Unemployment and Macro Stabilization Policies - Lecture 10 - Social Sciences 1 with Bresnock at University of California - Irvine

Emily K.

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Econ Social Issues-Ise

Unemployment Rate

Defined as the % of the "labor force" that is not working

(Labor force is all people 16 years and older who are "seeking" work, or unemplyed, and are not in institutions.)

Types of unemployment

1. Frictional - temprorary, transitional, voluntary; may consist choosing to be mobile for career, and/or salary reasons; also includes new entrants and reentrants to the labor force

2. Cyclical - resulting from swings in the business cycle

3. Structural - "hardcore" and "technological" unemployment, results from people lacking the skills for available jobs, persons w/ skills no longer needed; also caused by changes over time in demand and technology that alter the structure of total demand

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Measuring unemployment

1. Marginally employed

2. Discouraged workers

3. Underemployed

4. Partially unemployed

Marginally employed

Those workers who are partially dependent on the pay of others like housewives or students; including this group ↑s unemployment statistics

Discouraged workers

"Hidden" or "invisible" unemployment; those workers who have given up looking for work; persons are not recorded as unemployed thus ↓ understates of the actual amount of people listed as statistically unemployed

Underemployed

Those who are employed full-time, but who are really unemployed full-time from their chosen careers but who are counted as employed. This causes the unemployment statistics to be lower, thus underestimating the true unemployment problem

Partially employed

Part-time workers who are fully employed but who can't find a full-time job; only in cases where this is not by choice is this a problem, and in those cases the unemployment statistics will be understating the true unemployment problem

False information

People who are not really looking for work, but say they are to receive unemployment compensation; causes the statistics to be overstating the true unemployment problem

"Full employment" unemployment rate

"Full employment" is NOT equal to zero employment; known as "the natural rate of unemployment" = frictional+structural, thus, cyclical unemployment is zero.

"Potential output"

The output associated with the "natural rate of unemployment."

Causes of unemployment

1. Changing composition of the labor force

2. Raising minimum wage

3. Advances in technology

4. Business cycle fluctuations

Changing composition of the labor force

More part-time, more women, miniorities, young and old with less traditional work programs

Raising minimum wage

A small % of the labor force are actually minimum wage workers

Advances in technology

Permanent displacement of some; need for retraining/reinventing of others

Business cycle fluctuations

Deficient demand to support potential production levels

Costs/burdens of unemployment

When unemployment rises, less is produced and the "potential GDP" is not achieved. A "GDP gap" (difference between potential and actual GDP) will arise, and will represent a $ value of the production that did not occur because of unemployment brought on by a recession

Burdens classifed as:

Economic - burdens more likely felt by women, minorities, blue-collar workers, teenagers, and less educated

Non-economic/social - personal depression, human suffering, political unrest rises with unemployment and can lead to additional economic costs

Aggregate demand

Scheduel that shows the quantities of real national output, or GDP, that consumers, businesses, and government wish to purchase at each price level

AD=C+I+G+(X-M) ; C - consumer expenditure, I - income; G - government expenditure; (X-M) - Exports - Imports

Price level and GDP

Inversely related becuase these are the things that will move the economy along a particular aggregate demand curve. ("changes in the quantity demanded" of GDP)

`Interest-Rate effect

As P increases, so do interest reates which decreases C and I where i is the interest rate. i is viewed as a cost of borrowing

Weath (or real balances) effect

As P increases, the real value (purchasing power) of financial assets decrease and there will be a decrease in spending and vice versa

Foreign purchases effect

As P increases for American goods, consumers will increase purchases of importants and the US GSP will go down and vice versa

Changes in aggregate demand

Factors that will shift the entire aggregate demand right (↑) or left (↓)

Factors affecting C component of AD

1. Consumer wealth - financial and physical assets; ↓in real value of weath will ↑ savings to replenish wealth and vice versa

2. Consumer expectations - if consumers expect future real income to ↑ then there will be an ↑ in C and ↓ savings. If they expect inflation, ↑ in C and vice versa

3. Consumer indebtedness - if high, ↓C to pay off debt and vice versa

4. Taxes - if personal taxes ↑ then ↓C and ↓savings

Factors affecting I component of AD

1. As interest rates ↑, I ↓ and AD also ↓ and vice versa.

2. Optimist expectations = ↑AD; pessimistic expectations = ↓AD

3. As business taxes ↑, profits ↓, income ↓ then AD will also ↓ and vice versa

4. New technology increases income so AD will ↑ and vice versa

5. ↑ in excess capacity (sign of recession) then income will ↓ in capital goods, leading AD to ↓ and vice versa

Factors affecting G component of AD

Any ↑ of G will ↑AD and vice versa; any ↑taxes will ↓AD and vice versa

Factors affecting X component of AD

- National income abroad - ↑ in foreign national income will ↑AD domestically as X↑s and vice versa.

- Exchange rates - if the $ depreciates while a foreign currency appreciates, then foreigners will ↓X and ↑X for American goods and ↑AD.

Aggregate supply (AS)

Schedule which shows the quantity of real output, GDP, available at each possible price level

DIRECT relationship between the price level and GDP

3 ranges to AS

Range #1

Unemployment, unused equipment and capacity, no shortages or bottlenecks, product prices and wages are constant even if output and employment change; no inflation or deflation

Range #2

In some industries no further ↑s in output are possible as some industries have achieved full employment. In those industries, only price level can ↑ as AD ↑s. Other industries will continue to expand output and employment; Like a recovery period

Range #3

All companies have reached full employment; any ↑AD in this range will lead to ↑ in the price level; hyper inflation

Factors affecting AS

- Input prices

- Productivity

- Legal and institutional environment

Input prices

AKA costs of production, resource prices

- Domestic resource availability - ↑ availability (cheaper) = ↓ in resource prices and ↑ in AS and vice versa

- Prices of imported resources - ↑available foreign resources = ↓ in input prices and ↑ in AS and vice versa; or if the $ price of imported resources depreciates, we get more foreign resources for our $ and vice versa

- Market power - OPEC and unions enable prices to be raised above competitive ones so ↑ input prices and ↓AS and vice versa

Productivity

More real output per $ of input cost can ↑AS and vice versa

Legal and insitutional environment

- Business taxes and subsidies - if taxes ↑ then input costs will ↑ and AS will ↓ and vice versa. The opposite is true for subsidies.

- Government regulation - typically ↑input costs and thus ↓AS and vice versa

Equilibrium: Real output and the price level

The macroequilibrium is found where AD=AS; at this level of real GDP, the economy may or may not be at the full-employment level of GDP, Q_fe.

Two reaons for macroeconomic disequilibrium

- AD may be deficient; not enough AD; unable to take the economy to a full-employment equilibrium; due to weaknesses in any of the spending components (or "injections") of AD, like C, I, G, and X; due to "leakage" (taxes, savings, or imports) may have risen; deficiency is "recessionary gap - difference between AS and AD at Q_fe

- AS may be weak; not enough to take economy to full-employment equilibrium; occurs due to increases in resource prices like land and capital; "inflationary gap"

Macroeconomic stabilization policies

- Deficient AD; policies are¯designed to raise AD so that it can meet AS at Q_fe

- "Marginal propensity to consume" (MPC) and the spending multiplier

Marginal propensity to consume

Propensity = tendency

ΔC/ΔY where C = consumption expenditure and Y = income

MPC is the additional consumption expenditure that is associated with additional income.

MPC + MPS always = 1

Spending multiplier

=K; measures the increase in GDP relative to an increase in some type of expenditure, like C, I, G

K= ΔGDP/ΔI or K=ΔGDP/ΔC or K=ΔGDP/ΔG

Can also be k=1/1-MPC or k=1/MPS

If MPC=1 MPS=0 k=∞

MPC=.90 MPS=.10 k=10

MPC=.75 MPS=.25 k=4

MPC=.50 MPS=.50 k=2

MPC=0 MPS=1.00 k=1

Higher MPC=higher multiplier

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