The problem of unemployment box3 the costs of

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40box3Workers lose incomebox3Society pays for unemployment benefits and makes up lost tax revenuebox3We can account for the output cost by using Okun’s Law which states that each percentage point of cyclical unemployment is associated with a loss equal to 2% of full-employment outputsquare6E.g. if full-employment output is $10 trillion, each percentage point of unemployment sustained for one year costs $200 billion
12.2 The Problem of Unemploymentbox3The costs of unemploymentsquare6Loss in output from idle resources – who bears it:
4112.2 The Problem of Unemploymentbox3The costs of unemploymentsquare6Personal or psychological cost to workers and familiesbox3Especially important for those with long spells of unemployment or chronically unemployedbox3Loss of incomebox3Loss of job skillsbox3Loss of self-esteem and high stress
4212.2 The Problem of Unemploymentbox3The costs of unemploymentsquare6Offsetting factorsbox3Unemployment also leads to increased job search and acquiring of new skills, which may lead to increased productivity and increased future outputsquare6Frictional unemployment especially might post little economic cost and result in economic gain from workers/firm search and matchingbox3Unemployed workers have increased leisure time, however the benefits of increased leisure decrease as the amount of leisure increase (the cost being the lost income)
4312.2 The Problem of Unemploymentbox3The long-term behavior of the unemployment ratesquare6The changing natural ratebox3The natural unemployment rate corresponds to the full-employment level of outputbox3Measurement problem: we cannot observe when the economy is at full employment, hence we cannot observe the natural rate of unemployment – that is why estimates are needed
4412.2 The Problem of Unemploymentbox3The long-term behavior of the unemployment ratesquare6The changing natural ratebox3CBO’s estimates: square65% to 5.5% today, similar to 1950s and 1960ssquare6over 6% in 1970s and 1980sbox3Causes for rise in the natural rate 1950s – late 1970ssquare6Partly demographics; more teenagers and women with higher unemployment rates
4512.2 The Problem of Unemploymentbox3The long-term behavior of the unemployment ratesquare6The changing natural ratebox3Since 1980, demographic forces have reduced the natural rate of unemploymentsquare6The proportion of the labor force aged 16–24 years fell from 25% in 1980 to 16% in 1998square6Research by Shimer showed that this is the main reason for the fall in the natural rate of unemployment
4612.2 The Problem of UnemploymentActual and natural unemployment rates in the United States, 1960-2008
4712.2 The Problem of Unemploymentbox3The long-term behavior of the unemployment ratesquare6The changing natural ratebox3Some economists think the natural rate of unemployment is 4.5% or even lowersquare6The labor market has become more efficient at matching workers and jobs, reducing frictional and structural unemploymentsquare6Temporary help agencies have become prominent, helping the matching process and reducing the natural rate of unemployment

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