Reading 22
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Reading 22 - The Business Cycle Saturday, August 30, 2008 11:18 PM
Business Cycle has several phases • Expansion • Peak • Recession • Trough Working Age Population - population that is available to work • Labor Force - Working or looking for work • Employed • Unemployed • Outside Labor Force Three Major labor Market Indicators Unemployment Rate - Unemployed Population as % of Labor Force size • Most sensitive to business cycle Labor Force Participation Rate - Labor Force as % of Working age population Employment to Population Ratio - Employed as % of Working Age population Aggregate Hours - measures the total hours spent(full time and PT) to produce real GDP During economic expansions - increases Real wage rate measures the amount of good and services that an hour's work can purchase. • Employer-paid benefits are a component of total labor compensation which is used to measure real wage rates. Three categories of Unemployment • Frictional - result of normal labor turnover • Workers leave or enter workforce • Jobs created or destroyed • Structural - Immigration, tech changes which make some jobs obsolete. • Cyclical - normal business cycle contractions • Natural Rate of Unemployment = Frictional + Structural • Full employment occurs when there is no cyclical unemployment • As economy enters a recession, cyclical unemployment rises and unemployment > natural unemployment. Economy is operating below the full employment level. And real GDP is below potential GDP. • The level of unemployment accompanying the maximum sustainable longterm rate of output is termed the "natural" rate. Inflation Rate is annualized change in CPI CPI is believed to be upwardly biased due to four causes
i. ii.
New good bias - new good is added to CPI basket and is more expensive than the item it replaced Quality change bias -
Business Cycle has several phases • Expansion • Peak • Recession • Trough Working Age Population - population that is available to work • Labor Force - Working or looking for work • Employed • Unemployed • Outside Labor Force Three Major labor Market Indicators Unemployment Rate - Unemployed Population as % of Labor Force size • Most sensitive to business cycle Labor Force Participation Rate - Labor Force as % of Working age population Employment to Population Ratio - Employed as % of Working Age population Aggregate Hours - measures the total hours spent(full time and PT) to produce real GDP During economic expansions - increases Real wage rate measures the amount of good and services that an hour's work can purchase. • Employer-paid benefits are a component of total labor compensation which is used to measure real wage rates. Three categories of Unemployment • Frictional - result of normal labor turnover • Workers leave or enter workforce • Jobs created or destroyed • Structural - Immigration, tech changes which make some jobs obsolete. • Cyclical - normal business cycle contractions • Natural Rate of Unemployment = Frictional + Structural • Full employment occurs when there is no cyclical unemployment • As economy enters a recession, cyclical unemployment rises and unemployment > natural unemployment. Economy is operating below the full employment level. And real GDP is below potential GDP. • The level of unemployment accompanying the maximum sustainable longterm rate of output is termed the "natural" rate. Inflation Rate is annualized change in CPI CPI is believed to be upwardly biased due to four causes
i. ii.
New good bias - new good is added to CPI basket and is more expensive than the item it replaced Quality change bias -
