Lecture Economics (9/e): Chapter 34 - David C. Colander

Chapter 34 - Jobs and unemployment. The goals of this chapter are: State how the unemployment rate is measured and describe the debate about that measure; explain Okun''s rule of thumb and summarize the debate about the appropriate target rate of unemployment; explain why unemployment is more than a technical concept but one that involves normative judgments; discuss the advantages of, and problems with, a government-guaranteed minimum job program.

A man willing to work, and unable to find work, is perhaps the saddest sight that fortune’s inequality exhibits under this sun.

―Thomas Carlyle

Jobs and Unemployment

Ø State how the unemployment rate is measured

and describe the debate about that measure

Ø Explain Okun’s rule of thumb and summarize the

debate about the appropriate target rate of

unemployment

Ø Explain why unemployment is more than a

technical concept but one that involves

normative judgments

Ø Discuss the advantages of, and problems with, a

government-guaranteed minimum job program

Ø The labor force refer to those people in an economy

who are willing and able to work

Ø The unemployment rate is measured by dividing the

number of unemployed individuals by the number

of people in the civilian labor force and multiplying

by 100

Ø If the total unemployed stands at 12 million and the

labor force stands at 150 million, the

unemployment rate is:

12 million / 150 million = 0.08 X 100 = 8%

Ø Discouraged workers are people who do not look for a job

because they feel they don’t have a chance of finding one

Ø The underemployed are part-time workers who prefer

full-time work

Ø The unemployment rate does not include discouraged

workers or the underemployed

Ø Including discouraged workers and the underemployed,

unemployment would have been about 18 percent in 2012 instead of falling to 8.2 percent

Ø Some Classicals contend that the way the BLS measures

unemployment exaggerates the number of those truly

unemployed

Ø Economists use supplemental measures to give them insight

into the state of the labor market

• Labor force participation rate, which measures the labor force as a percentage of the total population

• Employment-population ratio, which is the number of

people who are working as a percentage of people

available to work

Changes in Output

Ø The secular trend rate of growth reflects both productivity

increases and labor force increases

Ø Okun’s rule of thumb states that a 1 percentage point rise

in the unemployment rate will be associated with a 2

percent fall in output from its trend and vice versa

Ø What makes estimating this relationship difficult is that

increases in productivity and increases in the number of people choosing to work fluctuate

Ø Okun’s rule explains cyclical unemployment, which is

temporary unemployment that can be expected to end as the economy recovers and can be resolved by macro

policies

Ø Structural unemployment is long-term unemployment that

occurs because of changes in the structure of the

economy and cannot be resolved by macro policies

Ø Reservation wage is the wage a person requires before

accepting a job The higher it is, the more likely one is to

be unemployed

Why Has the Target Rate of Unemployment

Changed over Time?

1. Demographics

2. Changing social and institutional structure

3. Changes in government institutions

4. Globalization

• Globalization requires structural change

Causes of Structural Unemployment

Ø The bursting financial bubble in 2007 and 2008

Ø The bursting of the bubble in housing

Ø People who lost equity in their houses decreased their

consumption spending and held down aggregate demand

in the private sector

Ø Structural problems associated with the bursting of the

financial bubble help explain why unemployment is likely

to remain high in the coming years

Ø The jobs experience of U.S workers depends on the sectors

where the jobs are:

• Tradable sector, such as manufacturing, where production can easily be shifted to a foreign country

• Nontradable sector, such as education, where it can’t

• Immigration sector, production that can be undertaken by non-U.S., largely unskilled immigrants

Ø Globalization lowered wages and raised unemployment in both

the tradable and immigrant sectors, with very little changes

in the nontradable sector

Involuntary Unemployment

Ø Individual responsibility framework: unemployment is

impossible if people are willing to work at any job for any pay

Ø Social responsibility framework: society owes people jobs

commensurate with their training and job experience at a respectable wage

Ø According to the “individual responsibility” measure, there

were 1 or 2 million unemployed in mid-2012; according to the “social responsibility” measure, the number of

unemployed was closer to 30-40 million

Employer of Last Resort

Ø With a guaranteed-jobs program, the government provides a

minimum job for every eligible citizen who truly want to

work and cannot find a job, and primarily benefits the least well off

Ø There is a reason most existing government programs are

designed differently—to help the middle class in addition

to the least well off

Ø Much of the current debate about unemployment is not

about providing a minimum job; rather it is about providing

Ø The unemployment rate is calculated as the number of

unemployed divided by the labor force It rises during a

recession and falls during an expansion

Ø The official measure of unemployment is based on

judgments about who to count as unemployed

Ø The microeconomic approach to unemployment divides

unemployment into categories

Ø Okun’s rule of thumb states that a 1 percentage point

change in the unemployment rate will tend to be

associated with a 2 percent deviation in output from its

trend in the opposite direction

Ø The target rate of unemployment has risen because the

workforce is younger, more women have entered the

workforce, government has expanded income-support

programs, and globalization

Ø The financial bubble resulted in unsustainably high

housing construction that allowed consumers to spend far

beyond their means

Ø The benefit of a government guaranteed jobs program is

that everyone who wants to work is employed; the problem

is that such a program costs money