF?1. After 14 months, Mrs. Smith gives up searching for a job.2. Claudia reports wanting to work, but she made no specific

efforts to find employment.3. John works as a clerk in a government office.4. Harry is in active duty in the military.5. Raul was paid for 2 hours work during the survey week.6. Joe is retired and volunteers his time at a hospital.7. Anthony was given a 2 day suspension from work for being

late.8. Joseph works two days a week at a restaurant.9. Mary, a part time teacher, reports searching unsuccessfully

for a full time job.10. Ron, a PhD in Philosophy, drives a delivery van after

searching unsuccessfully for a job. 25

5. Suppose that the active population is 230 million, the labor force participation rate is 66% and the unemployment rate is 5%. If the number of discouraged workers increases by 5 million, what does the unemployment rate become?

5. Active population is 30 million, labor force participation rate 60%, number of discouraged workers 2 million, number of people with full time jobs 13 million, number of people with part time jobs is 2 million. Calculate the unemployment rate.

Potential GDPReal GDP the economy produces when workers and factories are fully employed

27

Output produced when unemployment

is zero

Unemployment is never ZEROUnemployment is never ZERO

Three types of unemployment: Structural: workers who do not

have skills currently in demand…there is no job for them.

Frictional: workers who have the necessary skills but there is a job for them

Cyclical: workers have the necessary skills for the job, but lack of demand prevents firms from hiring them back.


Potential GDPReal GDP the economy produces when workers and factories are fully employed

30

Output produced when cyclical unemployment is zero

Unemployed due to lack of

skills1%

Unemployed due to

recession5%

Between Jobs4%

Zero Cyclical

Frictional4%

Cyclical5%

Structural1%

Ur=10%

Recession Ends

Natural

Rate of

Unemployme

nt

5%

Unemployment increases Inequality


Worst 2013Teens 27.0 25.1Black or African American 16.8 13.8Hispanic 13.1 9.6Men 10.4 7.1Women 8.4 7.0White 8.9 6.8

“When the economy

catches a cold minorities

and young people get

pneumonia”

Alan Blinder

“When the economy

catches a cold minorities

and young people get

pneumonia”

Alan Blinder

Unemployment Costs: Okun’s Law

1% Unemployment = 2.5% of GDP

33

GDP*0.025 = Goods and Services lost for each 1% extra

unemployment

GDP*0.025 = Goods and Services lost for each 1% extra

unemployment

14,000B *0.025 = 350B lost for each 1% extra

unemployment

14,000B *0.025 = 350B lost for each 1% extra

unemployment

Okun’s Law: an example

2007 Ur = 4.9% GDP= 11,620b 2008 Ur = 7.2%Extra Unemployment = 7.2 – 4.9 = 2.3%Each 1% extra unemployment = 2.5%

GDP% Lost GDP = 2.3(2.5) = 5.75% Lost GDP = 11,620b (5.75%)= 668B

Cyclical? Structural? Frictional?1. Richard loses his job at UPS due to a downturn in general

business conditions.2. Mark loses his job as a parking attendant. His job was replaced by

a new automated system.3. Sarah quits her job as a hostess to look for work that is more fun.4. Andrew quits looking for work because he does not think he can

find a suitable job.5. Nancy lost her job as a real estate agent during the housing

crisis.6. Mathew just graduated from college and does not have a job yet.7. Pedro lost his job as software developer for a weapons

manufacturer. He is looking for a new job.8. John lost his job as a public phone repairman because his skills

are no longer needed.

35

True or False?


1. Frictional unemployment is a "necessary" cost of a dynamic economy.

2. Someone unemployed for a long period of time due to technological change would be described as structurally unemployed.

The Natural Rate of Unemployment


Less than HS

HS graduates

Some College

Bachelor Degree and higher

11.2%

7.9%

6.7%

3.8%


More women work

outside the home

Fewer men work

outside the home

2008:73%

2008: 58.7%

Unemployment

Inflation

Bush 89-93

Clinton 93-01

Bush 01-09

Obama 09-

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