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Instability: Instability: Unemployment and Unemployment and

inflationinflation

The Twin ProblemsThe Twin Problems

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A. UnemploymentA. Unemployment

► one of the problems that arise from one of the problems that arise from economic instabilityeconomic instability

► the failure to use all available the failure to use all available economic economic resourcesresources to produce desired goods and to produce desired goods and services; the failure of the economy to services; the failure of the economy to fully employ its fully employ its labor forcelabor force..

► labor force: persons 16 years of age labor force: persons 16 years of age and older who are not in institutions and and older who are not in institutions and who are employed or unemployed who are employed or unemployed seeking work. seeking work.

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Total populationTotal population

Labor Labor forceforce

< 16 and or in < 16 and or in institutionsinstitutions

Not in labor forceNot in labor force

EmployedEmployed

unemployedunemployed

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► total population is divided into several total population is divided into several groups:groups:

1.1. Of age <16 and not in institutions.Of age <16 and not in institutions.

2.2. Not in labor force: > 16 who are Not in labor force: > 16 who are unemployed and are NOT seeking unemployed and are NOT seeking work: students, homemakers…work: students, homemakers…

3.3. People who are able and willing to workPeople who are able and willing to work

Employed + unemployed = labor forceEmployed + unemployed = labor force

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How to measure unemployment?How to measure unemployment?

Unemployment rate = (unemployed / LF) Unemployment rate = (unemployed / LF) x 100x 100

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Types of unemploymentTypes of unemployment

1.1. Frictional Unemployment:Frictional Unemployment: workers workers between jobs (searching for better between jobs (searching for better job, fired, laid of b\c of seasonal job, fired, laid of b\c of seasonal demand, searching for the first job…) demand, searching for the first job…)

This is called: search unemployment and This is called: search unemployment and wait unemploymentwait unemployment

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►2. Structural unemployment:2. Structural unemployment: unemployment of workers whose skills unemployment of workers whose skills are not demanded, who lack sufficient are not demanded, who lack sufficient skill to obtain employment, or who skill to obtain employment, or who cannot move to locations where jobs are cannot move to locations where jobs are available. available.

►The demand for the good or the service The demand for the good or the service produced is importantproduced is important

►Need to be retrained or moveNeed to be retrained or move►More likely to be long-term More likely to be long-term

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3. 3. Cyclical unemployment:Cyclical unemployment: caused by a caused by a decline in total spending decline in total spending

► more likely to occur in recession more likely to occur in recession phases of the BC.phases of the BC.

►As demand decreases, employment As demand decreases, employment falls and unemployment increasesfalls and unemployment increases

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Full EmploymentFull Employment

► full employment is less that 100% full employment is less that 100% employment of labor force. This is employment of labor force. This is because of structural and frictional because of structural and frictional unemployment. unemployment.

► therefore, we can say the economy is therefore, we can say the economy is fully employed even if we have both. fully employed even if we have both.

►Full employment occurs when there is Full employment occurs when there is no cyclical unemployment. no cyclical unemployment.

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►Since we have unemployment even Since we have unemployment even when we are at full employment: when we are at full employment:

““Full Employment Rate of Full Employment Rate of Unemployment”Unemployment”

OrOr

““Natural Rate of Unemployment” (Natural Rate of Unemployment” (NRUNRU))

And the economy is producing its And the economy is producing its

““potential output”potential output”

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►potential output: The GDPpotential output: The GDPrr that occurs that occurs when the economy is “fully when the economy is “fully employed”.employed”.

►NRU occurs when:NRU occurs when:

number of number of jobnumber of number of job

job-seekers = vacancies.job-seekers = vacancies.

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► even when number of job-seekers = even when number of job-seekers = number of job vacancies, NRU >0number of job vacancies, NRU >0

►This is because it takes time for This is because it takes time for frictionally unemployed seekers to find frictionally unemployed seekers to find jobs and for structurally unemployed jobs and for structurally unemployed to attain skills and locations needed to attain skills and locations needed for reemployment.for reemployment.

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►Note that NRU can change from time to Note that NRU can change from time to timetime

►The economy may operate at The economy may operate at unemployment rate higher than the NRUunemployment rate higher than the NRU

►This is the case when we have cyclical This is the case when we have cyclical unemploymentunemployment

► In other cases, it will be lower than the In other cases, it will be lower than the NRU (an increase in demand for NRU (an increase in demand for employees as demand in the economy employees as demand in the economy increases). increases).

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Economic Cost of Economic Cost of UnemploymentUnemployment

► this is the unemployment above the this is the unemployment above the NRUNRU

1.1. The forgone outputsThe forgone outputs: when the : when the economy fails to create enough jobs economy fails to create enough jobs for all who are able and willing to for all who are able and willing to work, potential production of goods work, potential production of goods and services is lost. This means that and services is lost. This means that the economy the economy operates inside the PPF. operates inside the PPF.

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2. Unequal Burden:2. Unequal Burden:

Level of skill, nature of occupation, Level of skill, nature of occupation, certain age and race and ethnicity, certain age and race and ethnicity, gender, and education.gender, and education.

3. Lost income and lower demand. 3. Lost income and lower demand.

4. Social costs:4. Social costs: self-respect, crime, self-respect, crime, health… health…