Business Cycles and Unemployment. Business Cycle Alternating periods of economic growth and contraction, which can be measured by changes in real GDP.

Business Cycles and

Unemployment

Business CycleAlternating periods of economic growth and contraction, which can be measured by changes in real GDP

Four phases of a business cycle• Peak• Recession• Trough• Recovery

Peakthe phase of the business cycle during which real GDP reaches its maximum after rising during a recovery

Economic growthan expansion in national output measured by the annual percentage increase in a nation’s real GDP

Why is growth an economic goal?It increases our standard of living - it creates a bigger “economic pie”

Troughthe phase of the business cycle in which real GDP reaches its minimum after falling during a recession

Recessiona downturn in the business cycle during which real GDP declines

Government Recession Definitionat least two consecutive quarters in which GDP declines

The DepressionThe term depression is primarily an historical reference to the extreme deep and long recession of the early 1930’s

RecoveryAn upturn in the business cycle during which real GDP rises

Hypothetical Business Cycle

Peak

Peak

Recession Recovery

Real GDP

Growth trend lin

e

Trough

Post-World War II RecessionsRecession Dates Duration % Decline in GNP Peak Unemployment Rate

Nov 1948-Oct 1949 11 -1.7 7.9%

July 1953 – May 1954 10 -2.7 5.9

Aug 1957 – Apr 1958 8 -1.2 7.4

Apr 1960 – Feb 1961 10 -1.6 6.9

Dec 1969 – Nov 1970 11 -0.6 5.9

Nov 1973 – Mar 1975 16 -3.1 8.6

Jan 1980 – July 1980 6 -2.2 7.8

July 1981 – Nov 1982 16 -2.9 10.8

July 1990 – Mar 1991 8 -1.3 6.8

Mar 2001 – Nov 2001 8 -0.5 5.6

Mar. 2001 - Nov. 2001 16 -3.5 9.5

Average 11 -1.9 7.6

Business Cycles in the U.S. 1929-2010

`29 `30 `35 `40 `45 `50 `55 `60 `65 `70 `75 `80 `85 `90 `95 `00 `05 `10

20

15

10

53.5

0

-5

-10

-15

Year

Annual real GDP growth

Long-term average growth

Zero growth

Three types of economic indicators• Leading• Coincident• Lagging

Leading IndicatorVariables that change before real GDP changes

• Changes in business and consumer credit• New orders for plant and equipment• New consumer goods orders• Unemployment claims• Delayed deliveries• New business formed

• Average workweek• New building permits• Changes in inventories• Material prices• Stock prices• Money supply

Coincident IndicatorVariables that change at the same time that real GDP changes

• Nonagricultural payrolls• Personal income• Industrial Production• Manufacturing and trade sales

Lagging IndicatorVariables that change after real GDP changes

• Unemployment rate• Duration of unemployment rate• Labor cost per unit of output• Inventories to sales ratio• Outstanding commercial loans• Commercial credit to personal income ratio• Prime interest rate

Civilian Labor ForcePeople 16 years or older who are either employed or unemployed, excluding members of the armed forces and people in institutions

Who is considered employed?Anyone who works at least one hour a week for pay or at least 15 hours per week as an unpaid worker in a family business

Primary Cause of UnemploymentWhen total spending falls, businesses will find it profitable to produce a lower volume of goods and avoid unsold inventory

Who is considered unemployed?Anyone who is 16 years of age and above who is actively seeking employment

Total Population age 16 and over

• Armed forces• Household workers• Students• Retirees• Persons with disabilities• Institutionalized• Discourage workers

Civilian labor forceEmployed• Employees• Self-employed

Unemployed• New entrants• Re-entrants• Lost last job• Quit last job• Laid off

Not in Labor Force

Unemployment rateThe percentage of people in the labor force who are without jobs and are actively seeking jobs

Unemployment rate

unemployedcivilian labor force

X 100=

Calculated60,000 households are surveyed each month

Where to find current unemployment rate?http://www.bls.gov

Year

Civilian non-institutional population Labor Force Unemployed

Unemployment Rate

Not in Labor Force

2000 212,577 142,583 5,692 4.0 69,9942001 215,092 143,734 6,801 4.7 71,3592002 217,570 144,863 8,378 5.8 72,7072003 221,168 146,510 8,774 6.0 74,6582004 223,357 147,401 8,149 5.5 75,9562005 226,082 149,320 7,591 5.1 76,7622006 228,815 151,428 7,001 4.6 77,3872007 231,867 153,124 7,078 4.6 78,7432008 233,788 154,287 8,924 5.8 79,5012009 235,801 154,142 14,265 9.3 81,6592010 237,830 153,889 14,825 9.6 83,941

Current Population Estimates

Unemployment rate

unemployedcivilian labor force

X 100=

9.6% 14,825153,889

X 100=

Discouraged Workera person who wants to work, but who has given up searching for work

Underemploymentpeople working at jobs below their level of skills

Criticisms of the Unemployment Rate• Does not include discouraged workers• Includes part-time workers• Does not measure underemployment

U.S. Unemployment Rate 1929-2009

Year

1930 1940 1950 1960 1970 1980 1990 2000 2009

25

20

15

10

5

0

U.S

. Un

em

plo

ym

en

t R

ate

(p

erc

en

t)

Types of Unemployment• Seasonal• Frictional• Structural• Cyclical

Seasonal UnemploymentUnemployment caused by recurring changes in hiring due to changes in weather conditions

Frictional UnemploymentNormal search time required by workers with marketable skills who are changing jobs, entering, or re-entering the labor force

Structural UnemploymentA mismatch of the skills of workers out of work and the skills required for existing job opportunities

Cyclical UnemploymentUnemployment caused by the lack of jobs during a recession

Full EmploymentUnemployment equals the sum of seasonal, frictional, and structural unemployment

What is considered full employment?The natural rate of unemployment changes over time, but today it is considered to be about 3% - 5%

GDP GapThe difference between full-employment real GDP and actual real GDP

Cost of UnemploymentGDP Gap - the gap between actual and potential real GDP measures the monetary losses of real goods and services when at less than full employment

`97 `98 `99 `00 `01 `02 `03 `04 `05 `06 `07 `08 `09 `10

14,00013,500

13,000

12,50012,000

11,50011,000

10,50010,000

9,500

GDP GAP (positive)

Actual real GDP

Potential real GDP

GDP GAP (negative)