As long as we re talking about stocks Why

Mar. 2014 Unemployment data Unemployment and its Natural Rate Chapter 28 Yes, in all

Learning Targets Be able to calculate… • Labor Force Participation Rate • Unemployment Rate • Why can the unemployment rate be misleading? Understand these concepts • Cyclical Unemployment • Natural Unemployment Copyright© 2004 South-Western

Breakdown of US labor force in 2001. Some definitions… Not all adults are considered part of the labor force. Many people are NOT in the labor force, such as… people who… • Students • Stay-at-home • Stopped looking for work How would you calculate the unemployment rate? Labor Force = # Employed + # Unemployed Labor Force Participation rate = Labor Force/Adult Population = 141. 8/211. 9 = 67% =% of adults interested in working Copyright© 2004 South-Western

How Is Unemployment Measured? ● The unemployment rate is calculated as the percentage of the labor force that is unemployed. Adult Population = 200 million Employed = 135 million Unemployed = 7 million Labor Force = ? 7 + 135 = 142 million Unemployment rate = ? 7 million/ 142 million (100) =. 05 = 5% Copyright© 2004 South-Western

Figure 3 Labor-Force Participation Rates for Men and Women since 1950 Labor Force Participation

Table 1 The Labor-Market Experiences of Various Demographic Groups Labor Force Participation Rate = Labor Force Adult Population 2004 2014 5. 5% 5. 1 12. 9 9. 9 2004 2014 73% 58 67 62 17. 8% 33% 39 24 Copyright© 2004 South-Western

Let’s test your knowledge so far… Employment Stats for Country A Population Adult Population Number employed 100, 000 70, 000 45, 000 Unemployed 5, 000 Calculate the Labor Force = # employed + # unemployed = 45, 000 + 5, 000 = 50, 000 Calculate the Labor Force Participation Rate = Labor Force / Adult Population *100 = 50, 000/70, 000 *100 = 71% Calculate the Unemployment Rate = # Unemployed / Labor Force * 100 = 5, 000/50, 000 * 100 = 10% Copyright© 2004 South-Western

2 Types of Unemployment 1. Natural Unemployment 2. Cyclical Unemployment= due to economic downturns Cyclical unemployment Natural Unemployment There is always some amount of unemployment! The “Natural” Unemployment Copyright© 2004 South-Western

Unemployment due to economic fluctuations is called “CYCLICAL” Unemployment. Cyclical unemployment Any unemployment below the natural rate is considered “full employment” Why is some unemployment natural? Copyright© 2004 South-Western

A little practice- Worksheet answers a. Labor Force 2001 = 105. 2 + 7. 4 = 112. 6 million Labor Force 2002 = 104. 2 + 8. 1 = 112. 3 million b. Labor Force Participation rate 2001 = 112. 6/ 168. 2 = 67% LF Part. Rate 2002 = 112. 3/169. 5 = 66. 2% c. Unemployment rate 2001 = 7. 4/112. 6 = 6. 6 % Unemployment rate 2002 = 8. 1/ 112. 3 = 7. 6% d. What could cause the labor force participation rate to decrease? People stopped looking for work (left the work force) College grads who haven’t gotten first job haven’t entered workforce. e. 2001 cyclical unemployment = 0% = fully employed 2002 cyclical unemployment = (7. 2% - 6. 6%) =. 6%, slight economic downturn!! Copyright© 2004 South-Western

Learning Targets Know the difference between the following • Natural Unemployment vs. Cyclical Unemployment Why is there a “natural rate of unemployment”? Frictional Unemployment Structural Unemployment What causes structural unemployment? • Workers who need to be retrained • Minimum Wage • Unions • Efficiency Wages Copyright© 2004 South-Western

Causes of a Natural Rate of Unemployment? Why there will always be some unemployment ■ Frictional Unemployment ♦ Somebody is always switching jobs! ♦ It takes time to find another job ♦ Unemployment compensation ADDS to friction! ■ People tend to find a job when their unemployment checks run out!! ● Structural Unemployment Surplus of Workers Some workers need to be retrained for a new employment environment! Copyright© 2004 South-Western

Minimum Wage ♦ Minimum Wage Laws cause structural unemployment ♦ Keep wages ABOVE equilibrium

Figure 4 Unemployment from a Wage above the Equilibrium Level Copyright© 2004 South-Western

■ Efficiency Wages ● Many employers would rather keep wages ABOVE equilibrium ● Why? ● Improve worker health (more relevant in developing countries) ● Limit worker turnover ● Increase worker EFFORT and QUALITY ■ They make their jobs more attractive and only hire the BEST, but the rest don’t get to work!!! ● Henry Ford paid $5/ hour in 1910 (twice the going rate) Copyright© 2004 South-Western

More Causes of Structural Unemployment… ■ Unions – Yes, unions cause unemployment! How? ♦

Right to Work States: Right to Work States http: //www. nrtw. org/en/print/1052 Screen clipping taken: 4/1/2014, 4: 10 PM Some states do not allow unions to force workers to join a union in order to work at a particular job. 24 states are right to work states. Copyright© 2004 South-Western

Journal Questions How does natural unemployment differ from cyclical unemployment? • Natural unemployment is the level of unemployment that exists when the economy is running at full employment. • Cyclical unemployment is the level of unemployment caused by economic downturns. What is Frictional Unemployment? • The temporary unemployment caused when people look for jobs. What is Structural Unemployment? • Long term unemployment caused when the supply of labor is more than the demand. Copyright© 2004 South-Western

CPI and Non-farm Payrolls

Is an increasing CPI a good thing? What does CPI indicate? Price changes A SLIGHT INCREASE IS OK. IT SHOWS THE ECONOMY IS GROWING. Do we necessarily want prices to increase? NOT REALLY Do we want prices to decrease? ABSOLUTELY NOT! So what do we want? WE WANT PRICES TO REMAIN STABLE!

What About Non-Farm Payrolls? Non-farm payrolls reports the number of jobs gained or lost in the economy in a single month. Negative non-farm payrolls numbers report that jobs are being LOST. Yes, we have been losing less jobs, BUT until recently no jobs had been created!