Potential GDP
Above Full
employment
Total Production
At Full
employment
Potential GDP
Below Full
employment
Time
Potential GDP
Real GDP the economy produces
when workers and factories are
fully employed
2
Increases in GDP come from:
More
workers
More
workers:
Growth in the labor force
More
factories
and/orin the country’s stock
More
factories:
Growth
of capital
Better technology
Improvements in technology
Real GDP = Hours of work X Output per
hour
Real GDP = Hours of work x Labor
productivity
Growth rate of potential GDP = Growth
rate of labor force x Growth rate of labor
productivity
Real GDP = Hours of work x Labor
productivity
Example
Hours of work per year = 250 B
Labor productivity = $56 per hour.
Real GDP= 250 B *$56 per hour
=$14T
4
Unemployment
A measure of wasted resources: Wasted
Labor hours and/or wasted capital
3/22/2016
(c) 2002 Claudia Garcia-Szekely
5
Measuring Unemployment
Since 1940.


Bureau of Labor Statistics (BLS) part of the
Department of Labor.
Data compiled from monthly surveys (60,000
households)


Current Population Survey
Data does not come from unemployment
insurance (UI) records…
3/22/2016
(c) 2002 Claudia Garcia-Szekely
6
Employed: have a job




Full time, part time or temporary work.
Worked at least ONE hour or more for
pay or profit during the survey week.
Worked 15 hours or more without pay in
a family business.
Temporarily absent from work

3/22/2016
Illness, vacation, labor dispute, etc.
(c) 2002 Claudia Garcia-Szekely
7
Unemployed: Do not have a job


3/22/2016
Made specific efforts to find a a
job.
Waiting to be called back to a job
from which they were temporarily
laid off.
(c) 2002 Claudia Garcia-Szekely
8
Not in the Labor Force

Those who have no job and are not looking
for a job.




Retired
Full time students
Home makers.
Volunteers
Institutional Population.




3/22/2016
Mental Institutions
Prison
Military
(c) 2002 Claudia Garcia-Szekely
a
l
P
o
p
u
l
a
ti
o
n
Non Institutional
239 Million
Active
Population
>> 16 years
243.3 Million
Total
Population:
308.7 Million
Non-Active
Population
< 16 years:
65.4
3/22/2016
Institutional
Confined to
institutions such
as nursing homes
and prisons, and
persons on active
duty in the Armed
Forces :
4.3 Million
N
A
o
ct
ti
A
vc
e
ti
v
e
e
hL
ea
bL
a
o
br
oF
or
Fr
oc
er
c
e
Labor Force:
Employed +
Unemployed
154 Million
Not in the Labor
Force:
85 Million
Employed: 140
Million
Unemployed:
14 Million
Labor Force
65.7%
Participation Rate
154M
Non Institutional
Labor Force
239 Million
X 100
=
Active Population
154M
243.3M
a
l
P
o
p
u
l
a
ti
o
n
N
A
o
ct
ti
A
vc
e
ti
v
e
e
hL
ea
bL
a
o
br
oF
or
Fr
oc
er
c
e
Labor Force:
Employed +
Unemployed
Employed: 140
Million
154 Million
Unemployed:
14 Million
140M
LF = Employed + Unemployed
Active
Population
>> 16 years
243.3 Million
Total
Population:
308.7 Million
Institutional
Confined to
institutions such as
nursing homes and
prisons, and
persons on active
duty in the Armed
Forces :
Not in the
Labor Force:
14M
85 Million
4.3 Million
Non-Active
Population
9.09%
Unemployment =
Rate (Ur)
< 16 years: 65.4
3/22/2016
14M
Unemployed
Labor Force
154M
X 100
Unemployment
SEE PROGRESSION
3/22/2016
(c) 2002 Claudia Garcia-Szekely
12
Is Unemployment Measured
Correctly?
No. There are three problems with the
way we measure unemployment
3/22/2016
(c) 2002 Claudia Garcia-Szekely
14
1. Discouraged Workers
A discouraged worker is someone who
gave up looking for a job.
 NOT counted as unemployed
 Should be included as unemployed:
they are part of the active
population and would work if a job
was available.
3/22/2016
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1M give up looking for work
LF = 138+16=154
Ur = 16/154=10.4%
New LF = 154-1=153
New Ur = 15/153=9.8%
Unemployed16
Unemployed
Employed
138
16-1=15
Discouraged Worker Effect.
The longer the
recession lasts, the
less accurate the Ur
Discouraged Workers
Thousands
3/22/2016
(c) 2002 Claudia Garcia-Szekely
18
Is Unemployment Measured
Correctly?
No. There are three problems with this statistic:
1. The Discouraged Worker Effect
2.
3/22/2016
The treatment of part time work as full
time.
(c) 2002 Claudia Garcia-Szekely
19
Employed: Worked at least ONE
hour or more for pay or profit


Some PT workers would work full
time if a job was available.
They should be counted –at least
partially- as unemployed.
3/22/2016
(c) 2002 Claudia Garcia-Szekely
21
Is Unemployment Measured
Correctly?
No. Three problems:
1. The Discouraged Worker Effect
2. The treatment of part time work as
full time.
3.
Underemployment A person
working on a job that does not use
his/her full potential.
Employed: Worked at least ONE
hour or more for pay or profit


Underemployed individuals are
counted as employed even though
their skills are not.
There are no official statistics on
underemployment

Difficult to develop objective criteria.
The Unemployment Rate:Three
Misrepresentations
Discouraged
Not counted as
Workers
Unemployed
Part Time Counted as employed
Workers
Underemployed Counted as employed
Workers
3/22/2016
(c) 2002 Claudia Garcia-Szekely
Underestimate true
Unemployment
Inflate Number
employed
Underestimate true
Unemployment
24
Potential GDP
Real GDP the economy produces when
workers and factories are fully employed
Output produced
when unemployment
is zero
25
Unemployment is never ZERO
Three types of unemployment:

Structural: workers who do not have
skills currently in demand


Frictional: workers who have the
necessary skills


There is no job for them.
There is a job for them
Cyclical: workers have the necessary
skills for the job, but lack of
demand prevents firms from hiring
them back.
3/22/2016
(c) 2002 Claudia Garcia-Szekely
27
Ur=10%
Between
Frictional
Jobs
4%
Frictional
Unemployed
4%to
Cyclical
due
recession
5%
5%
Structural
Unemployed due
Structural
1%
to lack
of skills
1%
1%
Zero
Cyclical
1. Unemployment Costs:
Worst
Aug-15
Overall Increases Inequality
10
5.1
Teens
Men
Women
White
Black or African
American
Asian
Hispanic
<HS
HS no College
Some College
Bachelor and higher
27
10.4
8.3
9.2
16.9
4.7
4.7
4.4
16.8
8.4
13
15.6
11
9
5
9.5
3.5
6.6
7.7
5.5
4.4
2.5
(c) 2002 Claudia Garcia-Szekely
30
Unemployment Costs:
2. Lost Output (Okun’s Law)
1% Unemployment = 2.5% of GDP
14,000B *0.025 = $350B
Goods and Services lost for
each 1% extra unemployment
Above the
Natural
Rate ~5%
31
Okun’s Law: an example
2007 Ur = 5%
GDP= 11,620b
2009 Ur = 7%
Extra Unemployment = 2%
Each 1% extra unemployment = 2.5% GDP lost
2(2.5) = 5% GDP lost
11,000b (0.05)= $550B lost
Unemployment Costs: 3. Social Costs
INCREASED SUICIDE RATES (VIDEO)
3/22/2016
(c) 2002 Claudia Garcia-Szekely
33
11.2%
Less than HS
7.9%
HS graduates
6.7%
Some College
3.8%
Bachelor Degree and higher
3/22/2016
(c) 2002 Claudia Garcia-Szekely
34
How do you protect yourself
from unemployment?
STAY IN SCHOOL
3/22/2016
(c) 2002 Claudia Garcia-Szekely
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The Natural Rate of Unemployment
Fewer men
work outside
the home
2008:73%
More women
work outside
the home
3/22/2016
(c) 2002 Claudia Garcia-Szekely
2008: 58.7%
37
3/22/2016
(c) 2002 Claudia Garcia-Szekely
38
Aug 6.1%
3/22/2016
39
High
inflation call
the Fed!
3/22/2016
Fed works it’s
magic through
unemployment
(c) 2002 Claudia Garcia-Szekely
40
Deflation
The Great
Recession
3/22/2016
(c) 2002 Claudia Garcia-Szekely
41
Majority of
those who are
unemployed find
jobs in less than
5 weeks
3/22/2016
(c) 2002 Claudia Garcia-Szekely
42
Majority of
those who are
unemployed find
jobs in less than
5 weeks
3/22/2016
Majority of those
who are unemployed
are unemployed for
more than 6 months
(c) 2002 Claudia Garcia-Szekely
43
OKUN’S LAW THE COMPLETE
STORY
3/22/2016
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44
How do we Fight Inflation?



Joblessness.
Slow down Aggregate Demand
for goods and services.
Policy tool of choice: interest
rate hikes by the Federal
Reserve Bank.
45
The Phillips Curve
Years of High
Inflation
If we plot past
data on
Inflation and
unemployment
we observe:
There is a
Years of Low
temporary
Inflation
trade off
Years of Low High
between
Unemployment Unemployment
inflation and
Unemployment
unemployment
46
The trade off between
unemployment and
inflation
In order to reduce inflation by 1%, we
must hold unemployment above the
natural rate two (to 2 and a half)
percentage points.
47
9.9%
Inflation
Unemployment
The trade off between unemployment
and inflation
A reduction in inflation from 10% to 4%
(6% points) costs (6x2) 12% in terms
of extra unemployment…
Paul Volcker: Chairman of the Federal
Reserve under Jimmy Carter and
Ronald Reagan (from August 1979 to
August 1987)
49
Unemployment above the NRU
(5.8%)
1980: 1.3 points
1981: 1.8 points
1982: 3.9 points
1983: 3.8 points
1984: 1.7 points
Between 1980
and 1985 a 6%
reduction in
inflation cost
unemployment to
be 12.5% points
above the natural
rate.
Total: 12.5 points
50
Inflation
Unemployment
Bush
89-93
Clinton 9301
Bush 01-09
Oba
ma
09-