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In addition to these primary goals, concern has been expressed at various times and places about other economic issues: the "quality of life," reducing “bads” such as pollution, fairness in the distribution of income or
wealth, or becoming self‑sufficient in the production
The concern over both unemployment and price instability led to the passage of the Employment Act of 1946, in which the United States committed itself to policies designed to reduce unemployment in a manner consistent with price stability. The government was holding itself responsible for short-run economic fluctuations.
Society loses some potential output of goods when some of its productive resources—human or non‑human— remain idle, and potential consumption is also reduced.
Clearly, there is a loss in efficiency when people are willing to work but productive equipment remains idle.
The civilian labor force figure excludes those in the armed services, prison or mental hospitals, as well homemakers, retirees, and full-time students because
they are not considered currently available for employment.
By far the worst employment downturn in U.S. history was the Great Depression, which began in late 1929 and continued until 1941. Unemployment fell from only 3.2 percent of
the labor force in 1929 to more than 20 percent in the early 1930s, and
Some economists would argue that modern macroeconomics, with its emphasis on the determinants of unemployment and its elimination, truly began in the 1930s.
In periods of prolonged recession, some individuals feel that the chances of landing a job are so bleak that they quit looking.
These "discouraged workers," who have not actively sought work for four weeks, are not counted as unemployed; instead they fall out of the labor force.
Also, people looking for full-time work who grudgingly settle for a part-time job are counted as “fully” employed, yet they are only “partly” employed.
However, at least partially balancing these biases in government employment statistics is the number of people who are overemployed—that is, working overtime or extra jobs.
Also, there are a number of jobs in the underground economy that are not reported at all.
In addition, there may be many people who claim they are actually seeking work when, in fact, they may just be going through the motions so that they can continue to collect unemployment compensation or receive other government benefits.
Considering the great variations in unemployment for different groups in the population, we calculate separate unemployment rates for groups classified by sex, age, race, family status, and type of occupation.
There are four main categories of unemployed workers job losers (temporarily laid off or fired), job leavers (quit), re-entrants (worked before and now
reentering labor force) new entrants (entering the labor force for
Job losers typically account for 50 to 60 percent of the unemployed, but sizeable fractions are also due to job leavers, new entrants, and re-entrants.
The percentage of the population that is in the labor force is called the labor force participation rate. Since 1950 it has increased from 59.2
percent to 67.1 percent, mostly between 1970 and 1990.
The increase can be attributed in large part to the entry of the baby boom into the labor force and a 14.2 percentage point increase in women’s labor force participation rate.
With frictional unemployment, geographic and occupational mobility are considered good for the economy, generally leading human resources from activities of relatively low productivity or value to areas of higher productivity, increasing output in society as well as the wage income of the mover.
Hence, frictional unemployment, while not good in itself, is a byproduct of a healthy phenomenon, and because it is short-lived, it is therefore not generally viewed as a serious problem.
Many persons advocate government-subsidized retraining programs as a means of reducing structural unemployment.
The dimensions of structural unemployment are debatable, in part because of the difficulty in precisely defining the term in an operational sense. Structural unemployment varies considerably.
If individuals seeking jobs and employers seeking workers had better information about each other, the amount of frictional unemployment would be considerably lower.
But because information and job search are costly, the bringing of demanders and suppliers of labor services together does not occur instantaneously.
Given its volatility and dimensions, governments have viewed unemployment resulting from inadequate demand to be especially correctable through government policies.
Most attempts to solve the unemployment problem have placed an emphasis on increasing aggregate demand.
The 5 percent natural rate of unemployment roughly equals the sum of frictional and structural unemployment at a maximum. Thus, unemployment rates below the
natural rate reflect a below-average level of frictional and structural unemployment.
Unemployment above the natural rate, however, reflects cyclical unemployment.
When all of the economy’s labor resources, and other resources like capital are fully employed, the economy is said to be producing at its potential level of output.
That is, at the natural rate of unemployment, all resources are fully employed and the economy is producing its potential output.
In periods of high and variable inflation, households and firms have a difficult time distinguishing changes in relative prices from changes in the general price level, distorting the information that flows from price signals.
Another cost of inflation is the cost that firms incur as a result of being forced to change their prices more often. menu costs—the costs of changing posted
prices shoe-leather costs—the costs of checking
on your assets. These costs are modest with low
inflation rates, but can be quite large where inflation is substantial.
An interest rate is, in effect, the price that one pays for the use of funds. Like other prices, interest rates are determined by the interaction of demand and supply forces.
The lower (higher) the interest rate, the greater (fewer) the quantity of loanable funds demanded, ceteris paribus.
The higher (lower) the interest rate, the greater (fewer) the quantity of loanable funds supplied by individuals and institutions like banks, ceteris paribus.
The equilibrium price, or interest rate, will be where the quantity demanded equals the quantity supplied.
When people start expecting future inflation, creditors become less willing to lend funds at any given interest rate because they fear they will be repaid in dollars of lesser value than those they loaned.
This is depicted by a leftward shift in the supply curve of loanable funds (a decrease in supply).
Likewise, demanders of funds (borrowers) are more anxious to borrow because they think they will pay their loans back in dollars of lesser purchasing power than the dollars they borrowed. Thus, the demand for funds increases.
Increasingly, laborers, pensioners, etc. try to protect themselves from inflation by using cost-of-living clauses in contracts.Personal income taxes are also now indexed for inflation.
Some have argued that we should go one step further and index everything. All contractual arrangements would be
adjusted frequently to take account of changing prices.
Such an arrangement might reduce the impact of inflation, but it would also entail additional contracting costs (and not every good—notably currency—can be indexed).
Business cycles refer to the short‑term fluctuations in economic activity, not to the long‑term trend in output, which in modern times has usually been upward.
December 1854 30 June 1857 18December 1858 22 October 1860 8June 1861 46 (Civil War) April 1865 32December 1867 18 June 1869 18December 1870 34 October 1873 65March 1879 36 March 1882 38May 1885 22 March 1887 13April 1888 27 July 1890 10May 1891 20 January 1893 17June 1894 18 December 1895 18June 1897 24 June 1899 18December 1900 21 September 1902 23August 1904 33 May 1907 13June 1908 19 January 1910 24January 1912 12 January 1913 23December 1914 44 (World War I) August 1918 7March 1919 10 January 1920 18July 1921 22 May 1923 14July 1924 7 October 1926 13November 1927 21 August 1929 43 (Depression)March 1933 50 May 1937 13 (Depression)June 1938 80 (World War II) February 1945 8October 1945 37 November 1948 11October 1949 45 (Korean War) July 1953 10May 1954 39 August 1957 8April 1958 24 April 1960 10February 1961 106 (Vietnam War) December 1969 11November 1970 36 November 1973 16March 1975 58 January 1980 6July 1980 12 July 1981 16November 1982 92 July 1990 8March 1991 120 March 2001 ---SOURCE: http://www.nber.org/cycles.html; U.S. Department of Commerce, Survey of Current Business, October 1994, Table C-51.
Often, key economic statistics, like unemployment rates, are seasonally adjusted, meaning the numbers are modified to take account of normal seasonal fluctuations.
Thus, seasonally adjusted unemployment rates in summer months are below actual unemployment rates because unemployment is normally high in summertime as a result of the inflow of school-age workers into the labor force.
Of course, the negative side to all of this is that although the incumbent may get re-elected, the economy may have been overstimulated, causing inflationary problems.
Businesses, government agencies, and to a lesser extent, consumers, rely on economic forecasts to learn of forthcoming developments in the business cycles.
Economists gather statistics on economic activity in the immediate past, and use past historical relationships between these factors and the overall level of economic activity (which form the basis of the economic theories used) to formulate econometric models.
Statistics from the immediate past are plugged into the models and forecasts are made.
One less sophisticated but very useful forecasting tool is watching trends in leading economic indicators, which tend to change before the economy as a whole changes.
While the economic indicators do provide a warning of a likely downturn, they do not provide accurate information on the depth or duration of the downturn.
