Business Cycles & Unemployment

BAIL OUT

Business Cycles and Unemployment Overview

  • Instructor: Sam (Hongkil) Kim

  • Course: Econ 2105

  • Reading Material: Business Cycles and Unemployment

Business Cycle

Main Phases

  • Economists define four distinct phases of the business cycle:

    1. Peak: The height of economic expansion before a downturn.

    2. Recession: A period where economic activity is declining.

    3. Trough: The lowest point of economic activity, indicating a transition from recession to expansion.

    4. Expansion: An increase in economic activity following a trough.

  • Characteristics:

    • The business cycle includes fluctuations around the long-run growth trend of the economy.

    • Duration and intensity of each phase can vary.

    • Individual business cycles can differ significantly.

Economic Indicators

U.S. Real GDP

  • Source: U.S. Bureau of Economic Analysis via FREDⓇ

  • Real GDP Overview (Billions of Chained 2017 Dollars):

    • Historical Growth Data (2006-2019):

    • 2006: $15.34 trillion

    • 2007: $15.63 trillion

    • 2008: $15.60 trillion

    • 2009: $15.21 trillion

    • 2010: $15.60 trillion

    • 2011: $15.84 trillion

    • 2012: $16.20 trillion

    • 2013: $16.50 trillion

    • 2014: $16.91 trillion

    • 2015: $17.40 trillion

    • 2016: $17.69 trillion

    • 2017: $18.11 trillion

    • 2018: $18.64 trillion

    • 2019: $19.07 trillion

  • Trends: Overall long-run trend indicates an expansion and growth of the U.S. economy.

Economic Cycle Characteristics

  • Cyclical Movements: Almost all sectors of the economy are influenced by the business cycle, particularly capital goods, consumer durables, and luxury goods.

  • International Impact: Fluctuations in one country's economy can affect others, showing the interconnectedness of global economies.

Economic Fluctuation Quiz

  • Question: If employment and output are at their lowest levels, what is occurring?

    • Correct Answer: Trough in the business cycle.

Macroeconomic Policy

Objective

  • The aim of macroeconomic policy is to stabilize the economy by buffering against business cycle fluctuations.

  • This entails adjusting aggregate spending to achieve full employment and maintain price stability.

Economic Indicators

  • Pro-Cyclical: Prices of goods and services, profits, wages, employment, and financial markets tend to rise with GDP.

  • Counter-Cyclical: Unemployment, government spending, and public debt tend to increase in economic downturns.

Causation and Spending

  • Key Determinants:

    • Long-term growth influenced by supply factors (human resources, capital, technology).

    • Short-term business cycle determined by total expenditure.

Causal Inquiry

  • What drives consumer and business willingness to spend?

Measurement of Unemployment

Data Collection

  • Bureau of Labor Statistics (BLS): Conducts monthly surveys of approximately 60,000 households.

  • Classification:

    • Not in Labor Force: Adults not seeking work (students, retirees, etc.).

    • Labor Force: Percentage of the population either employed or actively seeking work (approx. 50% in 2015).

Calculating Unemployment Rate

  • Formula:

    • Unemployment Rate=UnemployedLabor Force×100%\text{Unemployment Rate} = \frac{\text{Unemployed}}{\text{Labor Force}} \times 100\%

Types of Unemployment

1. Cyclical Unemployment

  • Caused by reductions in total spending, leading companies to cut jobs.

2. Structural Unemployment

  • Results from a mismatch in skills or location between available jobs and workers.

3. Frictional Unemployment

  • Represents normal transitions in the labor market, where workers are in between jobs.

Job Transition Experiences

  • Scenarios: Graduates looking for work, layoffs because of recessions, jobs lost due to changes in industry (e.g., Uber impacting taxi drives).

Economic Impact of Unemployment

Cost Analysis

  • Burden Disparities:

    • Certain demographics bear a disproportionate impact during recessions (lower-skilled, younger, less-educated workers).

    • Long-term unemployed workers experience a depreciation in skills and employability.

  • Social Consequences: Increased poverty, social isolation, crime, and mental health issues.

Statistical Data

  • Historical trends on unemployment rates categorized by age, race, educational attainment, and gender.

Real-World Example

Healthcare Reform

  • The Patient Protection and Affordable Care Act requires employers to offer health insurance or face penalties, impacting low-wage employment dynamics.

Conclusion

Unemployment Definitions

  • Natural Rate of Unemployment: Rate during normal economic conditions (only accounts for structural and frictional unemployment).

  • Full Employment: Occurs when the economy operates at the natural unemployment rate.

  • Underemployment: A situation where workers' skills are not utilized fully, often reflected in part-time positions despite a desire for full-time work.

Additional Observations

  • A closer look at variations in unemployment rates among different demographic groups provides insight into the broader implications of economic policy and labor market conditions.