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.
Introduction: Thinking Like an Economist CHAPTER 34 CHAPTER Jobs and Unemployment 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 McGrawHill/Irwin Copyright © 2013 by The McGrawHill Companies, Inc. All rights reserved Jobs and Unemployment 34 Chapter Goals Ø Ø Ø Ø 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 342 Jobs and Unemployment 34 Calculating the Unemployment Rate Ø Ø Ø The labor force refer to those people in an economy who are willing and able to work 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 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% 343 Jobs and Unemployment 34 How Accurate Is the Official Unemployment Rate? Ø Ø Ø Ø Discouraged workers are people who not look for a job because they feel they don’t have a chance of finding one The underemployed are part-time workers who prefer fulltime work The unemployment rate does not include discouraged workers or the underemployed Including discouraged workers and the underemployed, unemployment would have been about 18 percent in 2012 instead of falling to 8.2 percent 344 Jobs and Unemployment 34 How Accurate Is the Official Unemployment Rate? Ø Ø Some Classicals contend that the way the BLS measures unemployment exaggerates the number of those truly unemployed 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 345 Jobs and Unemployment 34 Okun’s Rule of Thumb, Unemployment, and Changes in Output Ø Ø Ø The secular trend rate of growth reflects both productivity increases and labor force increases Okun’s rule of thumb states that a percentage point rise in the unemployment rate will be associated with a percent fall in output from its trend and vice versa What makes estimating this relationship difficult is that increases in productivity and increases in the number of people choosing to work fluctuate 346 Jobs and Unemployment 34 Is Unemployment Structural or Cyclical? Ø Ø Ø 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 Structural unemployment is long-term unemployment that occurs because of changes in the structure of the economy and cannot be resolved by macro policies Reservation wage is the wage a person requires before accepting a job The higher it is, the more likely one is to be unemployed Another aspect of structural unemployment is geographic 347 Jobs and Unemployment 34 Why Has the Target Rate of Unemployment Changed over Time? Demographics Changing social and institutional structure Changes in government institutions Globalization • Globalization requires structural change 348 Jobs and Unemployment 34 Explaining the Jobless Recovery: Short-Run Causes of Structural Unemployment Ø The bursting financial bubble in 2007 and 2008 Ø The bursting of the bubble in housing Ø Ø People who lost equity in their houses decreased their consumption spending and held down aggregate demand in the private sector Structural problems associated with the bursting of the financial bubble help explain why unemployment is likely to remain high in the coming years 349 Jobs and Unemployment 34 Globalization and Jobs Ø 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 Globalization lowered wages and raised unemployment in both the tradable and immigrant sectors, with very little changes in the nontradable sector 3410 Jobs and Unemployment 34 Framing the Debate about Voluntary and Involuntary Unemployment Ø Ø Ø Individual responsibility framework: unemployment is impossible if people are willing to work at any job for any pay Social responsibility framework: society owes people jobs commensurate with their training and job experience at a respectable wage According to the “individual responsibility” measure, there were or million unemployed in mid-2012; according to the “social responsibility” measure, the number of unemployed was closer to 30-40 million 3411 Jobs and Unemployment 34 A Guaranteed-Job Proposal: Government as Employer of Last Resort Ø Ø 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 There is a reason most existing government programs are designed differently—to help the middle class in addition to the least well off Much of the current debate about unemployment is not about providing a minimum job; rather it is about providing people with a level of job that they expect 3412 Jobs and Unemployment 34 Chapter Summary Ø Ø Ø 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 The official measure of unemployment is based on judgments about who to count as unemployed The microeconomic approach to unemployment divides unemployment into categories Okun’s rule of thumb states that a percentage point change in the unemployment rate will tend to be associated with a percent deviation in output from its trend in the opposite direction 3413 Jobs and Unemployment 34 Chapter Summary Ø Ø 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 The financial bubble resulted in unsustainably high housing construction that allowed consumers to spend far beyond their means 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 3414 ... million unemployed in mid-2012; according to the “social responsibility” measure, the number of unemployed was closer to 3 0-4 0 million 34 11 Jobs and Unemployment 34 A Guaranteed-Job Proposal: Government... total population • Employment-population ratio, which is the number of people who are working as a percentage of people available to work 34 5 Jobs and Unemployment 34 Okun’s Rule of Thumb, Unemployment,... institutions Globalization • Globalization requires structural change 34 8 Jobs and Unemployment 34 Explaining the Jobless Recovery: Short-Run Causes of Structural Unemployment Ø The bursting financial