Unemployment and the Business Cycle

1. The Four Phases of the Business Cycle2. Unemployment Defined3. Types of Unemployment4. GDP Gap

I. Four Phases of The Business Cycle

Expansion Phase: denotes growth in the economy; businesses, employment and price level is growingPeak Phase: highest point of the expansion phase; unemployment at its lowest pointContraction Phase: also called “recession (a period in which of GDP declines for 2 consecutive quarters)downside of expansion; unemployment grows; business downsize and make cutsTrough: “bottoming-out” of contraction phase; unemployment and firm contraction reach its lowest point

Unemployment Line of the 1930s

II. Defining and Measuring Unemployment

Defining Unemployment:

Employed:– Any person 16 years of age or older

1. Who works for pay, either for someone else or in his or her own business for one or more hours per week

2. Who works without pay for more than 15 hours per week in a family enterprise (farmers)

3. Part-time workers are considered employed

Unemployed:• A person 16 years old or older who is not working, is available for work,

and has made specific efforts to find work during the previous 4 weeks

Measuring Unemployment:

Labor Force = Employed + Unemployed

Population = Labor Force + Not in Labor Force

Unemployment Rate = _____Unemployed _______ X 100

Employed + Unemployed

Labor Force Participation rate = Labor Force X 100

Population

III. Types of UnemploymentFrictional Unemployment:

• Will always occur; the normal turnover of employee• Workers that are between jobs, but have the skills needed to fill a job

opening• When workers are either searching for jobs or waiting to take jobs• When people change occupations or locations, or are new entrants

and reentrants• Occurs in the short term (less than 5 weeks)• Occurs when there is imperfect information between job seeker and

employer

Structural Unemployment:• Will always occur• Workers who becomes unemployed due to a lack of skill with new

technology introduced by his or her employer• Occurs when there is a mismatch of skills and available jobs, change

in consumer taste for new product or change in technology

Cyclical Unemployment:• Workers that are unemployed as a results from the normal

fluctuations in the business cycle; due to a recession

• Cyclical unemployment caused by a decline in total spending in the economy (occurs in the contraction stage of the business cycle)

Seasonal Unemployment• Unemployment that varies with the seasons of the year due to

seasonal fluctuations in supply and demand for labor

• Unemployment is low around holiday season when businesses hire extra help

• Government statisticians smooth out this to help other trends

IV. The Concept of Full Employment

Full Employment• It does not mean “zero unemployment”• The level of unemployment that results when the rate of

unemployment is normal, considering both frictional and structural factors

• The level of employment reached when there is no cyclical unemployment

Natural Rate of Unemployment:• The unemployment rate that exists in “normal” times; when there is neither a

recession nor a boom (Real GDP = potential GDP)• The long-run average unemployment rate due to frictional and structural

unemployment (page 202 in text)• It is a rate that is sustainable into the future ( “maximum sustainable rate”)• Also call the “non-accelerating inflation rate of unemployment”• The lowest rate of unemployment that will not result in inflation; when

employment falls below this rate, inflation accelerates

During a recession: the actual unemployment rate rises above the natural Unemployment rate

During a recession, the real GDP falls below potential GDP

V. Nature of Unemployment

Reasons people are unemployed• Job losers

• Job leavers

• New (or re-) entrants

Long-term vs. Short-term Unemployment• Hardship of unemployment depends on it’s duration; the long

you are unemployed the harder it is to maintain standard of living

• 50% of unemployment is short-term (less than 5 weeks)

• 35% of unemployment last 5 to 26 weeks

• 15% is long-term (more than 6 months)

• Long-term unemployment increases during recessions and fall during booms (expansionary)

Unemployment for different groups• Overall unemployment rate does not capture the long-term hardships

experienced by certain groups• Certain groups of workers experience long duration of

unemployment and suffer great hardship and find it difficult to find work

Group Unemployment Adults low Teenagers high Drop outs high Teenage minorities highest

VI. Determination of Employment

Labor demand and Labor supply– Labor Demand Curve:

– describes the behavior of firms– Indicates how much labor they would demand at a given wage (the price

of labor)

– Labor Supply Curve:– Describes the behavior of the workers– Shows how much labor they would supply at a given wage

– Real Wage:– We must think of wage relative to the average price of goods

Real Wage = wage Price level

V. Psychological Aspects of Unemployment

Economic loss; no money

Unemployment is hard on an individual’s self-respect and can destroy families (no college, smaller house, etc.)

Youth can become disillusioned about their future