lnc12 - Lecture notes companion 12The Business Cycle Labor...

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Lecture notes companion 12—The Business Cycle, Labor Markets, and the Natural Rate of Unemployment The Business Cycle Note that the term “cycle” is really a misnomer; “fluctuations” would be more accurate. “Cycle” implies that there is some pattern to the ups and downs of the economy. Actually, random shocks are responsible for many of the variations in the rate of growth of real GDP over time. Figure 1 shows a stylized view of the business cycle. Labor markets For current data on the US labor force and population, refer to the St. Louis Federal Reserve Bank FRED II database at http://research.stlouisfed.org/fred2 Unemployment Rate (Refer to Figure 2.) Just over half the civilian population is in the labor force. The unemployment rate (U) is calculated only for these people: U = # unemployed persons x 100 # in labor force) The unemployment rate is calculated by the US Department of Labor’s Bureau of Labor Statistics (BLS) each month. It is based on data the BLS collects through weekly telephone surveys. Discouraged workers (See the text’s description of these people.) As described in the text, the BLS survey method, despite refinements, is unable to distinguish many discouraged workers from others who are voluntarily not in the labor force. In truth, this is because these people have no incentive to “signal” their status to the BLS; indeed, if they are rational, they will seek the most beneficial use of their time rather than vainly wait in line at the unemployment office when they see little hope of landing a job. The stereotyped image of a discouraged worker is that of a middle-aged, unskilled man who has lost his job through a plant closure and is unable to find other employment in the “new” economy, and who works at odd jobs, goes fishing, and generally is waiting to collect Social Security. While there are many such people, there are a lot of other discouraged workers who have better alternatives. Consider two women, Alice and Barbara. Both live in Hiptown, which has a 2% unemployment rate and lots of cultural, shopping, and other attractions. Alice has a high school diploma, Barbara an MBA. Both are employed full-time at a local database software firm, Alice as a warehouse worker, Barbara as a marketing researcher. Both of their husbands have jobs at a local auto assembly plant, Alice’s as an assembly line worker, Barbara’s as head of engineering. Then, both move when their husbands are transferred to another plant in Dog City, a dreary industrial wasteland with 16% unemployment and where sitting around watching paint dry is considered great entertainment. Neither can find a suitable job (which is not the same as being unable to find any job; remember that each one will consider the opportunity cost of her time and, if she is US Civilian Population -- < 16 yrs. old -- institutionalized -- students -- housewives -- retirees -- disabled persons -- discouraged workers Labor force Not in labor force -- employed -- unemploy e d Figure 2.
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