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Part B: Other Measures of the Labor MarketUnderemployment Rate (U-6, broad measure)– Goes beyond the usual unemployment rateU-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 monthCurrent unemployment rate is 5.5%; Average since 1998 is 5.8%; Why complain?Employment is barely above 2007 levelU6 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 0Then unemployment rate is likely to be from 5-6% and at “full employment”Complications: Can be below natural rate for a whileImplications: The natural rate of unemployment is a decent measure of the “normal”unemployment rateoPart C: GDP and UnemploymentPotential 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 ofcapitalCapacity does notequal maximum possiblePotential GDP grows from year to year and in a recession, it is more than the real GDPOkun’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 timeFormula: 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 growthoPart D: Business CycleThe “Great Moderation”From 1982 to 2007Most stable period of U.S. growthLongest expansion: 1991 – 20012 brief/mild recessions: 1991-1992 and 2001Business Cycle– Combination of a recession and an expansionRecession– Significant decline in economic activity across an economy, lasting more than a few months; normally visible in real GDP, real income, employment, industrialproduction, 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 yearMost Severe Post War Recessions1973-1975 (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 definitionGreat Depression: 1929-1933 (Unemployment Rate from 20-25%)Causes of RecessionsA 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 4oPart A: Overview of AD and AS: P & YKey symbolsP: “Price level” (Average prices in the entire economy)Measure with the GDP Deflator; CPI moves similarly