lecture16 - 1 16-1 Unemployment and Inflation, Part 2 16-2...

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Unformatted text preview: 1 16-1 Unemployment and Inflation, Part 2 16-2 Agenda The Problem of Unemployment. The Problem of Inflation. 16-3 The Problem of Unemployment The costs of unemployment: Loss in output from idle resources: If full-employment output is $15 trillion, each percentage point of unemployment sustained for one year costs $300 billion according to Okuns Law Each percentage point of cyclical unemployment is associated with a loss equal to 2% of full-employment output. 16-4 The Problem of Unemployment The costs of unemployment: Loss in output from idle resources: Workers lose income. Business firms lose profits. Government loses tax revenues. And increases spending for unemployment benefits and other transfer payments. 2 16-5 The Problem of Unemployment The costs of unemployment: Personal or psychological cost to workers and their families. Especially important for those with long spells of unemployment. 16-6 The Problem of Unemployment The benefits of unemployment: There are some offsetting factors: Unemployment leads to increased job search and acquiring new skills, which may lead to increased future output. Unemployed workers have increased leisure time, though most wouldnt feel that the increased leisure compensated them for being unemployed. 16-7 The Problem of Unemployment Long-term behavior of the unemployment rate: The changing natural rate: How do we calculate the natural rate of unemployment? CBOs estimates: 5% to 5% today, similar to 1950s and 1960s; over 6% in 1970s and 1980s. Why did the natural rate rise in the late 1970s? Partly demographics as more teenagers and women with higher unemployment rates entered the workforce. 16-8 The Problem of Unemployment Long-term behavior of the unemployment rate: The changing natural rate: Since 1980, demographic forces have reduced the natural rate of unemployment. The proportion of the labor force aged 1624 years fell from 25% in 1980 to 16% in 1998. This is one of the main reason for the fall in the natural rate of unemployment. 3 16-9 Actual and natural unemployment rates 16-10 The Problem of Unemployment Long-term behavior of the unemployment rate: The changing natural rate: Some economists think the natural rate of unemployment is now 4.5% or even lower: The labor market has become more efficient at matching workers and jobs, reducing frictional and structural unemployment. Temporary help agencies have become prominent, helping the matching process and reducing the natural rate of unemployment. 16-11 The Problem of Unemployment Long-term behavior of the unemployment rate: The changing natural rate: Increased labor productivity may decrease the natural rate of unemployment: If increases in real wages lag changes in productivity, firms hire more workers and the natural rate of unemployment will decline temporarily....
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This note was uploaded on 04/01/2008 for the course ECON 100B taught by Professor Wood during the Spring '08 term at University of California, Berkeley.

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lecture16 - 1 16-1 Unemployment and Inflation, Part 2 16-2...

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