Principles of Macroeconomics
ECON203,
Lecture 8: Jobs (employment) and
Unemployment
Instructor: Turki Abalala
Recap of Last Lecture
 Labor Market Indicators
• The Unemployment Rate
• The labor force participation Rate
 Sources of unemployment
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Class Outline
 Unemployment and Full-employment
• Types of Unemployment
• Full Employment and Natural Unemployment Rate
• Unemployment and Real GDP
 Review Questions
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Unemployment and Full Employment
 Four types of unemployment:
1. Frictional unemployment
2. Structural unemployment
3. Seasonal unemployment
4. Cyclical unemployment
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Unemployment and Full Employment
1. Frictional Unemployment:
• It is the unemployment that arises from normal labor
turnover- from people entering and leaving the labor force,
from quitting jobs to find better ones, and from the ongoing
creation and destruction of jobs.
• It is a permanent and healthy phenomenon in dynamic and
growing economy.
• Firms and workers spend time searching out what they
believe will be the best attainable match, while these
unemployed people are searching, they are fractionally
unemployed.
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Unemployment and Full Employment
2. Structural Unemployment:
•
It is the unemployment that arises when changes in
technology or international competition change the skills
needed to perform jobs or change the location of jobs. For
example, telephone switching is now done by computer
rather than by operators. Also, call centers have been
relocated to India.
• Structural unemployment usually last longer than frictional
unemployment because workers must retrain and possibly
relocate to find a job.
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Unemployment and Full Employment
3. Seasonal Unemployment:
• Unemployment caused by seasonal patterns.
 For example, farm workers find jobs picking fruit as it
ripens, but once the fruit is picked they are laid off.
 Another example, during the month of Ramadan and
Eid festival, the demand for labor increases and other
months may decrease.
 To eliminate the impact of such changes, monthly
unemployment statistics are seasonally adjusted which
smoothe out these factors
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Unemployment and Full Employment
4. Cyclical Unemployment:
•
It is the fluctuating unemployment over the business cycle
that increases during a recession and decreases during an
expansion.
 For example, during the recession of 2008–2009, many
workers were laid off as business activity declined.
 Government policies to stimulate aggregate demand during
recessions is aimed at reducing this type of unemployment.
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Unemployment and Full Employment





Some people are unemployed for a week or two and others
for a year or more.
A short unemployment spell is not a major problem,
especially if the person ends up with a better job than the
previous one.
But a long spell of unemployment imposes a large personal
cost to the unemployed, leads to a loss of human capital, and
leads to underproduction and waste.
The average duration of unemployment varies over the
business cycle.
Average duration increases in a recession and decreases
during an expansion.
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Unemployment and Full Employment

Why are teenage unemployment rates so high?
There are two reasons:
1. Teenagers are still discovering what they are good at, so
they try different jobs and leave their jobs more frequently
than older workers.
2. Teenagers have little job experience, so firms often hire
them on a short-term or trial basis, which makes the rate
of job loss higher for teenagers than for older workers.
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Unemployment and Full Employment

When there is no cyclical unemployment or, equivalently,
when all the unemployment is frictional, structural, or
seasonal, the state of the economy is at full employment:
 The divergence of unemployment rate from full
employment is cyclical unemployment.

The unemployment rate when the economy is at full
employment is called natural unemployment rate.

Full employment and natural rate of unemployment are
examples of technical economic terms that does not
correspond with everyday language.
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Unemployment and Full Employment

Unemployment and Real GDP:
Cyclical unemployment is the fluctuating unemployment over
the business cycle—unemployment increases during
recessions and decreases during expansions.
 At full employment, there is no cyclical unemployment.
 At the business cycle trough, cyclical unemployment is
positive.
 At the business cycle peak, cyclical unemployment is
negative.
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Unemployment and Full Employment

The value of real GDP when all the economy’s factors of
production―Labor, capital, land, and entrepreneurial
ability― are employed is called Potential GDP.

The difference between Real GDP or actual output
and Potential GDP is called GDP gap or the output gap

The percentage of Output gap is the real GDP minus the
potential GDP divided by the potential GDP which is always
express in percentage:
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Unemployment and Full Employment

Potential GDP is the level of real GDP that the economy
would produce if it were at full employment.

Because the unemployment rate fluctuates around the
natural unemployment rate, real GDP fluctuates around
potential GDP:
 When the unemployment rate is above the natural rate,
real GDP is below potential GDP.
 When the unemployment rate is below the natural
unemployment rate, real GDP is above potential GDP.
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Unemployment and Full Employment

When the economy is at full employment, real GDP equals
potential GDP and there is no output gap.

When the unemployment rate is above the natural rate, real
GDP is below potential GDP and the output gap is negative.

When the unemployment rate is below the natural
unemployment rate, real GDP is above potential GDP and the
output gap is positive.
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Unemployment and Full Employment

Unemployment rate
unemployment rate.
fluctuates
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around
the
natural
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Unemployment and Full Employment

Because unemployment rate fluctuates around the natural
unemployment rate, real GDP fluctuates around potential
GDP.
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Reference
• Chapter 6 of “Foundations of Macroeconomics”
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Now it’s over for today.
Any question?
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