ECON 209 Lecture Notes - Lecture 21: Unemployment Benefits, Nairu, Budget Constraint
7 Jun 2018
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2018_04_09 ECON 209
Lecture 21: Chapter 30 continued, Chapter 31: Government Debt and Deficits
30.1 Employment and Unemployment
I. Unemployment is a field in economics
A. Key market
B. Fundamental in understanding how the economy works
II. In the long run, increases in the labour force are more or less matched by increases in
employment
III. In the short run, the unemployment rate fluctuates considerably because changes in the labour
force are not exactly matched by change in employment
IV. In the graph(s) below:
A. On the left:
1. More and more GDP
2. More and more workers
3. Employment has evolved with the labour force
B. On the right:
1. Fluctuations of unemployment are linked with the fluctuations of GDP
V. Changes in Employment
A. During periods of rapid economic growth, the unemployment rate usually falls
B. During recessions or periods of slow growth, the unemployment rate usually rises
1. Short-run fluctuations
C. Over longer periods, unemployment changes more due to structural changes in the
labour force
VI. Flows in the Labour Market
A. From 2014-2015: the Canadian unemployment rate was roughly constant at 6.8%
1. This does no mean that no jobs were created during the year
B. Workers were finding jobs at a rate between 500,000 and 600,000 per month
C. At the same time, other workers were leaving jobs or entering the labour force at roughly
the same rate
D. The amount of activity in the labor market is better reflected by the flows into and out of
unemployment than by the overall unemployment rate
Stocks and Flows in the Canadian Labour Market
E. Understanding the flows tells you much more about the labour market than changes in
the sets
F. The models of the labour market try to show the flows
1. The match breaks (why, who, when, what cost, etc.)
G. These flows can be completely different from one economy to another
1. Example: economies in Europe (jobs very secure, but difficult to get a job) versus
economies in US/Canada (more flexible)
VII. Measurement Problems
A. The official data understates the full effects of recessions on unemployment because
they do not include:
1. Discouraged workers
a) Part of N (but not because the person wants to be, because they lost
hope)
2. Underemployed workers
a) Part-time job
b) Not part of U
c) But the person is not satisfied - would like to work
VIII. Consequences of Unemployment
A. Two important costs associated with unemployment are:
1. Lost output
2. Personal costs
B. Unemployment is not only an economic cost - a social and political cost as well
31.2 Unemployment Fluctuations
I. Three types of unemployment:
A. Frictional, structural, and cyclical
II. Cyclical unemployment
A. Different ways of seeing it (there is debate of its existence)
B. In our model: it exists implicitly
1. Consequence of the output gaps
C. The difference between actual unemployment and the amount that would exist
when Y = Y*
D. Involuntary
1. Workers would like to, but can’t (Not open)
III. When Y = Y*, there is still some unemployment
A. Frictional
B. Structural
IV. Central question: What causes unemployment fluctuations?
V. Market-Clearing vs Non-Market Clearing Theories
A. In “market-clearing” theories, real GDP is always equal to Y*
1. All frictional and structural unemployment (no cyclical unemployment)
a) For them, the market clears
b) The flexibility of real wages results in a clearing of the labour market
2. The unemployment is because people are searching
3. Unemployment rate is always equal to the NAIRU
B. A second set of theories emphasizes the
distinction between unemployment that
exists when real GDP is equal to Y* and
unemployment that is due to deviations of
real GDP from Y*
1. Cyclical unemployment is
unemployment not due to frictional or
structural factors; it is due to deviations
of GDP from Y*
C. Wages are sticky - difficult for the firms to lower
wages enough to clear the market
Document Summary
Lecture 21: chapter 30 continued, chapter 31: government debt and deficits. I: key market, fundamental in understanding how the economy works. In the long run, increases in the labour force are more or less matched by increases in employment. In the short run, the unemployment rate fluctuates considerably because changes in the labour force are not exactly matched by change in employment. In the graph(s) below: more and more gdp, more and more workers, employment has evolved with the labour force, on the left, on the right, fluctuations of unemployment are linked with the fluctuations of gdp. Measurement problems they do not include: discouraged workers hope, underemployed workers, the official data understates the full effects of recessions on unemployment because, part of n (but not because the person wants to be, because they lost. Viii: part-time job, not part of u, but the person is not satisfied - would like to work.
