Macroeconomic Goals 17.1
17 c h a p t e r
THREE MAJOR MACROECONOMIC GOALS
Recall from Chapter 1 that macroeconomics is the study of the whole economy—the study of the forest, not the trees. Nearly every society has been interested in three major macroeconomic goals: (1) maintaining employment of human resources at relatively high levels, meaning that jobs are relatively plentiful and financial suffering from lack of work and income is relatively uncommon; (2) maintaining prices at a relatively stable level so that consumers and producers can make better decisions; and (3) achieving a high rate of economic growth, meaning a growth in output per person over time. We use the term real gross domestic product (RGDP) to measure output or production. The term real is used to indicate that the output is adjusted for the general increase in prices over time. Technically, gross domestic product (GDP) is defined as the total value of all final goods and services produced in a given period, such as a year or a quarter.
WHAT OTHER GOALS ARE IMPORTANT?
In addition to these primary goals, most societies are concerned, at various times, about other economic issues, some of which are essentially microeconomic in character. For example, “quality of life” issues have prompted some societies to try to reduce “bads,” such as pollution and crime, and increase goods and services, such as education and health services. Another goal has been “fairness” in the distribution of income or wealth. Still another goal pursued in many nations at one time or another has been self-sufficiency in the production of certain goods and services. For example, in the 1970s, the United States implemented policies that reduced U.S. reliance on other nations for supplies of oil, partly for reasons of national security.
HOW DO VALUE JUDGMENTS AFFECT ECONOMIC GOALS?
In stating that nations have economic goals, we must acknowledge that nations are made up of individuals.
Individuals within a society may differ considerably in how they evaluate the relative importance of certain issues, or even in whether they consider certain “problems” really to be problems after all. For example, most people view economic growth positively, but there are those who consider it less favorably. While some citizens may think the income distribution is just about right, others might think it provides insufficient incomes to the poorer members of society; still others think it involves taking too much income from the relatively well-todo and thereby reduces incentives to carry out productive, income-producing activities.
ACKNOWLEDGING OUR GOALS: THE EMPLOYMENT ACT OF 1946
Many economic problems—particularly those involving unemployment, price instability, and economic stagnation—are pressing concerns for the U.S. government. In fact, it was the concern over both unemployment and price instability that led to the passage of the Employment Act of 1946, which requires the U.S. government to pursue unemployment policies that are also consistent with price stability.
This was the first formal acknowledgment of these primary macroeconomic goals.
356 CHAPTER SEVENTEEN | Macroeconomic Goals
Macroeconomic Goals
s e c t i o n
17.1
_ What are the most important macroeconomic goals in the United States?
_ Are these goals universal?
_ How has the United States shown its commitment to these goals?
THE CONSEQUENCES OF HIGH UNEMPLOYMENT
Nearly everyone agrees that it is unfortunate when a person who wants a job cannot find one. A loss of a job can mean financial insecurity and a great deal of anxiety. High rates of unemployment in a society can increase tensions and despair. A family without income from work undergoes great suffering; as a family’s savings fade, family members wonder where they are going to obtain the means to survive.
Society loses some potential output of goods when some of its productive resources—human or nonhuman—remain idle, and potential consumption is reduced. Clearly, then, there is a loss in efficiency when people willing to work and equipment able to produce remain idle. That is, other things equal, relatively high rates of unemployment are viewed almost universally as undesirable.
WHAT IS THE UNEMPLOYMENT RATE?
When discussing unemployment, economists and politicians refer to the unemployment rate. To calculate the unemployment rate, you must first understand another important concept—the labor force. The labor force is the number of people over the age of 16 who are available for employment, whether or not they are currently employed, as seen in Exhibit 1. The civilian labor force figure excludes people in the armed services and those in prisons or mental hospitals. Other people regarded as outside the labor force include homemakers, retirees, and full-time students. These groups are excluded from the labor force because they are not considered currently available for employment.
When we say that the unemployment rate is 5 percent, we mean that 5 percent of the population over the age of 16 who are willing and able to work are unable to get jobs. That 5 percent means 5 out of 100 people in the total labor force are unemployed.
To calculate the unemployment rate, we simply divide the number of unemployed by the number in the civilian labor force.
Unemployment rate 5 Number of unemployed/ Civilian labor force In September 2003, the number of civilians unemployed in the United States was 9 million and the civilian labor force totaled 147 million. Using this data, we can calculate that the unemployment rate in September 2003 was 6.1 percent.
Unemployment rate 5 9 million/147 million 5
.061 3 100 5 6.1 percent
THE WORST CASE OF U.S. UNEMPLOYMENT
By far the worst employment downturn in U.S. history occurred during the Great Depression, which
Employment and Unemployment 357
1. The most important U.S. macroeconomic goals are full employment, price stability, and economic growth.
2. Individuals each have their own reasons for valuing certain goals more than others.
3. The United States showed its commitment to the major macroeconomic goals with the Employment Act of 1946.
1. What are the three major economic goals of most societies?
2. What is the Employment Act of 1946? Why was it significant?
s e c t i o n c h e c k
Employment and Unemployment
17.2
_ What are the consequences of unemployment?
_ What is the unemployment rate?
_ Does unemployment affect everyone equally?
_ What causes unemployment?
_ How long are people typically unemployed?
began in late 1929 and continued until 1941. Unemployment rose from only 3.2 percent of the labor force in 1929 to more than 20 percent in the early 1930s, and double-digit unemployment persisted through 1941. The debilitating impact of having millions of productive people out of work led Americans (and people in other countries as well) to say, “Never again.” Some economists would argue that modern macroeconomics, with its emphasis on the determinants of unemployment and its elimination, truly began in the 1930s.
VARIATIONS IN THE UNEMPLOYMENT RATE
Exhibit 2 shows the unemployment rates over the last 40 years. Unemployment since 1960 has ranged from a low of 3.5 percent in 1969 to a high of 9.7 percent in 1982. Unemployment in the worst years is two or more times what it is in good years. Before 1960, variations in unemployment were more pronounced.
358 CHAPTER SEVENTEEN | Macroeconomic Goals
Civilians Employed
(137.6 million)
Unemployed
(9 million)
Out of Labor Force
(75.2 million) (221.8 million)
Total Adult Population
(147 million)
Labor Force (Employed + Unemployed)
The U.S. Labor Force, 2003 SECTION 17.2
EXHIBIT 1
10% 9 8 7 6 5 4 3 2 1 0 1960 1965 1970 1975 1980
Year
1990 1985 1995 2000 2003
U.S. Unemployment Rate Percent
Unemployment Rates SECTION 17.2
EXHIBIT 2
SOURCE: Bureau of Labor Statistics, September 2003.
ARE UNEMPLOYMENT STATISTICS ACCURATE REFLECTIONS OF THE LABOR MARKET?
In periods of prolonged recession, some individuals think that the chances of landing a job are so bleak that they quit looking. These people are called discouraged workers. Individuals 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 part-time jobs are counted as “fully” employed, even though they are only “partly” employed. However, at least partially balancing these two biases in government employment statistics is the number of people who are overemployed—that is, working overtime or more than one job. Also, a number of jobs in the underground economy (e.g., drug dealing, prostitution, gambling, and so on) are not reported. In addition, many people may claim they are seeking work when, in fact, they may just be going through the motions so they can continue to collect unemployment compensation or receive other government benefits.
WHO ARE THE UNEMPLOYED?
Unemployment usually varies greatly between different segments of the population and over time.
Education as a Factor in Unemployment
According to the Bureau of Labor Statistics, the unemployment rate across the sexes and races among college graduates is significantly lower than for those who do not complete high school. In April 2002, the unemployment rate for individuals without high school diplomas was 9.0 percent compared with 4.7 percent for those with college degrees.
Further, college graduates have lower unemployment rates than people who have some college education but did not complete their bachelor’s degrees (5.7 percent).
Age, Sex, and Race as Factors in Unemployment
The incidence of unemployment varies widely among the population. Unemployment tends to be greater among the very young, among blacks and other minorities, and among workers with few skills. The unemployment rate for adult females tends to be higher than that for adult males.
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. Exhibit 3 shows unemployment rates for various groups. Note that the variation around the average unemployment rate for the total population of 5.7 percent was considerable. The unemployment rate for blacks and Hispanics was much higher than the rate for whites, a phenomenon that has persisted throughout the post–World War II period. Unemployment among teenagers was much higher than adult unemployment, at 16.4 percent. Some would regard teenage unemployment a lesser evil than unemployment among adults, because most teenagers have parents or guardians on whom they can rely for subsistence.
CATEGORIES FOR UNEMPLOYED WORKERS
According to the Bureau of Labor Statistics, there are four main categories of unemployed workers:
job losers (those who were temporarily laid off or fired), job leavers (those who quit their jobs), reentrants
(those who worked before and are reentering the labor force), and new entrants (those entering the labor force for first time—primarily, teenagers).
It is a common misconception that most workers are unemployed because they have lost their jobs.
While job losers may typically account for 50 percent to 60 percent of the unemployed, a sizable fraction is due to job leavers, new entrants, and reentrants, as seen in Exhibit 4.
Employment and Unemployment 359 Teenagers have the highest rates of unemployment. Do you think it would be easier for them to find jobs if they had more experience and higher skill levels?
© SW Productions/Photodisc/Getty One Image
HOW MUCH UNEMPLOYMENT?
While unemployment is painful to those who have no source of income, reducing unemployment is not costless. In the short run, a reduction in unemployment may come at the expense of a higher rate of inflation, especially if the economy is close to full capacity, where resources are almost fully employed.
Moreover, trying to match employees with jobs quickly can lead to significant inefficiencies because of mismatches between a worker’s skill level and the level of skill required for a job. For example, the economy would be wasting resources subsidizing education if people with Ph.D.’s in biochemistry were driving taxis or tending bar.
That is, the skills of the employee may be higher than that necessary for the job, resulting in what economists call underemployment. Another cause of inefficiencies is placing employees in jobs beyond their abilities.
THE AVERAGE DURATION OF UNEMPLOYMENT
The duration of unemployment is equally as important as the amount of unemployment. The financial consequences of a head of household being unemployed 4 or 5 weeks are usually not extremely serious, particularly if the individual is covered by an unemployment compensation system. The impact becomes much more serious if a person is unemployed for several months. Therefore, it is useful to look at the average duration of unemployment to discover what percentage of the labor force is unemployed longer than a certain period, say 15 weeks. Exhibit 5 presents data on the duration of unemployment. As you can see in this table, roughly 30 percent of the unemployed were out of work less than 5 weeks, and 23 percent of the total
360 CHAPTER SEVENTEEN | Macroeconomic Goals
a. U.S. Unemployment, by Sex and Age b. U.S. Unemployment, by Race or Ethnic Group
20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%
Total Population Men Women Teenagers (16–19 years)
Total Population White Black Hispanic Unemployment Rate Unemployment Rate
Unemployment in the United States by Age, Sex, and Race SECTION 17.2
EXHIBIT 3
Job losers
55.9%
Reentrants
26.9%
Job leavers
9.4%
New entrants
7.8%
Reasons for Unemployment
SECTION 17.2
EXHIBIT 4
SOURCE: Bureau of Labor Statistics.
unemployed were out of work for more than six months. The duration of unemployment tends to be greater when the amount of unemployment is high and smaller when the amount of unemployment is low. Unemployment of any duration, of course, means a potential loss of output. This loss of current output is permanent; it is not made up when unemployment starts falling again.
LABOR FORCE PARTICIPATION RATE
The percentage of the population that is in the labor force is what economists call the labor force participation rate. Since 1950, the labor force participation rate has increased from 59.2 percent to 67.1 percent. Most of that change occurred between 1970 and 1990. The increase in the labor force participation rate can be attributed in large part to the entry of the baby boomers into the labor force and a 14.2 percentage point increase in the women’s labor force participation rate.
Over the last 50 years, the number of women working has shifted dramatically, reflecting the changing role of women in the workforce. In Exhibit 6, we see that in 1950 less than 34 percent of women were working or looking for work. Today that figure is roughly 60 percent. In 1950, more than 85 percent of men were working or looking for work. Today the labor force participation rate for men has fallen to roughly 74 percent, as many men stay in school longer and opt to retire earlier.
Employment and Unemployment 361
Duration of Unemployment
EXHIBIT 5
Duration Percent Unemployed
Less than 5 weeks 30.3% 5 to 14 weeks 30.8 15 to 26 weeks 15.7 27 weeks and over 23.2
1950 1960 1970 1980 1990 2002 Total 59.2% 59.4% 60.4% 63.8% 66.4% 66.6%
Men 86.4 83.3 79.7 77.4 76.1 73.8
Women 33.9 37.7 43.3 51.5 57.5 59.8
Labor Force Participation Rates for Men and Women SECTION 17.2
EXHIBIT 6
1. The consequences of unemployment to society include a reduction in potential output and consumption—a decrease in efficiency.
2. The unemployment rate is found by taking the number of people officially unemployed and dividing by the number in the civilian labor force.
3. Unemployment rates are the highest for minorities, the young, and less-skilled workers.
4. There are four main categories of unemployed workers: job losers, job leavers, reentrants, and new entrants.
5. The duration of unemployment tends to be greater (smaller) when the amount of unemployment is high (low).
1. What happens to the unemployment rate when the number of unemployed people increase, ceteris paribus? When the labor force grows, ceteris paribus?
2. How might the official unemployment rate understate the “true” degree of unemployment? How might it overstate it?
3. Why might the fraction of the unemployed who are job leavers be higher in a period of strong labor demand?
4. Suppose you live in a community of 100 people. If 80 people are over 16 years old and 72 people are willing and able to work, what is the unemployment rate in that community?
5. What would happen to the unemployment rate if a substantial group of unemployed people started going to school full time? What would happen to the size of the labor force?
6. What happens to the unemployment rate when officially unemployed people become discouraged workers? Does anything happen to employment in this case?
In examining the status of and changes in the unemployment rate, it is important to recognize that there is not just one kind of unemployment. In this section, we will examine the three types of unemployment —frictional, structural, and cyclical—and evaluate the relative effects of each on the overall unemployment rate.
FRICTIONAL UNEMPLOYMENT
Some unemployment results from people being temporarily between jobs. For example, consider an advertising executive who was fired in Chicago on March 1 and is now actively looking for similar work in San Francisco. This is an example of
frictional unemployment. Of course, not all unemployed workers were fired; some may have voluntarily quit their jobs. In either case, frictional unemployment is short term and results from the normal turnover in the labor market, such as when people change from one job to another.
SHOULD WE WORRY ABOUT FRICTIONAL UNEMPLOYMENT?
Geographic and occupational mobility are considered good for the economy because they generally lead human resources to go 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 often short lived, it is generally not viewed as a serious problem. While the amount of frictional unemployment varies somewhat over time, it is unusual for it to be much less than 2 percent of the labor force. Actually, frictional unemployment tends to be somewhat greater in periods of low unemployment, when job opportunities are plentiful.
This high level of job opportunity stimulates mobility, which, in turn, creates some frictional unemployment.
STRUCTURAL UNEMPLOYMENT
A second type of unemployment is structural unemployment.
Like frictional unemployment, structural unemployment is related to occupational movement or mobility, or in this case, to a lack of mobility.
Structural unemployment occurs when workers lack the necessary skills for jobs that are available or have particular skills that are no longer in demand.
For example, if a machine operator in a manufacturing plant loses his job, he could still remain unemployed despite the openings for computer programmers in his community. The quantity of unemployed workers conceivably could equal the number of job vacancies, but the unemployment persists because the unemployed lack the appropriate skills. Given the existence of structural unemployment, it is wise to look at both unemployment and job vacancy statistics in assessing labor market conditions. Structural unemployment, like frictional unemployment, reflects the dynamic dimension of a changing economy. Over time, new
362 CHAPTER SEVENTEEN | Macroeconomic Goals
Types of Unemployment
17.3
_ What are the three types of unemployment?
_ What is frictional unemployment?
_ What is structural unemployment?
_ What is cyclical unemployment?
_ What is the natural rate of unemployment?
What type of unemployment would occur if these coal miners lost their jobs as a result of a reduction in demand for coal and needed retraining to find other employment?
Usually, structural unemployment occurs because of workers' poor skills or long-term changes in demand. Consequently, it generally lasts for a longer period than does frictional unemployment.
© Barry Lewis/CORBIS
jobs open up that require new skills, while old jobs that required different skills disappear. It is not surprising, then, that many people 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— sometimes it is very low and at other times, as in the 1970s and early 1980s, it is high. To some extent, in this latter period, jobs in the traditional sectors like automobile manufacturing and oil production gave way to jobs in the computer and biotechnology sectors. Consequently, structural unemploy...
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