Fluctuations in
Economic
Output,
Unemployment,
and Inflation
The Business Cycle
• The phases of the business cycle are:
•
•
•
•
Recovery or Expansion,
Peak or Boom (shaded green)
Recession or Contraction
trough or Depression (blue shaded areas).
Real GDP
Business
peak
Trend line
Business
peak
Depression
or trough
Depression
or trough
Time
The Business Cycle
• Cycles are irregular
•Annual growth
rate of real GDP
•8
•Long-run growth rate
(approx. 3%)
•6
•4
•2
•0
•- 2
•1960 •1965 •1970 •1975 •1980 •1985 •1990 •1995 •2000 •2005
•Source: Economic Report of the President, various issues.
• Ups and downs characterize business activity.
• There has been an upward trend in real GDP in the
United States and other industrial nations.
Economic Fluctuations
and the Labor Market
1. Employed
– a person (16 years old or over) who is
• working for pay at least one hour per week,
• self employed, or,
• working 15 hours or more each week without
pay in a family-operated enterprise.
2. Unemployed
– a person not currently employed who is either
• actively seeking a job, or,
• waiting to begin or return to a job.
3. Civilian Labor force
– civilians (16 years and older) who are either
employed or unemployed.
4. Not in the labor force
– persons (16 years and older) who are neither
employed
nor unemployed (like retirees,
4 Labor Market
Classifications
students, homemakers, or disabled persons).
The figures below (in millions) are for the U.S.
during the year 2006.
Population (age 16 and over) 299.8
Civilian pop. (age 16 and over) 228.6
Employed
144.4
Unemployed
7.0
a. Calculate the unemployment rate.
•7.0
•7.0 • 144.4
b. Calculate the labor force participation rate.
•7.0 • 144.4
•228.6
c. Calculate the employment/ population ratio
• 144.4
•228.6
•U.S. Employment and Unemployment,
2012
Total adult population over
the age of 16
In the labor force
Employed
Unemployed
Out of the labor force
243.2 million
154.9 million (63.7%)
142.4 million
12.5 million
88.3 million (36.3%)
Economic Fluctuations
and the Labor Market
• The non-institutional civilian adult population
is grouped into two broad categories:
• Persons not in the labor force, and,
• persons in the labor force.
Labor Force
Participation Rate
=
# in the Labor Force
Civilian population (16+)
Recall the Labor Force = Employed + Unemployed
• To be classified as unemployed, one must
either be on layoff or actively seeking work.
Rate of
Unemployment
=
# Unemployed
# in the Labor Force
Unemployment and
Measurement Problems
• The definition of unemployed involves some
subjectivity.
• Some argue the employment/population ratio
is a better indicator of job availability than the
unemployment rate.
Employment /
Population Ratio
=
# employed
Civilian population (16+)
Total adult population over the 243.2 million
age of 16
In the labor force
154.9 million (63.7%)
Employed
142.4 million
Unemployed
12.5 million
Out of the labor force
88.3 million (36.3%)
Total adult population over the 243.2 million
age of 16
In the labor force
154.9 million (63.7%)
Employed
142.4 million
Unemployed
12.5 million
Out of the labor force
88.3 million (36.3%)
Total adult population over the 243.2 million
age of 16
In the labor force
154.9 million (63.7%)
Employed
142.4 million
Unemployed
12.5 million
Out of the labor force
88.3 million (36.3%)
U.S. Population, Employment,
and Unemployment: 2001
211.9 million
Civilian population
16 and over
141.8 million
70.1 million
Civilian
labor force
Not in the
labor force
• Household workers
• Students
• Retirees
• Disabled
135.1 million
Labor Force
Participation Rate
Employment /
Population Ratio
Rate of
Unemployment
Employed
Unemployed
• Employees
• Self-employed
workers
• New entrants
• Reentrants
• Lost last job
• Quit last job
• Laid off
=
Civilian labor force
Civilian population (16+)
=
66.9%
=
Number employed
Civilian population (16+)
=
63.8%
=
4.8%
=
6.7 million
Number unemployed
Civilian labor force
U.S. Population, Employment,
and Unemployment: 2004
223.4 million
Civilian population
16 and over
147.4 million
76.0 million
Civilian
labor force
Not in the
labor force
• Household workers
• Students
• Retirees
• Disabled
139.3 million
Labor Force
Participation Rate
Employment /
Population Ratio
Rate of
Unemployment
=
Civilian labor force
Civilian population (16+)
=
Number employed
Civilian population (16+)
=
Number unemployed
Civilian labor force
8.1 million
Employed
Unemployed
• Employees
• Self-employed
workers
• New entrants
• Reentrants
• Lost last job
• Quit last job
• Laid off
=
147.4
223.4
=
66.0%
=
139.3
223.4
=
62.3%
=
8.1
147.4
=
5.5%
• U.S. Population, Employment,
• and Unemployment: 2006
•228.6 million
•77.4 million
•Civilian population
•16 and over
•Civilian
•labor force
•Not in the
•labor force
• Household workers
• Students
• Retirees
• Disabled
•Employed
•144.4 million
•Rate of
Unemployment
• Employees
•
• Self-employed
•workers
•Civilian labor force
=•Civilian
•=
population (16+)
•151.8
•228.6
• =•66.4%
•Number employed
•=
•= •Civilian
population (16+)
•144.4
•228.6
•= •63.2%
•Labor Force •
Participation Rate
•Employment /
Population Ratio
•151.8 million
•=
•Number unemployed
•Civilian labor force
• =
•7.0
•
•151.8
= •4.6%
•7.0
million
•Unemployed
• New entrants
• Reentrants
• Lost last job
• Quit last job
• Laid off
•2001
Labor Force
Participation Rate
Employment /
Population Ratio
Rate of
Unemployment
=
Civilian labor force
Civilian population (16+)
=
Number employed
Civilian population (16+)
=
Labor Force
Participation Rate
•2003
Employment /
Population Ratio
Rate of
Unemployment
=
Civilian labor force
Civilian population (16+)
=
Number employed
Civilian population (16+)
•Employment /
Population Ratio
•Rate of
Unemployment
=
66.9%
=
135.1
211.9
=
63.8%
=
6.7
141.8
=
4.8%
=
147.4
223.4
=
66.0%
=
139.3
223.4
=
62.3%
=
8.1
147.4
=
5.5%
•Civilian labor force
=•Civilian
•=
population (16+)
•151.8
•228.6
• =•66.4%
•Number employed
•=
•= •Civilian
population (16+)
•144.4
•228.6
•= •63.2%
=
•Labor Force •
Participation Rate
•2006
Number unemployed
Civilian labor force
=
141.8
211.9
•=
Number unemployed
Civilian labor force
•Number unemployed
•Civilian labor force
• =
•7.0
•
•151.8
= •4.6%
Fluctuations in the Unemployment
Rate: 1948-2014
Labor Force Participation Rate
of Men and Women: 1948-2003
• During the same period the rate of men has been falling.
•Labor Force Participation Rate of Men and
Women
•87 % •83%
•78 % •76 % •74 %
• 58 % •59 %
•33 %
•1948 •1960 •1975 •1990 •2006
•––––––– Men –––––––
•Source: www.bls.gov.
•38 %
•46 %
•1948 •1960 •1975 •1990 •2006
•–––––– Women ––––––
• The labor force participation rate of women has been
steadily increasing for several decades.
The Unemployment Rate By Gender:
1972-2012
The Unemployment Rate
By Age and Gender: 2006
•Unemployment Rate, 2006
•16.9 %
•13.8 %
• 8.7 %
•7.6 %
•3.5 %
•16-19 •20-24 •25+
•–– Men aged ––
•Source: www.bls.gov.
•4.6 % •4.6 % •4.6 %
•3.7 %
•All •All
•All
men workers women
•16-19 •20-24 •25+
•–– Women aged ––
• Little difference in the rate of unemployment between men
and women.
• Rate for persons under age 25 is much higher than for both
The Unemployment Rate For Women,
by Age: 1972-2012
The Unemployment Rate By Race
and Ethnicity: 1972-2012
Reasons for Being Unemployed
Reason
New Entrants
Re-entrants
Job Leavers
Job Losers: Temporary
Job Losers: Non-Temporary
Percentage
10.8%
28.5%
8.1%
8.5%
44.1%
Composition of the Unemployed by
Reason
• There are various reasons why
persons were unemployed in 2006.
• A little less than two-fifths (39.1%)
of the unemployed were dismissed
from their previous jobs.
• 43.6% of the unemployed were
either new entrants or reentrants
into the labor force.
•Source: www.bls.gov.
•Job
•leavers
•12.5 %
•New
entrants
9.5%
•Reentrants
34.1%
•Dismissed from
•previous jobs
39.1%
•On
•layoff
•13.3%
Length of Unemployment, May 2013
Length of Time
Under 5 weeks
5 to 14 weeks
15 to 26 weeks
Over 27 weeks
Percentage
23.2%
22.8%
16.7%
37.3%
1. Frictional
2. Structural
3. Cyclical
4. Seasonal
between jobs
job replaced
less business
temporary job
Deals with which
type?
1. Frictional?
2. Structural?
3. Cyclical?
• 1. A student who decides at midsemester to devote the rest of the term
to studying quits her part-time job
• 2. A graphic artist who is out of work
because a computer now does her job.
• 3. A waiter who quits his job and is
applying for the same type of work in a
restaurant where morale is better.
• 4. The son of a local farmer who works
20-hour weeks without pay on the farm
while waiting for a job at a nearby
factory.
• 5. A travel agent who is laid off
because the economy is in a slump and
vacation travel is at a minimum.
• 6. A plumber who works 5 hours per
week for his church (on a paid basis) until
he can get a full-time job
At full employment there
will still be some:
1. Frictional
2. Structural
but no Cyclical
actual unemployment
may only get as low as
4–5%
The Business Cycle
• Cycles are irregular
•Share of labor
force unemployed
•Actual rate of
unemployment
•10
•8
•6
•4
•Natural rate of
unemployment
•2
•1960
•1965
•1970
•1975
•1980
•1985
•1990
•2008
•1995
•2000
•2005
• Ups and downs characterize business activity.
• There has been an upward trend in real GDP in the
United States and other industrial nations.
Unemployment Across Economies
• Recently, the unemployment rate in the U.S. and Japan has been
lower than in major European economies.
• Higher unemployment benefits, less flexible bargaining, and
more regulated labor markets of Europe explain this.
Average Unemployment Rate
(1990-1999)
Spain
19.9 %
France
11.2 %
Italy
10.6 %
U.K.
8.2 %
Germany
7.5 %
U.S.
Japan
5.8 %
3.1 %
Source: Economic Outlook, OECD (Dec. 2000).
Unemployment Across Economies
Average Unemployment Rate
(1994-2003)
(1990-1999)
Spain
14.6 % 19.9 %
France
11.2 % 10.6 %
Italy
10.6 %
U.K.
8.2 %
Germany
8.6 %
7.5 % 6.5 %
U.S.
5.8 %
Japan
3.1 % 4.2 %
Source: Economic Outlook, OECD (Dec.
2000).
(June 2004).
5.1 %
10.5 %
Unemployment Across Economies
•Average Unemployment Rate
•(1997-2006)
•11.6 %
•Spain
•9.7 %
•Italy
•9.2 %
•France
•8.5 %
•Germany
•U.K.
•5.4 %
•U.S.
•4.9 %
•Japan
•4.6 %
•Source: Economic Outlook, OECD (June 2007).
• U.S. and Japan lower than major European economies.
• Higher unemployment benefits, less flexible collective
bargaining, and more regulated labor markets in Europe.
Actual and Potential GDP
• Potential output :
Maximum sustainable output level consistent with the
economy’s resources,
(on the production possibilities curve.)
• Actual and potential output will be equal when the
economy is at full employment.
• Here we illustrate both actual and potential GDP.
•Real GDP
(billions of 2000 $)
•12,000
•2001
recession
•10,000
•1990-91
recession
•8,000
•Potential
GDP
•Actual
GDP
•6,000
•4,000
•2,000
•1960
recession
•1970
recession
•1982
recession
•1980
recession
•1974-75
recession
•1960 •1965 •1970 •1975 •1980 •1985 •1990 •1995 •2000 •2005
• Note the gap (shaded area) between actual and potential
GDP during periods of recession.
Historically Speaking
Classify each of the following as (a) employed,
(b) unemployed, or (c) not in the labor force:
a. a person who is not working but applied for a job at WalMart last week
b. a person working part-time who is searching diligently
for a full-time job
c. an auto worker vacationing in Florida during a layoff at a
General Motors plant who expects to be recalled in a
couple of weeks
d. a 17-year-old who works six hours per week as a route
person for the local newspaper
e. homemaker working 70 hours a week preparing meals
and performing other household services
f. a college student who spends between 50 and 60 hours
per week attending classes and studying
g. a retired Social Security recipient
•a
•b
•c
•1.
Which of the following individuals would be considered unemployed by the official
government definition?
a.
George, who returned to graduate school after failing to find a
b.
Gwen, a medical student, who is still in college and is not working
c.
Morgan, who is employed part-time but desires a full-time job
•d.
job the last four months
Ralph, an auto worker vacationing in Florida during a layoff at a General Motors plant.
•2.
Suppose there was a country with an adult (age 16 and over) population of 1,000, of which
100 were unemployed and 700 were employed. Which of the following is true?
•a.
The employment population ratio is 87.5 percent.
•b.
The labor force participation rate is 70 percent.
•c.
The unemployment rate is 12.5 percent.
•d.
There are 700 individuals in this country’s labor force.
•3.
The type of unemployment caused by changes in the business cycle is
•a. cyclical
•b. natural •c. frictional
•d. structural.
•4.
•a.
Frictional unemployment is the result of
not enough jobs for everyone to be employed.
•b.
•c.
unemployed workers’ skills not matching those needed for the available jobs.
a decline in the demand for labor, such as during a recession.
•d.
imperfect information and temporary periods of unemployment while workers are
changing jobs.
•5.
of
the
•a.
Suppose there was a country with an adult (age 16 and over) population
1,000, of which 100 were unemployed and 700 were employed. Which of
following is true?
The employment population ratio is 87.5 percent.
•b.
The labor force participation rate is 70 percent.
•c.
•d.
The unemployment rate is 12.5 percent.
There are 700 individuals in this country’s labor force.
•6.
The type of unemployment caused by changes in the
business cycle is
•d. structural.
•a. cyclical •b. natural •c. frictional
•7.
Frictional unemployment is the result of
•a.
not enough jobs for everyone to be employed.
•b.
unemployed workers’ skills not matching those needed for the available
jobs.
a decline in the demand for labor, such as during a recession.
imperfect information and temporary periods of unemployment while
workers are changing jobs.
•c.
•d.
•8.
a.
b.
•c.
•d.
The labor force participation rate of women in the
United States has been
increasing for several decades.
decreasing for the past several decades after increasing
dramatically in the early 1900s.
approximately constant during the last three decades.
decreasing since the early 1900s.
•7.
Which of the following individuals would be considered
unemployed by the official government definition?
a. George, who returned to graduate school after failing to find a
job the last four months
b. Gwen, a medical student, who is still in college and is not working
c. Morgan, who is employed part-time but desires a full-time job
•d. Ralph, an auto worker vacationing in Florida during a layoff at
a General Motors plant.