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EC140 Lecture Notes - Labour Force Survey, Frictional Unemployment, Unemployment

Course Code
Rizwan Tahir

of 5
Chapter 21: Monitoring Jobs and Inflation
Tuesday, January 15, 2013
1:33 PM
Why Unemployment is a Problem
oResults in lost incomes and production, human capital
oUnemployment benefits create safety net but don't fully replace lost wages,
not everyone receives benefits
oProlonged unemployment permanently damages person's job prospects by
destroying human capital
Labour Force Survey
oPopulation divided into two groups:
Working-age population: number of people aged 15> who are not in
institutional care
People in labour force (employed)
People not in labour force (unemployed- finding job, waiting to
be called back to previous job, waiting to start new job)
Labour force: sum of employed and unemployed workers
People too young to work (<15) or in institutional care
Four Labour Market Indicators
oUnemployment rate
Percentage of labour force that is unemployed
(Number of people unemployed / labour force ) x 100
Increases in recession and reaches peak value after recession ends
oInvoluntary part-time rate
Percentage of labour force who work part time but want full time jobs
(number of involuntary part time works / labour force) x 100
oLabour force participation rate
Percentage of working-age population who are members of labour
(labour force / working-age population) x 100
oEmployment-to-population ratio
Percentage of working-age population who have jobs
(employment / working-age population) x 100
Other Definitions of Unemployment
oPurpose of unemployment rate is to measure underutilization of labour
oOfficial measure is imperfect because excludes:
marginally attached workers
Person who currently is neither working nor looking for work but
wants and is available for job and has looked for work sometime
in recent past
Discouraged worker: marginally attached worker who has
stopped looking for job because of repeated failures to find one
part time workers who want full time jobs (involuntary part time)
Want full-time jobs but can't find them
In official stats, workers are called economic part-time
workers, partly unemployed
Most costly unemployment is long term unemployment
that results from job loss
oOver 25, short term unemployment rate is low and only fluctuates slightly
oUnder 25, short term unemployment rate is high and fluctuates more strongly
Can be classified into 3 types…
a. Frictional Unemployment
oUnemployment that arises from normal labour market turnover
oIncreases number of people entering/reentering labour force and
increases in unemployment benefits raise frictional unemployment
oFrictional unemployment is permanent and healthy for growing
a. Structural Unemployment
oUnemployment created by changes in technology and foreign
competition that change skills needed to perform jobs or locations of
oLasts longer than frictional unemployment
a. Cyclical Unemployment
oIs higher than normal unemployment at business cycle trough and
lower than normal unemployment at business cycle peak
oEx. worker laid off because in recession and then rehired when
expansion begins = cycle unemployment
"Natural" Unemployment
oIs the unemployment that arises from frictions and structural change when
there is no cyclical unemployment
oNatural unemployment rate is natural unemployment as percentage of labour
oChanges over time, key factors:
Age distribution of population
Economy with young population has larger number of new
job seekers every year
Has high level of frictional unemployment
Scale of structural change
Technological upheaval- when pace and volume of
technological change and change is driven by international
competition increases
Natural unemployment increases
Real wage rate
Natural unemployment increases if minimum wage is
raised to exceed equilibrium wage rate
Or if more firms use efficiency wage (wage set above
equilibrium real wage to enable firm to attract most productive
workers, motivate them to work hard, not quit)
Unemployment benefits
Unemployment benefits increase natural unemployment
by lowering opportunity cost of job search
Full Employment
Situation where unemployment rate = natural unemployment rate
When economy is at full employment, there is no cyclical unemployment (all
unemployment is frictional and structural)
Real GDP and Unemployment over the cycle
Potential GDP is quantity of real GDP produced at full employment
Corresponds to capacity of economy to produce output on sustained
Output Gap = Real GDP - Potential GDP
Output gap fluctuates over business cycle, unemployment rate
fluctuates around natural unemployment rate
When output gap is negative, unemployment exceeds natural
unemployment rate
Real GDP = Potential GDP, no output gap (full employment)
Real GDP > Potential GDP, inflationary Gap (above full employment)
Real GDP < Potential GDP, recessionary Gap (below full employment)
Price Level, Inflation, Deflation
Price level is average level of prices and value of money
Inflation- persistently rising price level
Deflation- persistently falling price level
We want to measure inflation/deflation rate, distinguish between money
values and real values of economic variables
Why inflation, deflation are problems
Low, steady, anticipated inflation/deflation is not a problem
Unpredictable inflation/deflation is problem because:
Redistributes income and wealth (between employers, workers and
borrowers, lenders)
High inflation- diverts resources from productive activities to
inflation forecasting
Social perspective- waste of resources is cost of inflation
At its worse, hyperinflation occurs- rapid inflation rate where
workers paid twice a day because money loses value so quickly
Lowers real GDP and employment
Diverts resources from production
Consumer Price Index (CPI)
Measures average of prices paid by urban consumers for "fixed" basket of
consumer goods/services
Defined to equal 100 for reference base period (currently 2002)
Average CPI in 2002 = 100, in 2011, CPI = 120 (20% higher)
Constructing CPI:
Selecting CPI basket
Based on consumer expenditure survey (by Stats Canada)- 2008
Housing is largest component, transportation and food and
beverages are next largest, remaining components account for 36%
of basket
Conducting monthly price survey
Every month, stats Canada check price of 80,000 goods in CPI
basket in 30 metro areas