Part B: Other Measures of the Labor Market Underemployment Rate (U-6, broad measure) – Goes beyond the usual unemployment rate U-6 unemployment rate = (unemployed + marginally attached workers + part time but wants full time)/(labor force + marginally attached workers) Marginally Attached Workers – Looked for jobs in the past 12 months, but not the past month Current unemployment rate is 5.5%; Average since 1998 is 5.8%; Why complain? Employment is barely above 2007 level U6 unemployment rate is 11% (>1994 to 2008 values) 31% of the unemployed have been so for 27+ weeks (not seen from 1948 to 2008) Normal Rate of Unemployment – The rate of unemployment when cyclical unemployment is 0 Then unemployment rate is likely to be from 5-6% and at “full employment” Complications: Can be below natural rate for a while Implications: The natural rate of unemployment is a decent measure of the “normal” unemployment rate o Part C: GDP and Unemployment Potential GDP – Real GDP when all firms are operating at “capacity”
Capacity can be exceeded for a year or two with extra overtime and reduced maintenance of capital Capacity does not equal maximum possible Potential GDP grows from year to year and in a recession, it is more than the real GDP Okun’s Law – The connection between real GDP (Y) and the unemployment rate (u) Idea: Since the labor force grows when population increases and since productivity rises, some economic growth (which creates jobs) is needed to keep the unemployment rate constant over time Formula: Percent change in Y = 3 – (2 x %change in unemployment) So, we need 3% GDP growth to keep the unemployment growth rate constant; faster growth is needed to cut the growth o Part D: Business Cycle The “Great Moderation” From 1982 to 2007 Most stable period of U.S. growth Longest expansion: 1991 – 2001 2 brief/mild recessions: 1991-1992 and 2001 Business Cycle – Combination of a recession and an expansion Recession – Significant decline in economic activity across an economy, lasting more than a few months; normally visible in real GDP, real income, employment, industrial production, and wholesale/retail sales “Postwar” (after WWII) Cycles: Have been 12 recessions, which have averaged 11 months (6-18 months); Unemployment has been up to 2-4%; Real GDP has been down to .5-5% Expansions have averaged 50 months (12-120) and real GDP has been up to 2-4% a year Most Severe Post War Recessions 1973-1975 (Real GDP: 3.1; Unemployment Rate: 4.2; 16 months) 1981-1982 (Real GDP: 2.7; Unemployment Rate: 3.2; 16 months) 2007-2009 (Real GDP: 4.7; Unemployment Rate: 4.5; 18 months) Depression – Severe recession; No agreed upon definition Great Depression: 1929-1933 (Unemployment Rate from 20-25%) Causes of Recessions A shock to external economy (1 & 2 are most common Post War Era) 1. Monetary Policy (to reduce inflation) 2. Oil Shock (big price increase) 3. Fiscal Policy (To quickly balance the budget) 4. Financial (lending falls) Section 4 o Part A: Overview of AD and AS: P & Y Key symbols P: “Price level” (Average prices in the entire economy) Measure with the GDP Deflator; CPI moves similarly
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