Economic Costs of Unemployment

8/13/2019 Economic Costs of Unemployment

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Okuns Law and UnemploymentWeek - II

06/12/13


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Introduction to the Classical and Keynesian Schools

of Thought.


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GDP Gap and OkunsLaw

The basic loss of unemployment is forgone output.

This is a set of goods and services that is forever lost. We measure this as the GDP Gap.

The amount of a product that a production facility actually

produces, as opposed to the amount that it could produce if it

were to run at full theoretical capacity.

Determining the difference between potential output and

actual output, or output gap, is an important step in

identifying sources of waste or defect that can be targeted for

process improvement.


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GDP Gap and OkunsLaw

Approximately a 2% GDP Gap occurs

For every 1% unemployment exceeds the natural

rate...

GDP GAP: The amount by which actual GDP falls

short of potential GDP

Arthur Okun first to quantify the idea:


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The Okuns Law

Okun's law investigates the statistical relationship

between a country's unemployment rate and the

growth rate of its economy

Louis explains that Okun's law "is intended to tell us

how much of a country's gross domestic product

(GDP) may be lost when the unemployment rate isabove its natural rate."


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The Okuns Law

Output depends on the amount of labor used in the

production process, so there is a positive relationship

between output and employment.

Total employment equals the labor force minus the

unemployed, so there is a negative relationship

between output and unemployment (conditional on

the labor force)."


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GDP Gap and Okuns Law

At times, the economys actual output will exceed

its potentialnegative GDP gap.

when the statistics dont agree with what

happening because some facts are lost or missed.

Extra shifts of workers, capital equipmentused beyond its design capacity, overtime work and

moonlighting are common statistics that cannot be

accurately counted.

In 1988-89, an economic expansion caused actual

GDP to exceed potential GDP. This condition

eventually caused inflation and could not be

sustained.


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Unequal Burdens of Unemployment

Occupation

Age

Race and Ethnicity Gender

Education

Duration


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How Useful Is Okun's Law?

"Okun's law is not a tight relationship," but that

"Okun's law predicts that growth slowdowns typically

coincide with rising unemployment."

In regard to the fact it did not hold up that well during

the financial crisis, Bernanke speculated that "theapparent failure of Okun's law could reflect, in part,

statistical noise."


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Is There A Social Cost To Extended Unemployment?

Non-Economic Costs of Unemployment

Cyclical Unemployment, when high, causes social problems.

1. People out of work become depressed and crime rates rise.

2. Violence in the home rises as well because of the frustration

factor.

3. Families suffer and often fall apart.

4. Severe depression can cause major political and social change.


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Output Growth, Unemployment, Inflation,

and Nominal Money Growth


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Social Cost of Unemployment

FBI crime statistics show

that both property crimeand violent crime

increased between 1985 and

1991 and fell dramatically

from 1993 to 2003 instep with the decrease in

unemployment.

Crime rates move with the business cyclerising

during periods of high unemployment and fallingduring periods of low unemployment.

QuickTime and a

TIFF (Uncompressed) decompressorare needed to see this picture.

Bureau of Justice Statistics

http://www.ojp.usdoj.gov/

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Economic Costs of Unemployment