Chapter 20 Macroeconomics

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Chapter 20 Macroeconomics

• Unemployment and Inflation

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Natural Unemployment Rate

• Used when the economy is in its normal state
  with no recession or boom period
• Cyclical unemployment is related to short term
  fluctuations in the employment rate

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Frictional and Structural

• Frictional unemployment is caused when workers
  change jobs or are new to the workplace
• Structural unemployment skills are no longer
  needed - technology replaces workers - must be
  retrained

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Measuring Unemployment

• Census bureau surveys a sample of 60,000
  households - Current Population Survey
• Labor Force - anyone over 16 who is employed or
  unemployed
• Must be looking for work, not in jail or hospital

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The Labor Force and Discouraged Workers

• Discouraged workers - someone forced to retire
  before desired time
• Part time work is counted as employed - working
  between 1-34 hours per week
• 20 women work part time 7 of men
• 11 of US workers are part time
• 29 of women who have children under 6 work part
  time

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Three Key Indicators of Conditions in the Labor
Market

• Unemployment rate - of labor force that is
  unemployed
• Labor force participation rate - ratio of people
  in the labor force to the working age population
• Employment to population ratio - the ratio of
  employed workers to the working age population

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Aggregate hours of input labor

• Number of people employed is not a good measure
  of labor input
• Must used number of hours worked
• Aggregate hours is the number of hours worked by
  all workers which is used to determine production
  in GDP

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The Nature of Unemployment - Reasons people are
Unemployed

• Job Losers - state of flux - dot coms - not
  always due to a poor economy
• Job Leavers - average American changes jobs every
  3-4 years - young
• New Entrants and Re-entrants -seasonal
  unemployment

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New labor demand caused by an increase in real
wages, thus more people seeking employment
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Job Rationing and Job Search

• Explain why the unemployment rate is not 0
• Real wages - adjusted for inflation or the prices
  of products
• Real wages are higher than the equilibrium point
  - thus causing a limited amount of demand
• Why doesnt the wage simply decrease to meet the
  equilibrium point

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Why wage will always be too high

• Minimum wage
• Insider and outsider - insiders have some control
  over wages and hiring (unions)
• Efficiency Wage - paying workers more than the
  equilibrium point to keep employees and lower
  turnover - will save costs in the long run

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Job Search

• Job market is always in a state of flux
• Stochastic equilibrium - due to constant job
  creation and destruction
• People wait for the best job and thus are
  unemployed

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Policies to reduce the unemployment rate

• Minimum wage could increase unemployment - many
  are low skilled and the minimum wage is higher
  than the firms are willing to pay them
• Unemployment compensation - allows 26 weeks to
  search for a job - increasing unemployment for
  that time

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Global Unemployment

• Very different among countries
• Due to natural rather cyclical unemployment
• Unemployment compensation is higher in Australia
  and France - causing unemployment