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ECON203 Principles of Macroeconomics

Week 5Topic: JOBS (EMPLOYMENT) versus

UNEMPLOYMENT

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Lesson ObjectivesLesson ObjectivesTo learn aboutAfter studying these topics you should be able to:• Understand about labor force, employment,

unemployment, employed, unemployed, full employment, sources of unemployment, types of unemployment, potential GDP, output gap.

• Calculation unemployment rate, labor force participation rate,

• Understand the relationship between unemployment and output gap

Employment and UnemploymentEmployment and UnemploymentThe population is divided into two groups:

1. The working-age population—the number of people aged 16 years and older who are not in jail, hospital, or some other institution.

2. People too young to work (under 16 years of age) or in institutional care.

The working-age population is divided into two groups:1. People in the labor force2. People not in the labor force

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Labor Force, Employment and Labor Force, Employment and EmployedEmployed

• Labor Force refers all citizens 16 years of age and older who are working or looking for work.

Labor force = employed + unemployed population

• Employment refers a simple term holding of a job for which a wage is paid, or the operating of one’s own business. A person in this situation is said to be employed.

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Unemployment and Unemployment and unemployedunemployed

Unemployment refers to the number or proportion of people in an economy who are willing and able to work but are unable to get a job. A person in this situation is said to be unemployed.

Unemployment rate refers the percentage of those in the labor force who are unemployed. It is equals the number unemployed divided by the number in the labor force.

Other Definitions of Other Definitions of UnemploymentUnemployment

Marginally Attached Workers

–A marginally attached worker is a person who currently is neither working nor looking for work but has indicated that he or she wants and is available for a job and has looked for work sometime in the recent past.

–A discouraged worker is a marginally attached worker who has stopped looking for a job because of repeated failure to find one.

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Calculating Unemployment Calculating Unemployment RateRate

100forceLabor

unemployed poeple ofNumber

Ratent Unemployme

Example: In Saudi Arabia, if the number of people unemployed in 2010 was 5 million and the labor force was 155 million , here : Unemployment rate = (5/ 155) x 100 =3.2 %.

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Labor Force Participation Labor Force Participation RateRate

Labor Force Participation Rate refers the share of the population 16 years and older working or seeking work.

100population age-Working

ForceLabor

In 2008, the labor force was 154.6 million and the working-age population was 233.8 million.

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Importance of Real GDP Importance of Real GDP

•Labor force consists of employed and unemployed persons

•Those not working include 1) those not in the working force, and 2) those unemployed

•The population includes the

•employed

•unemployed

•people not in the labor force

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Sources of UnemploymentSources of Unemployment

People become unemployed if they are1.Job losers2.Job leavers3.Entrants or reentrants

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Sources of UnemploymentSources of UnemploymentJob losers: A job looser is someone who is laid off from a job, either permanently or temporarily. People lose their jobs for many reasons ;1. Some people are not a good match for their jobs.2. Firms fail, or a new technology destroys some types of jobs. A job looser who decided to look for a new job remains in the labor force and becomes unemployed.

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Sources of UnemploymentSources of UnemploymentJob leavers: Few people quit their jobs because they want to spend time looking for better one , these job leavers become unemployed.

But a Job leaver is someone who voluntarily quits a job because he or she has found a better job or has decided to withdraw from labor force. Neither of these two types of job leavers becomes unemployed.

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Sources of UnemploymentSources of Unemployment• Entrants or reentrants: An entrant is someone who has just finish

school and is looking for a job. Many entrants spend time looking for first job and during this period they are unemployed.

A reentrant is someone who has previously had a job, has been quiet and left the labor force, and has now decided to look for a job again.

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Types of UnemploymentTypes of Unemployment

Four types of unemployment– Frictional unemployment– Structural unemployment– Seasonal unemployment– Cyclical unemployment

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Types of UnemploymentTypes of UnemploymentFrictional Unemployment:- It is the unemployment that arises from normal labor

turnover-from people entering and leaving the labor force, from quitting jobs to find better ones.

- It is a permanent and healthy phenomenon in dynamic and growing economy.

- Firms and workers spend time searching out what they believe will be the best attainable match, while these unemployed people are searching, they are fractionally unemployed.

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Types of UnemploymentTypes of UnemploymentStructural Unemployment:

It is the unemployment that arises when there is a mismatch of skills or geographic location. Occurs because changes in tastes, technology, or competition reduce the demand for certain skills and increase the demand for other skills.

Structural unemployment lasts longer than frictional unemployment.

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Types of UnemploymentTypes of UnemploymentSeasonal Unemployment:Unemployment caused by seasonal changes in labor demand during the year.– For example, during the month of Ramadan and Eid festival, the

demand for labor increases and other months may decrease.

To eliminate the impact of such changes, monthly unemployment statistics are seasonally adjusted which smoothest out these factors

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Types of UnemploymentTypes of UnemploymentCyclical Unemployment:It occurs because of business cycle fluctuations in

output that occurs during recessions. Cyclical unemployment is the higher than normal unemployment at a business cycle trough and lower than normal unemployment at a business cycle peak.

Example: A worker laid off because the economy is in a recession and is then rehired when the expansion begins experiences cycle unemployment.

Government policies to stimulate aggregate demand during recessions is aimed at reducing this type of unemployment.

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Full EmploymentFull EmploymentFull employment occurs when unemployment arises from frictions, seasons, and structural change exist but there is no cyclical unemployment. It is also called natural unemployment.

The natural unemployment rate is natural unemployment as a percentage of labor force.

Natural unemployment rate = natural unemployment x 100 labor force

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Potential GDP& Output GapPotential GDP& Output GapPotential GDP is the value of the real GDP when all the economy’s factors of production are employed i.e. Potential GDP is the quantity of real GDP produced at full employment. The GDP gap or the output gap is the difference between Real GDP (actual output) and Potential GDP i.e. output gap = Real GDP - potential GDP.The percentage of Output gap is the real (actual) GDP minus the potential GDP divided by the potential GDP which is always express in percentage.

[(Real GDP- Potential GDP)/Potential GDP]*100

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The Relationship Between The Relationship Between Unemployment & the Unemployment & the

Output GapOutput Gap • When unemployment rate exceeds full

employment rate (the natural unemployment rate), the real GDP is below potential GDP and the Output Gap is negative.

• When Unemployment rate is below full employment rate (the natural unemployment rate), the real GDP is above potential GDP and the Output Gap is positive.

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Now it’s over for Now it’s over for today. Do you have today. Do you have any question?any question?