business cycle & unemployment the economy in flux
TRANSCRIPT
Business Cycle & Business Cycle & UnemploymentUnemployment
The economy in flux.The economy in flux.
Examining the Economy
Need to address two Time HorizonsLong-Run
Over the Course of Several Years, what is GDP’s Trend?
Short-RunWhat are GDP’s month-to-month or
quarter-to-quarter fluctuations?
A Closer Look at Real GDP
http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&width=1000&height=600&preserve_ratio=true&s[1][id]=GDPC96
Real GDP: 1990 to Today
http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&width=1000&height=600&preserve_ratio=true&s[1][id]=GDPC96
Terminology
Business CycleAlternating periods of economic growth
and contraction, measured by %GDP.Avg. Cycle last about 8 - 10 years.
Trend LineShows Long-run GDP trend.
Economic Growth Increase in national output measured by a
positive %GDP.
Phases of the Business Cycle
TimeG
DP
Real GDP
Trend4 Phases1.Peak
• Point where Real GDP reaches a local Max.
2.Recession• Period during which real
GDP declines• (2 consecutive Quarters)
3.Trough• Point where real GDP
reaches a local min.4.Recovery/Boom
• Period during which real GDP increases
Peak
Peak
Recession
Recovery
Business Cycle
Trough
Trough
Easier to look at Growth Rates
Growth rates can tell us the same info about the business cycle
1. Recovery/Boom Growth Rate > 0
2. Recession Growth Rate < 0
3. Peak Growth Rate = 0 &
moving from + to -
4. Trough Growth Rate = 0 &
moving from - to +
Time
Growth Rate
%GDPPeak
Trough
Recession
RecoveryRecovery
Growth Rate of Real GDP
Growth Rate: 1990 to today
Forecasting the Business Cycle
Takes time to collect data on GDP.1 month lag for initial quarterly report6 month or longer for revised estimates
We need to know faster:Use Indicators
Leading Indicators: Inventories, Avg. Work Week…Coincidental Indicators:Industrial Production, Non-Ag. Payroll
Lagging Indicators: Unemployment, Duration of UE, Prime Rate
Economic Goals
Maintain Growth TrendMinimize Size of Economic Fluctuations
Try to keep Business Cycle as close to Trend line as Possible
Why?Economy potentially experiences problems when
away from trend: Below Trend: Unemployment Concerns Above Trend: Inflation Concerns
Unemployment
Unemployment Rate: The % of people in the labor force who are
without jobs and are actively looking
Population Break Down
Working Age PopulationAnyone over 16 years old
Discouraged Worker: a person who wants work, would take a job if found, but has given up looking.
Not in Labor ForceArmed forces, household workers,
volunteers, students, retirees, disabled, Institutionalized workers,
Discouraged Workers
Civilian Labor Force
Member of working age population not listed to left
Unemployed
No job, but looking within last 2 weeks: New entrants, re-entrants,
lost or quit last job & laid-off
EmployedPaying job or self-employed
Employment Statistics
Unemployment Rate UE% = # of Unemployed/(# in Labor Force)
=UE / (LF)=UE / (UE + E)
Ex: Unemployed = 100; Employed = 900; UE%= 100/(100+900) = 100/1000=.1=10%
Labor Force Participation Rate (LFPR) LFPR = LF / Working Age Pop
Employment Ratio ER = Employed / Working Age Pop
Unemployment History
Avg. UE% = 5.6%
Employment Ratio History
Problems w/ Unemployment Measure
UE% Overstated because:No Black MarketsPeople lie to get Unemployment
CompensationUE% Understated because:
Discouraged WorkersUnderemployed: Part-time workers who
want full time work
To Fix UE need to know the cause
Types of Unemployment:1. Frictional Unemployment
People who are in between jobs or just entered the job market:
2. Seasonal Unemployment UE related to changing seasons: ex. Winter UE
in agriculture or construction Technically a sub category of frictional
To Fix UE need to know the cause
3. Structural Unemployment No longer have skill demanded by employers Mismatch of skills
4. Cyclical Unemployment Unemployment caused by economic
fluctuations. Caused by the cycle.
Unemployment: Natural? Good Sign?Frictional, Seasonal & Structural
We expect these 3 types of UE will always exist
Maybe even good:Frictional:
People leave jobs to find better ones, or graduate from school…Good.
Seasonal: Necessary for the type of work, so expected.
Structural: Implies new technology, more skills need. Good sign
for the economy, not for the individual
Full Employment
If we expect these types of UE, then we don’t worry when we have UE.
Full Employment ImpliesUE% = Seasonal% + Structural% +Frictional %NOTE: FULL EMPLOYMENT DOES NOT
MEAN UE = 0%
Natural Rate of Unemployment
The unemployment rate that exists at Full employment.
Estimated to be between 4% & 6%, so… aprox: 5%
Unemployment Goal
Keep Economy at Full EmploymentMaintain the Natural Rate of UEKeep Cyclical Unemployment = 0Stay near trend line
Cost of Unemployment
GDP Gap = Potential real GDP – actual Real GDP Potential Real GDP
What GDP would have been if we were at Full Employment
Actual Real GDP Real GDP actually produced
GDP Gap measures lost production caused by unemployment
“How Far Inside the PPC are we?”