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Chp. 6 1

Potential GDP

Potential GDP is the value of real GDP when all

the economy¶s factor s of production are fully

employed.

Our changing standard of living is captured by

1. The growth of potential GDP per per son

2. Fluctuations of real GDP per per son aroundpotential GDP

Chapter 6

Jobs and Unemployment



Chp. 6 2



Chp. 6 3

Business Cycle

Fluctuation

s in the pace of econom

ic act

ivity

is called the business cycle.

The business cycle is a per iodic irregular up-

and down movement of total production and

other measure of economic activity.



Chp. 6 4

Business Cycle

The four stages of a business cycle are expansion,

recession, peak, and trough.

Increases in overall economic activity; often

identif ied as increases in real GDP is called an

expansion. ³Peak´ is the highpoint in a business cycle.

Decreases in overall economic activity; often

identif ied as reductions in real GDP is called a

recession. ³Trough´ is a low-point in a business cycle.



Chp. 6 5

Source: research.stlouisfed.org



Chp. 6 6

Current Population Survey

Divide

sthe populat

ion

into

w orking-age popu lation and other s

± W orking-age popu lation is the total number of

people aged 16 year s and over who are not in a

jail, ho

spital, or

some other form of

institut

ionalcare or in the U.S. Armed Forces.

Divides the working-age population into those in

the labor force and those not in the labor

force ± Labor force is the number of people employed

plus the number unemployed.



Chp. 6 7

Employed ± Definition

The survey counts as employed all per sons who,dur ing the week before the survey:

1. Worked at least 1 hour in a paid job or 15

hour s unpaid in family business.

2. Were not working but who had jobs from

which they were temporar ily absent.



Chp. 6 8

Unemployed ± Definition

The survey counts as u nemployed all per sons who, dur ing the week before the survey:

1. Had no employment

2. Were available for work,

and either:

1. Had made efforts to f ind employment dur ing

the previous four weeks, or

2. Were waiting to be recalled to a job from

which they had been laid off.



Chp. 6 9

Notes

Part-time worker s ARE included in the labor force and ARE counted as employed.

Full-time homemaker s are not included in the

labor force so are not counted as unemployed.

Full-time students (non working) are not

included in the labor force so are not counted as

unemployed.



Chp. 6 10

Date: June 2009



Chp. 6 11

Main Labor Market Indicators

The unemployment rate

The labor force participation rate



Chp. 6 12

Unemployment rate

Unemployment rate is the percentage of people inthe labor force who are unemployed.

Unemployment rate =

Number of

people unemployed

x 100%

Labor force



Chp. 6 13

The unemployment rate increases in recessions and

decreases in expansions.



Chp. 6 14

Labor force participation rate

Labor force participation rate is the percentage of the working-age population who are member s of

the labor force.

Labor force

participation rate =Working-age population

x 100%Labor force



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Chp. 6 16

Sources of Unemployment

People who become unemployed are J ob loser s (f ires and layoff s)²people who are

laid off from their jobs

J ob

leaver s (qu

its)²people who voluntar

ily qu

ittheir jobs

Entrant s and reentrant s²people who have just

left school or who are now looking for a job after

a per iod out of the labor force.



Chp. 6 17



Chp. 6 18

Mar ginally Attached Workers and

Discouraged Workers

A marginally attached w orker is a per son whodoes not have a job, is available and willing towork, has not made specif ic efforts to f ind a jobwithin the previous four weeks, but has lookedfor work sometime in the recent past.

A di scou raged w orker is a marginallyattached worker who has not made specif icefforts to f ind a job within the previous four weeks because previous unsuccessful attempts were discouraging.

They are NOT included in the labor force andhence NOT off icially counted as unemployed



Chp. 6 19

Types of Unemployment

S easonal u nemployment is the

unemployment that ar ises because of

seasonal nature of some jobs.

Examples: agr icultural jobs, tour ism jobs.

Frictional u nemployment is theunemployment that ar ises from normal labor

turnover²from people enter ing and leaving

the labor force and from the ongoing creation

and destruction of jobs.Examples: Quits or f ires due to matching problems

between employer and employee; New entrants (or re-

entrants) searching for a job.



Chp. 6 20

Types of Unemployment

S tr u ct u ral u nemployment is theunemployment that ar ises due to change of location of jobs or change in the requirement of skills needed to perform jobs (due to a changein technology).

Cyclical u nemployment is the fluctuatingunemployment over the business cycle thatincreases dur ing a recession (due to f ires andlayoff s) and decreases dur ing an expansion.



Chp. 6 21

Full Employment

F u ll employment occur s when there is no

cyclical unemployment or, equivalently, when all

the unemployment is fr ictional, structural, or

seasonal.

± Note: Th is does NOT imply a zero unemployment

rate

Nat u ral u nemployment rate is the

unemployment rate when the economy is at full

employment.



Chp. 6 22

Potential GDP

Potential GDP (³f u ll employment´ GDP) is the

level of real GDP that the economy would

produce if it were at full employment.

It can be thought of as the capacity level of the

economy, the level of real GDP that theeconomy is capable of producing on a

sustained basis.



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Unemployment and Real GDP

Because the unemployment rate fluctuates

around the natural unemployment rate, real GDP

fluctuates around potential GDP.

When the unemployment rate is above the

natural rate, real GDP is below potential GDP. When the unemployment rate is below the

natural unemployment rate, real GDP is above

potential GDP.



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