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    6 MONITORING CYCLES, JOBS, AND THE PRICE LEVEL**

    * * This is Chapter 22 in Economics.

    C h a p t e r K e y I d e a s

    Vital Signs

    A. The last U.S. recession began in March 2001 and ended in November 2001. What defines a recession, who makes the decision that we are in one, and how?

    B. How do we measure unemployment and what other data do we use to monitor the labor market?

    C. Being employed alone does not determine standard of living; the cost of living also matters, so we also need to know what the Consumer Price Index is, and how that is measured and used.

    O u t l i n e

    I. The Business Cycle

    A. The business cycle is the periodic but irregular up-and-down movement in production and jobs.

    1. The National Bureau of Economic Research (NBER) defines a recession somewhat differently than the common definition. The NBER says A recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade.

    2. The NBERs Business Cycle Dating Committee identifies and dates them for the United States.

    C h a p t e r

  • 1 2 2 C H A P T E R 6

    B. Business Cycle Dates

    1. There have been 16 recessions and 17 expansions since 1919.

    2. Table 6.1 lists the months of troughs and peaks for each.

    C. The 2001 Recession

    1. The 2001 recession was one of the mildest on record, but the subsequent recovery was weak and did not initially extend to the labor market, leading to the label of a jobless recovery.

    2. Figure 6.1 shows business cycle patterns since 1928 with a graph of the output gap over time. The Great Depression and World War II stand out as the most extreme deviations from potential GDP.

  • M O N I T O R I N G C Y C L E S , J O B S , A N D T H E P R I C E L E V E L 1 2 3

    II. Jobs and Wages

    A. Population Survey

    1. The U.S. Census Bureau conducts monthly surveys to determine the status of the labor force in the United States.

    2. United States population is divided into two groups

    a) The working-age population, which is the number of people aged 16 years and older who are not in jail, hospital, or other institution (in 2003, the working-age population was 221.2 million).

    b) People too young to work (less than 16 years of age) or in institutional care.

    3. The working-age population is divided into two groups: people in the labor force and people not in the labor force. In 2003, 147.8 million people were in the labor force and 73.4 million people were not in the labor force.

    3. The labor force is the sum of employed and unemployed workers. To be considered unemployed, a person must be:

    a) without work and have made specific efforts to find a job within the past four weeks, or

    b) waiting to be called back to a job from which he or she was laid off, or

    c) waiting to start a new job within 30 days.

    4. Figure 6.2 shows the population labor force categories for 2003.

    B. Three Labor Market Indicators

    1. The unemployment rate is the percentage of the labor force that is unemployed.

    a) The unemployment rate is (Number of people unemployed/Labor force) 100. b) The unemployment rate reaches its peaks during recessions.

    2. The labor force participation rate is the percentage of the working-age population that is in the labor force.

    a) The labor force participation rate is (Labor force/Working-age population) 100. b) Overall, the labor force participation rate has increased from 59 percent in the 1960s to

    67 percent in 2000. The labor force participation rate for men has declined, but for women has increased.

    c) The labor force participation rate falls during recessions as discouraged workers people available and willing to work but who have not made an effort to find work within the last four weeks leave the labor force.

    3. The employment-to-population ratio is the percentage of working-age people who have jobs.

    a) The employment-to-population ratio is (Number of people employed/Working-age population) 100.

  • 1 2 4 C H A P T E R 6

    b) The employment-to-population ratio has increased from 55 percent in the early 1960s to 62.6 percent in 2003. The employment-to-population ratio has declined for men and increased for women.

    4. Figure 6.3 shows the labor force participation rate, employment to population ratio, and unemployment rate, 19632003.

    5. Figure 6.4 shows the changing face of the labor market by showing how the labor force participation rates and employment-to-population ratios for males and females have behaved from 1963 to 2003.

  • M O N I T O R I N G C Y C L E S , J O B S , A N D T H E P R I C E L E V E L 1 2 5

    C. Aggregate Hours

    1. Aggregate hours are the total number of hours worked by the people employed, both full time and part time, during a year.

    2. Aggregate hours have increased since 1963 but less rapidly than the total number of workers because the average workweek has shortened.

    3. Figure 6.5 shows aggregate hours and average weekly hours per person from 19632003.

    D. Real Wage Rate

    1. The real wage rate is the quantity of goods and services that an hours work can buy.

    2. The real wage rate equals the money wage rate divided by the price level.

    3. Three measures of the real wage rate are:

    a) average hourly earnings of private manufacturing nonsupervisory workers deflated by the GDP deflator.

    b) total wages and salaries from the National Income and Product Accounts divided by aggregate hours and then deflated by the GDP deflator.

    c) total labor compensation, which includes wages, salaries, and supplements divided by aggregate hours and then deflated by the GDP deflator.

    3. Figure 6.6 shows the three measures of real wage rates listed above, 19632003.

    4. The growth rate of the average real wage rate slowed during the 1970s and early 1980s, a reflection of the productivity growth slowdown.

    a) The real wage rate of private manufacturing nonsupervisory workers remained almost

  • 1 2 6 C H A P T E R 6

    constant throughout the 1970s and 1980s, but started to increase again in the mid-1990s.

    b) The growth of the real wage rate, measured by total wages and salaries divided by total hours, slowed substantially during the mid-1970s, grew rapidly in the 1990s, but fell slightly after 2000.

    c) The real wage rate, measured by total labor compensation (which includes fringe benefits) divided by total hours, also grew more slowly in the mid-1970s, but the slowdown was less than for the real wage rate measured by wages and salaries only.

    III. Unemployment and Full Employment

    A. The Anatomy of Unemployment

    1. Unemployed people can be divided into three types:

    a) Job losers are workers who have been laid off or fired and are searching for new jobs. Job losers account for the largest fraction of the unemployed and the fraction rises during recessions.

    b) Job leavers are workers who have voluntarily quit their jobs to look for new ones. Job leavers are the smallest fraction of the unemployed.

    c) Entrants and reentrants are people entering the labor force for the first time or returning to the labor force and searching for work. The primary source of reentrants is (formerly) discouraged workers.

    2. People end a spell of unemployment if they

    a) are hired or recalled to a job.

    b) withdraw from the labor force.

    3. Figure 6.7 illustrates the labor market flows between the different states.

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    4. Figure 6.8 shows unemployment by reason, 19832003.

    5. The duration of unemployment increases during recessions. Figure 6.9 shows unemployment by duration close to a business cycle peak in 2000 and close to a trough in 2002.

    6. The unemployment rates for young workers and black workers are higher than the unemployment rates for older workers and white workers. Figure 6.10 shows the unemployment rates of teenagers and adults, whites and blacks close to a business cycle peak in 2000 and close to a trough in 1992

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    B. Types of Unemployment

    Unemployment can be classified into three types:

    1. Frictional unemployment is unemployment that arises from normal labor market turnover, that is, from people entering and leaving the labor force and from the ongoing creation and destruction of jobs.

    a) The creation and destruction of jobs requires that unemployed workers search for new jobs.

    b) Increases in the number of young people entering the labor force and increases in unemployment benefit payments raise frictional unemployment.

    2. Structural unemployment is unemployment that arises when changes in technology or international competition change the skills needed to perform jobs or changer the locations of jobs.

    3. Cyclical unemployment is the fluctuation in unemployment over the business cycle.

    C. Full Employment

    1. Full employment occurs when there is no cyclical unemployment or, equivalently, when all unemployment is frictional or structural.

    2. The unemployment rate at full employment is called the natural rate of unemployment. The natural rate of unemployment is not zero because some jobs are always being created and destroyed and some people are always entering the labor force or changing jobs.

    D. Real GDP and Unemployment Over the Cycle

    1. Potential GDP is the qua

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