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KW_Macro_Ch_15_Sec_01_The_Nature_of_Unemployment - chapter...

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>> Labor Markets, Unemployment, and Inflation Section 1: The Nature of Unemployment chapter 15 U.S. government statistics count as unemployed a worker who is actively looking for a job but hasn’t found one. Recall from Chapter 6 that the unemployment rate is the ratio of the number of people unemployed to the total number of people in the labor force who are either currently working or looking for jobs. If everyone who wanted a job had one, the unemployment rate would be 0%. But American public policy con- siders “full employment,” which you might think means that everyone who wants to work can, to be a number well above 0%. Indeed, as explained in For Inquiring Minds, a famous piece of legislation known as the Humphrey–Hawkins bill, passed by Congress in 1978, called on the government to seek full employment—but defined full employment to be an unemployment rate of 4%. Although 4% unemployment may seem like a large number—after all, this implies that even with “full employment” millions of Americans looking for work would be job- less—at the time Humphrey–Hawkins was passed the vast majority of economists con- sidered this target to be unrealistic. In fact, the Congressional Budget Office currently calculates the cyclically adjusted budget balance, the budget balance if the economy were
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2 C H A P T E R 1 5 S E C T I O N 1 : T H E N AT U R E O F U N E M P L OY M E N T at potential output and, hence, at full employment, under the assumption that full employment means 5.2% unemployment. To understand why there are so many unemployed workers at full employment, we need to look at the realities of the labor market. Job Creation and Job Destruction At any given time, most Americans know someone who has lost his or her job recent- ly. On average, about one worker in seven loses his or her job (in some cases because of leaving voluntarily) even in good years. There are many reasons for such job loss. One is that industries rise and fall as new technologies emerge and consumers’ tastes change. For example, employment in high-tech industries such as telecommunications surged in the late 1990s but slumped severely after 2000. That’s a major reason that Watson, the software devel- oper, lost his job in 2002 and has had difficulty finding another. Another reason is that individual companies do well or badly depending on the quality of their man- agement or simply depending on luck: in 2005 General Motors announced plans to close a number of auto plants even as Japanese companies such as Toyota announced plans to open new plants in North America. In addition, individual workers are con- stantly leaving jobs for personal reasons—family moves, dissatisfaction, better job prospects elsewhere. This constant churning of the workforce is an inevitable feature of the modern economy. It is also one main reason that there is a considerable amount of unem- ployment even when the economy is at full employment.
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