ECO 155 750 LECTURE FOURTEEN 1
SO WHAT WE WANT TO DO IS CONTINUE THE DISCUSSION WE HAD
ALREADY STARTED. IF YOU REMEMBER, WE'RE DISCUSSING THREE
IMPORTANT ECONOMIC CONCEPTS. THESE ARE CONCEPTS THAT WE'LL
COME BACK TO TIME AND TIME AGAIN SO WE WANT TO BE SURE AND
UNDERSTAND THEM VERY WELL.
THE FIRST ONE WAS THE CONSUMER PRICE INDEX. AND IF YOU
REMEMBER, THAT IS AN INDEX OF THE COSTS OF PURCHASING CONSUMER
GOODS. THERE'S A MARKET BASKET THAT GETS PRICED, A MARKET BASKET
OF CONSUMER GOODS, AND THAT'S PRICED EACH MONTH AND COMPARED
TO ITS LEVEL IN A BASE YEAR, A BASE PERIOD. AND SO IF WE SEE THE
CONSUMER PRICE INDEX STANDING OUT -- LET'S SAY ONE HUNDRED AND
SIXTY, JUST TO PICK A NUMBER -- WHAT THAT MEANS IS THAT THE PRICE
LEVEL IS ONE POINT SIX TIMES THE BASE YEAR LEVEL. IF THE CONSUMER
PRICE INDEX WAS TWO HUNDRED AND TWENTY, THAT WOULD BE TWO POINT
TWO TIMES THE PRICE LEVEL IN THE BASE YEAR. SO ANYWAY, THAT WAS
OUR FIRST CONCEPT.
THE SECOND WHICH WE HAD BEEN ALREADY -- WE STARTED TALKING
ABOUT AND WILL CONTINUE TODAY IS THE UNEMPLOYMENT RATE. AND WE
HAD ALREADY BEGUN TALKING NOT DIRECTLY ABOUT THE UNEMPLOYMENT
RATE, BUT ABOUT SOME RELATED CONCEPTS. IF YOU REMEMBER, WE HAD
THE ENTIRE -- HOW'D WE SAY THIS -- CIVILIAN NONINSTITUTIONAL
POPULATION OVER SIXTEEN YEARS OLD. TODAY I'LL JUST CALL THAT ECO 155 750 LECTURE FOURTEEN 2
POPULATION. BUT IT IS THE CIVILIAN POPULATION; NOT PEOPLE IN THE
MILITARY, FOR EXAMPLE. IT'S THE NONINSTITUTIONAL POPULATION; NOT
PEOPLE IN JAIL, FOR EXAMPLE. AND IT'S THE SIXTEEN AND OVER
POPULATION. THE IDEA IS THAT YOU NEED TO BE SIXTEEN OR OVER TO BE
REALLY ELIGIBLE TO WORK. AND THAT DOESN'T MEAN THAT PEOPLE HAVE
NEVER WORKED THAT WERE UNDER SIXTEEN, BUT NOWADAYS THAT'S SORT
OF A THRESHOLD WE WOULD SAY TO ENTER THE LABOR FORCE.
OUT OF THIS POPULATION OF PEOPLE -- AND WE SAID LAST TIME, I
BELIEVE, TWO HUNDRED AND TEN MILLION PEOPLE, MORE OR LESS, IN THIS
CIVILIAN NONINSTITUTIONAL ADULT POPULATION. OUT OF THE TWO
HUNDRED AND TEN MILLION PEOPLE, WHAT WE HAVE IS SOME PEOPLE WHO
ARE IN THE CIVILIAN LABOR FORCE AND OTHER PEOPLE WHO ARE JUST NOT
IN THE LABOR FORCE. AND I MAY -- OR I BETTER LOOK AT MY NUMBERS
HERE. MY NUMBERS TELL ME THAT THIS IS A HUNDRED AND FORTY MILLION
PEOPLE THAT'S IN THE CIVILIAN LABOR FORCE. AND, OF COURSE, WE'RE
TALKING ROUND NUMBERS AS OPPOSED TO THE EXACT NUMBER DOWN THE
SEVERAL DECIMAL POINTS.
NOT IN THE LABOR FORCE? LOOK, EVERYBODY THAT'S AN ADULT IS
EITHER IN THE LABOR FORCE OR THEY'RE NOT IN THE LABOR FORCE,
OBVIOUSLY. AND SO IF WE HAVE A HUNDRED AND FORTY MILLION OUT OF
THE TWO TEN THAT ARE IN THE LABOR FORCE, WE HAVE ANOTHER SEVENTY
MILLION THAT ARE NOT IN THE LABOR FORCE. OUT OF EVERYBODY WHO'S IN
THE LABOR FORCE, THAT HUNDRED AND FORTY MILLION, WHAT WE HAVE IS ECO 155 750 LECTURE FOURTEEN 3
PEOPLE WHO ARE EMPLOYED AND PEOPLE WHO ARE UNEMPLOYED. HOW
MANY DO YOU THINK WE HAVE OF THOSE? THE NUMBER OF PEOPLE WHO
ARE EMPLOYED IS ABOUT A HUNDRED AND THIRTY-THREE MILLION AND THE
NUMBER OF PEOPLE WHO ARE UNEMPLOYED, ABOUT SEVEN MILLION. SO WE
START WITH THIS POPULATION AND YOU CAN SEE THAT -- AND WHAT WOULD
IT BE, ABOUT THREE PERCENT OF THAT POPULATION, OF THE TOTAL
POPULATION IS UNEMPLOYED, THE SEVEN MILLION DIVIDED BY TWO TEN.
OKAY.
THE UNEMPLOYMENT RATE -- WELL, LET'S WRITE DOWN A FORMULA
FOR THAT. UNEMPLOYMENT RATE EQUALS THE NUMBER OF PEOPLE
UNEMPLOYED DIVIDED BY THE NUMBER OF PEOPLE IN THE CIVILIAN LABOR
FORCE. WELL, HOW MANY PEOPLE ARE IN THE CIVILIAN LABOR FORCE?
HOW MANY PEOPLE ARE UNEMPLOYED? WE'VE GOT SEVEN MILLION PEOPLE
UNEMPLOYED AND A HUNDRED AND FORTY MILLION PEOPLE IN THE CIVILIAN
LABOR FORCE. OH, BY THE WAY, SOMETIMES YOU MULTIPLY BY A HUNDRED
TO GET RID OF THE DECIMAL SIGN.
BUT ANYWAY, THIS IS -- MAYBE I OUGHT TO LOOK. THIS IS ABOUT FIVE
PERCENT. THAT'S A LITTLE HIGH. I'VE ROUNDED OFF. THE ACTUAL
UNEMPLOYMENT RATE IS A LITTLE BIT BELOW FIVE PERCENT, BUT THAT'LL
GIVE YOU A GENERAL IDEA. IF YOU HEAR SOMEBODY SAY THAT THE
UNEMPLOYMENT RATE'S FIVE PERCENT, THEN WHAT THEY'RE SAYING IS
THAT THE NUMBER OF PEOPLE UNEMPLOYED -- THOSE PEOPLE WHO ARE
UNEMPLOYED, THEY ARE IN THE LABOR FORCE -- LET ME GO BACK TO HERE. ECO 155 750 LECTURE FOURTEEN 4
THE CIVILIAN LABOR FORCE INCLUDES PEOPLE WHO ARE UNEMPLOYED.
THESE PEOPLE WANT TO WORK, THEY'RE LOOKING FOR WORK. IF YOU JUST
WANT TO WORK BUT YOU'RE NOT LOOKING, YOU'RE COUNTED NOT IN THE
LABOR FORCE. YOU HAVE TO ACTUALLY BE OUT THERE. TO BE COUNTED IN
THE CIVILIAN LABOR FORCE, YOU EITHER HAVE TO HAVE A JOB OR YOU HAVE
TO BE LOOKING FOR A JOB.
AND SO ANYWAY, THIS NUMBER OF PEOPLE, THE NUMBER OF PEOPLE
UNEMPLOYED, DIVIDED BY THIS NUMBER OF PEOPLE, THE CIVILIAN LABOR
FORCE, THAT'S OUR UNEMPLOYMENT RATE. OKAY. BY THE WAY, SINCE I'VE
GOT THAT, I THOUGHT I WOULD GO BACK AND MENTION SOMETHING THAT
WE TALKED ABOUT BEFORE.
THIS RATIO, THE RATIO OF THE CIVILIAN LABOR FORCE TO THE
POPULATION -- AND THAT'S AGAIN THE CIVILIAN NONINSTITUTIONAL ADULT
POPULATION -- I CALLED THAT THE LABOR FORCE PARTICIPATION RATE LAST
TIME. LABOR FORCE PARTICIPATION RATE. IT'S OUT OF EVERYBODY, WHAT
PERCENT OF 'EM WANT JOBS; HAVE JOBS, WANT JOBS. AND IF YOU'LL
REMEMBER, I THINK THAT THIS WAS -- OH, I'VE ALREADY GOT THE NUMBERS
ON IT. ONE FORTY OVER TWO TEN EQUALS ABOUT SIXTY-SEVEN PERCENT
OF EVERYBODY IN THE UNITED STATES, SIXTEEN OR OVER, ABOUT TWO-
THIRDS OF 'EM EITHER HAVE JOBS OR ARE LOOKING FOR JOBS. AND THAT IS
A VERY HIGH NUMBER.
I THINK WHEN I WAS A KID THIS NUMBER WAS CLOSER TO FIFTY, FIFTY-
FIVE PERCENT. AND WHAT'S HAPPENED OVER THE YEARS TO DRIVE THIS UP, ECO 155 750 LECTURE FOURTEEN 5
I CAN MENTION A COUPLE OF THINGS THAT ARE SORT OF OBVIOUS. ONE,
THE WOMEN'S MOVEMENT THAT'S GOTTEN FEMALES OUT OF THE
HOUSEHOLD AND INTO THE LABOR FORCE. THAT'S DRIVEN MILLIONS OF
ADDITIONAL PEOPLE INTO THE LABOR FORCE AND PUSHED THIS NUMBER UP.
A SECOND THING THAT'S BEEN GOING ON IS THE BABY BOOM
GENERATION WHICH -- WHEN I WAS A KID THERE WERE A NUMBER OF BABY
BOOMERS, INCLUDING MYSELF, WHO WERE NOT IN THE LABOR FORCE -- TOO
YOUNG AND SO FORTH. AND SO WHAT'S HAPPENED IS THE BABY BOOM
GENERATION HAS AGED AND EVERYBODY IN THAT HUGE POPULATION -- I
THINK THERE'S SEVENTY-EIGHT MILLION PEOPLE IN THAT GENERATION, THE
BABY BOOM GENERATION. BUT OUT OF THAT SEVENTY-EIGHT MILLION
PEOPLE, NOW THEY'RE ALL OLD ENOUGH TO GET JOBS AND A VERY HIGH
PERCENT OF 'EM ARE IN THE LABOR FORCE.
AND SO THOSE TWO THINGS HAVE REALLY DRIVEN THIS NUMBER UP.
AS I SAY, I THINK IT WAS ON THE ORDER OF FIFTY-FIVE PERCENT,
SOMETHING LIKE THAT, WHEN I WAS A KID. NOWADAYS IT'S CONSIDERABLY
HIGHER. AND YOU MIGHT GO, "YEAH, FIFTY-FIVE PERCENT, SIXTY-SEVEN
PERCENT, NO BIG DEAL." BUT, YOU KNOW, WHEN YOU'RE TALKING ABOUT
ANOTHER TEN PERCENT -- LET'S JUST USE THAT NUMBER -- TEN PERCENT OF
TWO HUNDRED AND TEN MILLION, WE'RE TALKING AN EXTRA TWENTY-ONE
MILLION PEOPLE LOOKING FOR JOBS. AND AN EXTRA TWENTY-ONE MILLION
PEOPLE LOOKING FOR JOBS, THAT'S A HECK OF A LOT OF PEOPLE. AND
WE'VE FOUND JOBS FOR MOST OF 'EM. ECO 155 750 LECTURE FOURTEEN 6
AND I'LL REMIND YOU THAT IN, LET'S SAY, EUROPE, FOR EXAMPLE, THE
TOTAL NUMBER OF PEOPLE WORKING TODAY IS REALLY NO HIGHER THAN IT
WAS TEN OR FIFTEEN YEARS AGO. EUROPE HAS A VERY DIFFICULT TIME
GENERATING JOB GROWTH. WHERE HERE IN THE UNITED STATES, AS I SAY,
WE'VE GOT ANOTHER TWENTY, TWENTY-FIVE MILLION PEOPLE THAT HAVE
ENTERED THE LABOR MARKET IN THE LAST COUPLE OF DECADES AND THOSE
PEOPLE HAVE FOUND JOBS, FOUND WORK. OUR ECONOMY IS AN ENGINE OF
GROWTH. IT'S NOT ONLY CREATING A HIGHER LEVEL OF PRODUCTION AND
INCOME, BUT ALSO MORE JOBS FOR PEOPLE.
SO ANYWAY, HERE'S SOME OF THE RELATIONSHIPS, THEN. IT'S A
LITTLE BIT DIFFICULT TO KEEP THESE IN MIND BUT NOT TOO TOUGH ONCE
YOU KIND OF THINK YOUR WAY THROUGH 'EM. THESE PEOPLE HERE ARE
UNEMPLOYED BUT THEY ARE STILL CONSIDERED TO BE IN THE LABOR
FORCE. BUT THEY'RE NOT WORKING AND THESE PEOPLE AREN'T WORKING,
AND MAYBE THERE'S A TENDENCY TO KIND OF GROUP THOSE UP TOGETHER
AND LET ON LIKE THEY'RE THE SAME BUT THEY'RE NOT. THESE PEOPLE DO
NOT WANT JOBS, THE PEOPLE WHO ARE NOT IN THE LABOR FORCE. THESE
PEOPLE DO WANT JOBS. THEY JUST HAPPEN NOT TO HAVE A JOB RIGHT
NOW. BUT THEY HAVE TO LOOK EACH MONTH, AT LEAST BE LOOKING FOR
JOBS, INQUIRING ABOUT JOBS, IN ORDER TO BE COUNTED IN THE LABOR
FORCE.
WHAT HAPPENS IS, THE LABOR DEPARTMENT WILL COME TO HOMES --
THEY SURVEY HOMES EVERY MONTH. I THINK BETWEEN FIFTY AND SIXTY ECO 155 750 LECTURE FOURTEEN 7
THOUSAND HOMES GET SURVEYED EVERY MONTH. AND SO THE SURVEYOR
COMES TO THE DOOR AND SAYS BASICALLY, "HOW MANY PEOPLE ARE IN
THIS HOUSEHOLD THAT ARE AGED SIXTEEN AND ABOVE? HOW MANY OF
THOSE PEOPLE HAVE JOBS AND WERE EMPLOYED AT LEAST ONE HOUR
DURING THE MONTH? HOW MANY PEOPLE WERE NOT EMPLOYED BUT WERE
LOOKING FOR JOBS, ACTIVELY LOOKING FOR JOBS?"
AND SO THESE NUMBERS ARE ALL BEING WRITTEN DOWN. HOW MANY
PEOPLE, THEN, ARE IN THE HOUSEHOLD THAT ARE SIXTEEN AND ABOVE BUT
EITHER DON'T HAVE A JOB OR NOT LOOKING FOR A JOB, THOSE PEOPLE ARE
NOT IN THE LABOR FORCE. THESE KINDS OF SURVEYS GET DONE EVERY
MONTH -- AS I SAY, BETWEEN FIFTY AND SIXTY THOUSAND HOUSEHOLDS.
WHAT DO THEY CALL THIS? CURRENT POPULATION SURVEY. YOU
DON'T REALLY NEED TO KNOW THAT. BUT IF THERE'S ANYBODY THAT WANTS
TO KNOW, I DON'T MIND TELLING YOU. AND THIS CURRENT POPULATION
SURVEY IS CONDUCTED BY THE SAME PEOPLE THAT DO THE CENSUS. THIS
IS THE CENSUS BUREAU WHICH IS PART OF THE COMMERCE DEPARTMENT,
WHICH IS ITSELF ONE OF THE GOVERNMENTAL -- ONE OF THE CABINET LEVEL
DEPARTMENTS IN THE COMMERCE DEPARTMENT. ANYWAY, QUESTIONS
ABOUT ANY OF THIS STUFF?
WHY IS THERE UNEMPLOYMENT? ECONOMISTS SAY THAT THERE'S
UNEMPLOYMENT FOR THREE MAIN REASONS. THE FIRST OF THOSE
REASONS -- AND WE GIVE NAMES TO 'EM, FIRST OF ALL. THE FIRST TYPE OF
UNEMPLOYMENT IS FRICTIONAL UNEMPLOYMENT. WITH FRICTIONAL ECO 155 750 LECTURE FOURTEEN 8
UNEMPLOYMENT, WE JUST HAVE THE KIND OF UNEMPLOYMENT THAT
OCCURS WHEN PEOPLE ARE BETWEEN JOBS. AND THEY'RE JUST BETWEEN
JOBS -- AND I CAN GIVE YOU A COUPLE OF GOOD REASONS. ONE IS MAYBE
THEY WERE FIRED. THE EMPLOYER JUST SAID, "THIS IS NOT A GOOD MATCH,
YOU KNOW. I DON'T LIKE YOUR FACE OR I DON'T LIKE YOUR WORK OR I DON'T
LIKE WHAT TIME YOU SHOW UP IN THE MORNING." BUT FOR ONE REASON OR
ANOTHER, MAYBE THE EMPLOYEE GETS FIRED.
AND ANOTHER THING MIGHT BE -- THE EMPLOYEE MIGHT JUST SAY, "I
DON'T LIKE WORKING HERE. THERE ARE BETTER PLACES TO WORK." AND SO
THE WORKER MIGHT QUIT THE JOB OR THE EMPLOYER MIGHT QUIT THE
WORKER AND SAY, YOU KNOW, "YOU'RE FIRED" OR "DON'T COME BACK," OR
WHATEVER. AND THEN IN THE TIME THAT IT TAKES THAT PERSON TO GO OUT
AND GET ANOTHER JOB, THAT PERSON'S FRICTIONALLY UNEMPLOYED. IT'S
FRICTIONAL UNEMPLOYMENT. OKAY.
AND SO FOR -- JUST TO TAKE AN EXAMPLE. SUPPOSE THAT I GOT
FIRED AND THEN I WENT LOOKING FOR ANOTHER JOB AND GOT A JOB
TEACHING AT DRURY. AND MAYBE I GET FIRED IN, OH, MARCH AND THEN I
FIND A JOB AT DRURY MAYBE IN MAY, IS WHEN THEY TELL ME, "YEAH, WE'RE
LOOKING FOR SOMEBODY. WE'LL HIRE YOU." AND THEN I DON'T ACTUALLY
GO TO WORK FOR THEM UNTIL, LET'S SAY, LATE AUGUST OR EARLY
SEPTEMBER WHEN THE SCHOOL YEAR STARTS. SO THEN I WOULD BE
UNEMPLOYED FOR A FEW MONTHS IN THERE AND THAT WOULD BE
CONSIDERED FRICTIONAL UNEMPLOYMENT. I'VE GOT THE SKILLS TO GET ECO 155 750 LECTURE FOURTEEN 9
THE NEW JOB; I'M GONNA MOVE TO THAT NEW JOB; IT'S JUST THAT IT TAKES
ME TIME TO DO THAT. AND SO THAT'S FRICTIONAL UNEMPLOYMENT.
AND HERE'S WHAT WE SAY ABOUT FRICTIONAL UNEMPLOYMENT.
DON'T COUNT ON GETTING RID OF THAT. THIS IS NOT REALLY EVEN A MAJOR
PROBLEM. IT'S REALLY KIND OF A GOOD THING, TO TELL YOU THE TRUTH. I
MEAN, IF YOU CAN BELIEVE THAT ABOUT UNEMPLOYMENT. IT'S A GOOD
THING TO HAVE FRICTIONAL UNEMPLOYMENT IN THIS SENSE. LOOK, IF YOU
DON'T HAVE A GOOD MATCH BETWEEN THE WORKER AND THE JOB, WE
DON'T WANT THE WORKER DOING THAT JOB. IF THAT WORKER'S NOT UP TO
PERFORMING, WHERE THAT THE EMPLOYER THINKS "GET OUTTA HERE,"
THEN WE DON'T WANT THAT WORKER THERE. WE THINK IT'S A GOOD THING
FOR THAT WORKER TO LEAVE THAT JOB WHERE HE'S NOT GETTING THE JOB
DONE AND GO TO A JOB WHERE HE CAN DO IT. OR IF THE WORKER SAYS, "I
HATE THESE -- YOU KNOW, MY CO-WORKERS, MY BOSS, THE TIME OF THE
DAY I HAVE TO WORK, THE LOCATION. I DON'T LIKE THIS." THEN WE DON'T
WANT THAT WORKER TO BE THERE. WE WANT THAT WORKER TO MOVE TO
ANOTHER JOB WHERE HE OR SHE PREFERS THE WORKING CONDITIONS.
SO ANYWAY, FRICTIONAL UNEMPLOYMENT IS KIND OF A GOOD THING.
WE WOULD RATHER THE WORLD WAS PERFECT WHERE NOBODY NEEDED TO
MOVE BETWEEN JOBS, WHERE NOBODY WAS WORTHY OF BEING FIRED, AND
EVERY WORK PLACE WAS LOVELY AND ALL THE WORKERS WANTED TO STAY
THERE. THAT WOULD BE PREFERABLE. BUT GIVEN THE REALITIES OF THE
WORLD, THEN WE LIKE TO SEE PEOPLE MOVING FROM WHERE THEIR TIME IS ECO 155 750 LECTURE FOURTEEN 10
NOT VERY VALUABLE TO WHERE IT'S MORE VALUABLE. SO THIS IS NOT A BAD
THING, NOT SOMETHING TO BE STRUGGLED AGAINST OR WHATEVER, TO BE
DEALT WITH.
STRUCTURAL UNEMPLOYMENT. STRUCTURAL UNEMPLOYMENT.
HERE'S WHAT CHANGES -- AND, BY THE WAY, LET ME JUST KIND OF JOT
THESE DOWN: SHIFT IN DEMAND, CHANGES IN PRODUCTION COSTS. I'LL
LEAVE IT AT THAT. THERE ARE THINGS THAT CAN HAPPEN IN THE ECONOMY.
FOR EXAMPLE, SHIFTS IN DEMAND.
LET'S GO BACK TO THE 1970S. HERE'S WHAT HAPPENED IN THE 1970S.
THE PRICE OF OIL WENT WAY UP AND THE PRICE OF GASOLINE WENT WAY
UP. EVERYBODY'S FAMILIAR WITH THAT. SO WHAT HAPPENED? AND THE
ANSWER IS, WHEN THE PRICE OF GASOLINE AND OIL WENT UP, THEN PEOPLE
STARTED DRIVING SMALLER CARS. THAT'S PRETTY SIMPLE. THEY STARTED
DOING OTHER THINGS AS WELL, BUT DRIVING SMALLER CARS. WHY? TO GET
BETTER GAS MILEAGE.
WHEN GASOLINE PRICES -- WHAT, THEY WENT FROM, OH, THIRTY
CENTS A GALLON TO OVER A DOLLAR A GALLON WITHIN JUST A FEW YEARS,
SO QUADRUPLED THE PRICE OF GASOLINE. WHAT HAPPENED WAS, PEOPLE
STARTED SAYING, "I WANT A SMALLER CAR." NOW, HERE'S THE THING: THE
AMERICAN AUTO INDUSTRY, FORD AND GENERAL MOTORS AND CHRYSLER
AND, BACK THEN, AMERICAN MOTORS. IT'S NO LONGER CHRYSLER NOW, IS
IT? NO LONGER AN AMERICAN COMPANY. NOW A GERMAN COMPANY. BUT
ANYWAY, BACK IN THE 1970S WHEN PEOPLE SAID, "I WANT A SMALLER CAR," ECO 155 750 LECTURE FOURTEEN 11
THEY TURNED TO THE AMERICAN AUTO INDUSTRY AND THE AMERICAN AUTO
INDUSTRY SAYS, "WELL, WE DON'T PRODUCE VERY MANY SMALL CARS AND
THE ONES WE PRODUCE ARE NOT VERY GOOD." THEY DIDN'T ACTUALLY SAY
THAT, BUT THE CUSTOMERS KNEW SO THEY DIDN'T HAVE TO.
SO WHAT THE CUSTOMERS DID IS THEY SAID, "WELL, LET'S BUY
FOREIGN CARS." AND SO WHAT HAPPENED IS, AMERICANS STARTED BUYING
A LARGE NUMBER OF FOREIGN SMALL CARS. THIS WOULD BE A SHIFT IN THE
STRUCTURE OF THE ECONOMY. DEMAND SHIFTED AND IT WAS ORIGINALLY
CAUSED BY A CHANGE IN THE COST OF ENERGY. BUT WHAT HAPPENED WAS
THERE WAS A SHIFT IN DEMAND. AND THERE WASN'T A NEW JOB FOR
PEOPLE TO GO TO WITH THEIR SKILLS. THERE WERE PEOPLE IN THE UNITED
STATES USED TO PRODUCING, LET'S SAY, LINCOLN CONTINENTALS BUT THE
DEMAND FOR LINCOLN CONTINENTALS WAS DOWN. THESE PEOPLE COULD
PRODUCE SMALLER CARS BUT THE SMALL CAR COMPANY IS OVERSEAS.
AND SO PEOPLE WITH SKILLS LOOKED AROUND, "WHERE AM I GONNA
GO TO WORK NEXT," AND THE ANSWER IS NO PLACE BECAUSE WE DON'T
NEED PEOPLE WHO CAN PRODUCE BIG CARS. AND IF YOU WANT TO
PRODUCE A SMALL CAR, YOU HAVE TO MOVE TO JAPAN, LET'S SAY. AND
PEOPLE DIDN'T DO THAT SO THEY JUST COULDN'T FIND A PLACE TO GO TO
WORK.
LET ME BACK UP TO FRICTIONAL UNEMPLOYMENT. IN THIS FIRST CASE,
PEOPLE HAD THE SKILLS. YOU'RE OUT OF WORK BUT YOU'VE GOT THE SKILL
TO GO GET THE OTHER JOB. I GAVE THE EXAMPLE OF ME BEING FIRED OR ECO 155 750 LECTURE FOURTEEN 12
LEAVING THIS UNIVERSITY AND GOING OVER TO DRURY AND DOING
BASICALLY THE SAME THING I'M DOING HERE. PUTTING PEOPLE TO SLEEP
AND GRADING THEIR TESTS. OKAY. SO ANYWAY -- WELL, YOU KNOW, THAT'S
WHAT I DO. I'VE GOT TO RECOGNIZE THAT.
FRICTIONAL UNEMPLOYMENT, WE HAVE THE SKILLS TO CHANGE JOBS.
BUT WITH STRUCTURAL UNEMPLOYMENT, YOU'RE THROWN OUT OF WORK BY
MAYBE A SHIFT IN DEMAND OR A SHIFT IN PRODUCTION COSTS. YOU'RE
THROWN OUT OF WORK AND YOU WANT TO GO AND DO THAT SAME JOB
SOMEPLACE ELSE, BUT THERE'S NO JOB FOR YOU, NO OPENING. THIS IS
STRUCTURAL UNEMPLOYMENT. THE STRUCTURE OF THE ECONOMY HAS
CHANGED AND IT'S CHANGED IN SUCH A WAY THAT YOU'RE OUT LOOKING
FOR WORK AND THERE'S NOBODY WANTS TO HIRE YOU. STRUCTURAL
UNEMPLOYMENT. DON'T HAVE THE RIGHT SKILLS.
NOW, HERE'S THE THING, IS WE REALLY KIND OF HATE THIS, YOU
KNOW. WE DON'T LIKE THE SITUATIONS WHERE PEOPLE DON'T HAVE THE
RIGHT SKILLS. ONE OF THE THINGS THAT RESULTS FROM THIS STRUCTURAL
UNEMPLOYMENT IS PEOPLE GO BACK TO SCHOOL, GO BACK TO SCHOOL.
NOW, EVERYBODY DOESN'T GO BACK TO SCHOOL. BUT I'M SAYING THAT'S
ONE WAY OF DEALING WITH THIS, IS RETRAINING. THERE'VE BEEN A LOT OF
LAYOFFS IN THE UNITED STATES IN RECENT YEARS AND THAT'S THE TREND,
GO BACK TO SCHOOL, GET RETRAINED FOR A DIFFERENT KIND OF JOB.
BUT, YOU KNOW, THIS TAKES TIME. IF YOU'RE GONNA BE TRAINING
FOR A DIFFERENT TYPE OF JOB, THERE'S NO JOB FOR YOU TO DO THAT'S ECO 155 750 LECTURE FOURTEEN 13
SORT OF LIKE WHAT YOU'RE FAMILIAR WITH DOING, AND YOU HAVE TO GO
BACK TO SCHOOL, HOW LONG ARE YOU GONNA BE UNEMPLOYED? A MONTH
OR TWO? I DON'T THINK SO. YOU CAN BE UNEMPLOYED MANY MONTHS,
MAYBE A YEAR OR TWO -- AND POTENTIALLY LONGER.
SO THE POINT IS, IS THAT THIS STRUCTURAL UNEMPLOYMENT, IT'S A
LITTLE BIT MORE OF A SEVERE PROBLEM AND YET WE DON'T WANT TO
PREVENT THAT FROM HAPPENING. WE WANT TO BE ABLE -- WE CONSUMERS,
WE WANT TO BE ABLE TO JUST SAY, "I DON'T WANT A BIG CAR. I WANT TO
BUY A SMALL CAR. AND IF THAT CREATES UNEMPLOYMENT, SO BE IT. I DON'T
WANT TO BE WORRIED ABOUT THAT. I WANT TO DRIVE THE CAR I WANT TO
DRIVE."
WE NEED TO HAVE AN ECONOMY THAT CAN ADJUST TO SHIFTS IN
CONSUMER DEMAND AND CHANGES IN PRODUCTION COSTS. LET'S SAY
WAGES GO WAY UP AND -- WELL, LET ME NOT GO DOWN THAT PATH AND
GIVE MORE EXAMPLES. BUT THE POINT IS, WE WANT AN ECONOMY THAT'S
FLEXIBLE. WHERE THAT IF CHANGES IN SORT OF UNDERLYING ECONOMIC
CONDITIONS OCCUR, THEN WE WANT TO SAY, "WELL, I'M SORRY BUT THERE'S
NO MORE WORK FOR YOU. YOU HAVE TO LEAVE."
YOU KNOW WHAT THEY DO IN SOME COUNTRIES, PARTICULARLY
OVERSEAS IN GERMANY, DIFFERENT PLACES IN EUROPE? WHAT THEY HAVE
IS A LOT OF RULES AND REGULATIONS THAT MAKE IT DIFFICULT FOR THE
EMPLOYER TO LAY OFF THE WORKER. AND SO IF THERE'S A SHIFT IN
DEMAND -- I GAVE THE EXAMPLE NO MORE DEMAND FOR BIG CARS. THE ECO 155 750 LECTURE FOURTEEN 14
DEMAND FOR SMALL CARS IS, YOU KNOW, CAUSING US TO IMPORT FOREIGN
CARS. NO MORE PRODUCTION OF BIG CARS. WHAT HAPPENS? WELL, AND
I'M SAYING IN THE UNITED STATES WE SAY, "TOO BAD YOU'RE OUT OF WORK."
BUT IN SEVERAL EUROPEAN COUNTRIES AND ELSEWHERE WHAT THEY
SAY IS, "WELL, NO, WE DON'T LAY ANYBODY OFF." MAYBE THERE'S A RULE, A
REGULATION, THAT PREVENTS THAT. THAT'S BEEN THE RULE OF THE LAND
PRETTY MUCH IN JAPAN OVER THE YEARS, HAS BEEN LIFETIME
EMPLOYMENT. "YOU GO TO WORK FOR US, WE KEEP YOU ON FOREVER."
SO WHAT HAPPENS IF THE DEMAND GOES AWAY FOR THE PRODUCT?
AND THE ANSWER IS, THE COMPANY JUST FINDS SOMETHING FOR THAT
WORKER TO DO AND KEEPS ON PAYING HIM. AND AFTER AWHILE, YOU
KNOW, YOU CAN ONLY SUSTAIN SO MUCH OF THAT AND THE COMPANY IS
OUT OF BUSINESS. IN EUROPE IT'S MORE A CASE RATHER THAN JUST SORT
OF COMPANIES GUARANTEE THE WORKER'S LIFETIME EMPLOYMENT; IT'S
MORE A CASE OF THE LAW GUARANTEES THAT. THE LAW IN GERMANY, FOR
EXAMPLE, THEY HAVE SOMETHING CALLED CO-DETERMINATION LAWS IN
GERMANY. AND WHAT HAPPENS IS THE WORKERS' UNIONS HAVE A
REPRESENTATIVE THAT SITS ON THE BOARD, THE GOVERNING BOARD, OF
BIG COMPANIES. AND SO THEN WHEN THE BIG COMPANY HAS A DOWNTURN
AND THEY SAY, "OH, WE NEED TO LAY OFF SOME WORKERS," THEN THE
UNION MEMBER OF THE BOARD, THEY SAY, "OH, NO. WE'RE NOT GONNA LET
YOU DO THAT. WE VETO THAT. WE VOTE AGAINST IT."
AND SO IT'S HARD FOR COMPANIES TO LAY THE WORKERS OFF. SO ECO 155 750 LECTURE FOURTEEN 15
WHAT HAPPENS? THE COMPANY JUST KEEPS PAYING THE EMPLOYEE. THE
EMPLOYEE JUST SITS THERE AND DOES VERY LITTLE WORK BECAUSE HIS
JOB HAS BEEN ABOLISHED, FOR ALL INTENTS AND PURPOSES. SO WHAT WE
HAVE IS A BIG, INEFFICIENT COMPANY PAYING EMPLOYEES THAT ARE NOT
GETTING THE WORK DONE. AND IT'S NOT THE EMPLOYEES THAT CAN'T
WORK; IT'S JUST THE SITUATION WHERE THEY HAVEN'T BEEN TOLD, "HEY,
YOUR SKILLS NO LONGER MATCH THE THINGS THAT CONSUMERS WANT TO
BUY ANYMORE."
AND SO PEOPLE SIT THERE. THEY AREN'T DOING THE WORK BUT
THEY'RE NOT GETTING RETRAINED, EITHER, SO THE ECONOMY'S NOT
IMPROVING. THESE WORKERS ARE JUST BASICALLY WORKING AT HALF OF
CAPACITY. THEY'RE NOT GETTING RETRAINED. THEY'RE NEVER GONNA
MOVE TO A JOB THAT THEY'RE BETTER SUITED FOR IF THEY'RE NOT BEING
RETRAINED, IF THEY CONTINUE TO BE PAID BY THEIR EMPLOYER.
SO WHAT I'M SAYING TO YOU IS, WE HATE UNEMPLOYMENT JUST AS
SORT OF OUR PHILOSOPHY -- DON'T LIKE UNEMPLOYMENT, LIKE IT WHEN
PEOPLE CAN GO OUT AND GET A JOB AND WORK. YES, THAT IS OUR
PHILOSOPHY. BUT IT'S ALSO OUR PHILOSOPHY TO HAVE AN ECONOMY
THAT'S FLEXIBLE, AND THAT IF CONSUMERS WANT TO BUY SOMETHING
DIFFERENT, THEY CAN BUY SOMETHING DIFFERENT. AND IF THAT MEANS
PEOPLE LOSE JOBS, SO BE IT. WE WANT THAT KIND OF AN ECONOMY, TOO.
SO WHAT I'M SAYING TO YOU IS, THIS STRUCTURAL UNEMPLOYMENT IS
CONSIDERED UNDESIRABLE BUT IT'S VERY CHALLENGING TO REDUCE THAT. ECO 155 750 LECTURE FOURTEEN 16
VERY CHALLENGING WITHOUT JUST SAYING, "WE'RE NOT GONNA LET
CONSUMER DEMAND OR PRODUCTION COSTS CONTROL THE WAY OUR
ECONOMY OPERATES."
BUT IF WE DO THAT -- I MENTIONED TO YOU AWHILE AGO -- NOT ONLY
DOES EUROPE SAY, "WE'RE GONNA PROTECT ALL THESE JOBS" -- THINK
ABOUT THE CONSEQUENCES OF THIS. CONSUMER DEMAND SHIFTS, THE
COMPANY SAYS, "WE NEED TO LAY OFF THE WORKERS BECAUSE PEOPLE
ARE NO LONGER BUYING OUR PRODUCTS," AND THEN THE GOVERNMENT
COMES ALONG AND SAYS, "YOU CAN'T LAY OFF THOSE WORKERS." THINK
WHAT THE MANAGEMENT OF THE COMPANY STARTS SAYING. NEXT TIME
DEMAND PICKS UP AND PEOPLE START BUYING MORE OF THE PRODUCT, IT'S
TIME TO HIRE SOME WORKERS. AND THE COMPANY SAYS, "NO, I'M NOT
GONNA HIRE ANY WORKERS. BECAUSE IF WE HIRE WORKERS, WE'VE GOT
'EM FOREVER. WE CAN'T GET RID OF 'EM. AND IF WE CAN'T GET RID OF 'EM" -
- AND WHY CAN'T WE? BECAUSE OF THESE CO-DETERMINATION AND OTHER
LAWS -- "IF WE CAN'T GET RID OF THESE WORKERS, LET'S DON'T HIRE 'EM IN
THE FIRST PLACE."
AND SO WHAT I'M TELLING YOU IS IS THAT GERMANY AND FRANCE AND
SOME OTHER EUROPEAN COUNTRIES, THEY ARE TRYING TO PREVENT JOB
LOSSES THROUGH THEIR LAWS, BUT THE LONGER-TERM EFFECT IS TO MAKE
EMPLOYERS JUST SAY, "I DON'T WANT TO HIRE ANYBODY BECAUSE I CAN'T
EVER GET RID OF 'EM." AND SO WE FIND A SITUATION WHERE EUROPE IS
NOT CREATING NEW JOBS. IN THE UNITED STATES, WHERE YOU CAN LAY ECO 155 750 LECTURE FOURTEEN 17
OFF YOUR WORKERS OR FIRE 'EM OR CLOSE DOWN YOUR PLANT AND MOVE -
- IN THE UNITED STATES WHERE IT'S POSSIBLE TO DO THAT, YOU WOULD
THINK, "OH, WE'RE GONNA HAVE MORE UNEMPLOYMENT." AND THE ANSWER
IS, YEAH, WE DO, BUT IT'S A SHORT-TERM KIND OF UNEMPLOYMENT. THE
WORKER GOES AND DOES SOMETHING ELSE; THE COMPANY GOES AND
HIRES WORKERS IN SOME OTHER TOWN; THE UNITED STATES CREATES
JOBS.
AND SO IT'S SORT OF A PARADOX, BUT THAT'S THE WAY IT WORKS. OR
IT MAY BE IRONIC RATHER THAN PARADOX. I'LL LET YOU DECIDE ON THAT
ONE AND I'LL GO AHEAD TO NUMBER THREE.
NUMBER THREE, CYCLICAL UNEMPLOYMENT. CYCLICAL
UNEMPLOYMENT. THIS IS REALLY THE KIND OF MACRO -- OR THE KIND OF
UNEMPLOYMENT WE ARE MOST CONCERNED WITH IN THIS COURSE. AND I
STARTED TO SAY THE WORD AND CUT MYSELF OFF THERE --
MACROECONOMIC UNEMPLOYMENT.
THESE FIRST TWO KINDS OF UNEMPLOYMENT THAT I'VE TALKED
ABOUT, FRICTIONAL AND STRUCTURAL, THOSE REALLY HAVE
MICROECONOMIC CAUSES. RIGHT? IT'S "OH, I DON'T LIKE WORKING HERE; I
QUIT MY JOB; I GO GET ANOTHER JOB. IN-BETWEEN TIMES I'M UNEMPLOYED."
OR CONSUMERS SHIFT THEIR DEMAND FROM ONE KIND OF CAR TO ANOTHER
KIND OF CAR, OR SOME -- WELL, AT ONE POINT IN THE PAST THEY STOPPED
BUYING THE, YOU KNOW, HORSES AND BUGGIES AND BUGGY WHIPS AND
SHIFTED OVER TO CARS. STRUCTURAL UNEMPLOYMENT. THESE ARE ECO 155 750 LECTURE FOURTEEN 18
REALLY MICROECONOMIC IN NATURE.
THIS ONE, THIS LAST ONE, THOUGH -- CYCLICAL UNEMPLOYMENT -- IT'S
A MACROECONOMIC TYPE OF UNEMPLOYMENT. IT AFFECTS PRETTY MUCH
EVERYONE. AND I DON'T MEAN TO SAY EVERYBODY'S UNEMPLOYED. BUT
THIS KIND OF UNEMPLOYMENT IS BASICALLY THE CONSEQUENCE OF
CHANGES IN MACROECONOMIC CONDITIONS. OKAY.
WE TALKED ABOUT THE BUSINESS CYCLE THE OTHER DAY. LET ME
JUST KIND OF REMIND YOU BY PUTTING -- HERE'S MONTHS AND YEARS, AND
THEN REAL GDP. I KNOW WE HAVEN'T REALLY TALKED ABOUT THAT VERY
MUCH. I'LL COME BACK TO IT. BUT I TALKED TO YOU ABOUT THE BUSINESS
CYCLE, HOW WE GO FROM PEAK TO TROUGH TO PEAK, AND SO FORTH, THIS
BEING A CYCLE. WELL, THIS THING RIGHT HERE, WHEN THE ECONOMY
TURNS DOWN, THAT'S THE CAUSE OF CYCLICAL UNEMPLOYMENT. IT'S WHEN
THE ECONOMY JUST SLOWS DOWN. IT'S BEEN GROWING, IT'S BEEN IN THE
EXPANSION PHASE, BUT THEN IT REACHES A PEAK, THEN BOOM, WE'RE INTO
A RECESSION. AND WHEN WE'RE INTO A RECESSION AND OUTPUT IN THE
ECONOMY IS LAGGING -- YOU KNOW, IT'S SLOWING DOWN, PEOPLE AREN'T
BUYING, SO THEN COMPANIES DON'T PRODUCE, DON'T SELL -- THAT'S THE
PERIOD WHEN WE HAVE CYCLICAL UNEMPLOYMENT. AND THAT'S THE KIND
OF UNEMPLOYMENT WE'RE GONNA BE MOST CONCERNED WITH.
IF YOU WANT TO FIGHT FRICTIONAL UNEMPLOYMENT OR YOU WANT TO
FIGHT STRUCTURAL UNEMPLOYMENT, WHAT YOU NEED IS MICROECONOMIC
POLICIES. FRICTIONAL UNEMPLOYMENT, STRUCTURAL UNEMPLOYMENT. ECO 155 750 LECTURE FOURTEEN 19
THOSE ARE REALLY MICROECONOMIC IN NATURE. THAT IS TO SAY, IT HAS TO
DO WITH THE OPERATION OF INDIVIDUAL MARKETS AND SHIFTS AND
DEMANDS IN THOSE MARKETS, AND SO FORTH. THESE ARE MICROECONOMIC
IN NATURE AND SO TO DEAL WITH THEM, YOU NEED MICROECONOMIC
POLICIES.
BUT CYCLICAL UNEMPLOYMENT, THE UNEMPLOYMENT THAT OCCURS
WHEN THE ECONOMY ENTERS A RECESSION OR A DOWNTURN, THAT'S THE
KIND OF UNEMPLOYMENT THAT WE FIGHT WITH MACROECONOMIC POLICIES.
SO ANYWAY, LET ME JUST KIND OF LEAVE IT AT THAT IN TERMS OF THIS
MICRO/MACRO. WE ARE MAINLY GONNA BE TALKING ABOUT CYCLICAL
UNEMPLOYMENT.
LET'S ADD SOME OF THESE THINGS UP AND SEE WHAT WE HAVE. IF WE
HAVE THE NUMBER OF PEOPLE FRICTIONALLY UNEMPLOYED AND WE DIVIDE
BY THE CIVILIAN LABOR FORCE, THAT GIVES US A FRICTIONAL
UNEMPLOYMENT RATE. IF WE TAKE THE NUMBER OF PEOPLE WHO ARE
STRUCTURALLY UNEMPLOYED AND DIVIDE BY THE CIVILIAN LABOR FORCE,
WHAT DO YOU THINK WE HAVE? WE HAVE THE STRUCTURAL
UNEMPLOYMENT RATE. AND THEN IF WE ADD THE NUMBER OF PEOPLE WHO
ARE CYCLICALLY UNEMPLOYED AND DIVIDE BY THE CIVILIAN LABOR FORCE,
WE HAVE THE, WHAT, THE CYCLICAL UNEMPLOYMENT RATE. SO THE TOTAL
UNEMPLOYMENT RATE IS JUST THESE THREE THINGS ADDED TOGETHER.
THE UNEMPLOYMENT RATE IS EQUAL TO THE FRICTIONAL RATE PLUS THE
STRUCTURAL UNEMPLOYMENT RATE PLUS THE CYCLICAL UNEMPLOYMENT ECO 155 750 LECTURE FOURTEEN 20
RATE.
MOST OF THE TIME PEOPLE JUST TALK ABOUT "THE" UNEMPLOYMENT
RATE SO THEY'RE TALKING ABOUT THIS ALL INCLUSIVE MEASURE. HERE'S A
TERM, THOUGH, YOU NEED TO BE FAMILIAR WITH. IF YOU ADD TOGETHER
THESE TWO TYPES OF MICROECONOMIC UNEMPLOYMENT, YOU ADD THOSE
TOGETHER, THESE TWO THINGS ADDED TOGETHER ARE CALLED THE
NATURAL RATE OF UNEMPLOYMENT. THAT'S THE NATURAL RATE OF
UNEMPLOYMENT. AND SO THE TOTAL UNEMPLOYMENT RATE IS EQUAL TO
THE NATURAL RATE PLUS THE CYCLICAL RATE. AND SO NOW WHAT WE'VE
DONE IS WE'VE DIVIDED THIS INTO TWO PARTS, THE MICROECONOMIC
UNEMPLOYMENT AND THE MACROECONOMIC UNEMPLOYMENT.
AND, BY THE WAY, WE WILL USE THAT TERM, THE NATURAL RATE OF
UNEMPLOYMENT, QUITE A BIT AS THE SEMESTER GOES ALONG. THIS
NATURAL RATE OF UNEMPLOYMENT. AND, BY THE WAY, THESE ARE ALL
CONCEPTS THAT WE CAN UNDERSTAND -- YOU KNOW, THINKING ABOUT 'EM,
TALKING ABOUT THEM AS ECONOMISTS. WE CAN UNDERSTAND THESE. BUT
PEOPLE DON'T, LIKE, WEAR A SIGN THAT SAYS, "I'M STRUCTURALLY
UNEMPLOYED" OR "I'M FRICTIONALLY UNEMPLOYED." PEOPLE THEMSELVES
OFTENTIMES DON'T KNOW. SO WHAT WE ARE TALKING ABOUT IS, WE'RE
TRYING TO UNDERSTAND THE CAUSES OF UNEMPLOYMENT AND THEREFORE
WHAT KINDS OF POLICIES ARE BEST AT DEALING WITH THEM. BUT IT'S NOT
NECESSARY FOR EACH PERSON TO KNOW WHAT KIND OF UNEMPLOYMENT
THEY'RE SUFFERING WITH. ECO 155 750 LECTURE FOURTEEN 21
THIS UNEMPLOYMENT, THE NATURAL RATE OF UNEMPLOYMENT, IS
AROUND FOUR -- WHAT, FOUR TO FIVE AND ONE-HALF PERCENT, SOMEPLACE
IN THAT RANGE, IS WHERE THE NATURAL RATE OF UNEMPLOYMENT IS FOR
THE UNITED STATES NOWADAYS. AND PROBABLY FOUR TO FIVE PERCENT.
BUT LET'S LEAVE IT AT THAT, FOUR TO FIVE AND A HALF.
HMMM. SO HERE'S WHAT I'M SAYING TO YOU. LET'S SAY SOMEBODY
TOLD YOU, "HEY, THE UNEMPLOYMENT RATE IS SEVEN PERCENT." LET'S
JUST SAY YOU HEARD THAT. HOW MUCH IS THE CYCLICAL UNEMPLOYMENT
RATE? IF THE TOTAL UNEMPLOYMENT RATE IS SEVEN PERCENT -- AND LET'S
JUST FOR ONE SECOND HERE SAY THAT THE NATURAL RATE OF
UNEMPLOYMENT IS FOUR -- SO THEN THAT WOULD MEAN THAT THE CYCLICAL
UNEMPLOYMENT RATE IS THREE PERCENT, RIGHT?
WE KNOW THIS NUMBER. THIS IS MEASURED BY THE GOVERNMENT
AND STATISTICS ARE RELEASED MONTHLY. THE NATURAL RATE OF
UNEMPLOYMENT, THAT DOESN'T CHANGE VERY MUCH. WE DON'T DO A
RECALCULATION EVERY MONTH. WE JUST SAY, "AH, YOU KNOW, IT'S ABOUT
FOUR TO FIVE AND A HALF PERCENT." LET'S SAY IT'S FOUR. SO THEN WE
KNOW THAT THE DIFFERENCE BETWEEN SEVEN AND FOUR IS THREE, AND
THAT'S THE CYCLICAL UNEMPLOYMENT RATE. IF THIS WAS FIVE AND A HALF,
THE NATURAL RATE, THEN WHAT WOULD WE HAVE HERE? ONE AND A HALF
PERCENT.
SO WE SORT OF HAVE SOME BOUNDARIES THERE THAT WE COULD
SAY, "AH, YOU KNOW, THE CYCLICAL UNEMPLOYMENT RATE IS ONE AND A ECO 155 750 LECTURE FOURTEEN 22
HALF TO THREE PERCENT." THAT'S THE PROBLEM THAT WE'RE GONNA TRY
AND DISCUSS -- OR NOT GONNA "TRY"; WE'RE GONNA DISCUSS THIS
SEMESTER -- IS THE MICROECONOMIC POLICIES THAT CAN BE BROUGHT TO
BEAR ON THAT CYCLICAL UNEMPLOYMENT RATE AND BRING IT DOWN.
WHAT'S THE UNEMPLOYMENT RATE RIGHT NOW? IT'S IN THE
NEIGHBORHOOD OF FOUR AND A HALF PERCENT. FOR THE LAST COUPLE OF
YEARS IT'S BEEN, I THINK, BETWEEN FIVE PERCENT AND A LITTLE BIT LOWER
FOR THE LAST COUPLE OF YEARS. QUESTIONS ABOUT THIS?
NOW, ONE FINAL THING: TERMINOLOGY. THAT'S NOT ONE FINAL THING;
THERE'LL BE A MILLION THINGS. BUT ONE MORE THING. SUPPOSE YOU HEAR
THIS TERM "FULL EMPLOYMENT." WE HAVE FULL EMPLOYMENT. WHAT'S
THAT MEAN? DOES THAT MEAN EVERYBODY HAS A JOB? AND THE ANSWER
IS, NO, IT DOES NOT MEAN EVERYBODY HAS A JOB. WHAT IT MEANS IS THAT
THERE'S NO CYCLICAL UNEMPLOYMENT. THAT ALL THE UNEMPLOYMENT WE
HAVE IS THAT MICROECONOMIC KIND, THE NATURAL KIND OF
UNEMPLOYMENT, THIS NATURAL RATE OF UNEMPLOYMENT. OKAY. SO IF WE
HEAR THE TERM "FULL EMPLOYMENT," WHAT THAT MEANS IS THE
UNEMPLOYMENT RATE IS EQUAL TO THE NATURAL RATE OF UNEMPLOYMENT.
IN 1946 THE CONGRESS PASSED A LAW -- LET ME KIND OF GIVE YOU A
LITTLE BIT OF HISTORY, NOT VERY MUCH. WE'LL COME BACK TO IT LATER.
BUT IN THE 1930S, OF COURSE, THE UNITED STATES HAD A DEPRESSION, THE
GREAT DEPRESSION OF THE 1930S. IT STARTED AS A RECESSION, GOT
WORSE AND WORSE DUE TO FEDERAL RESERVES AND MISTAKEN POLICIES, ECO 155 750 LECTURE FOURTEEN 23
AND FINALLY WE ENDED UP HAVING THAT RECESSION TURN INTO A VERY
BAD DOWNTURN, A BUSINESS CYCLE -- AND BY THE WAY, WHAT IS A
DEPRESSION? SOME PEOPLE -- HOW'S THAT DEFINITION GO? A RECESSION
IS WHEN MY NEIGHBOR IS OUT OF WORK; A DEPRESSION IS WHEN I'M OUT OF
WORK. SO THAT IS ONE DEFINITION.
BUT GENERALLY WHAT WE SAY IS, THE ECONOMY'S GOT THESE
NORMAL DOWNTURNS AND IF THE DOWNTURN IS REAL STEEP, THEY'LL
START TALKING ABOUT THAT BEING A DEPRESSION. "HEY, THAT'S A LOT
BIGGER DOWNTURN THAN WE'RE USED TO." SO ANYWAY, IN THE 1930S WE
HAD A DEPRESSION. THE UNEMPLOYMENT RATE IN THE 1930S GOT TO BE
ABOUT TWENTY-FIVE PERCENT. I THINK THAT WAS 1933. IT WAS TWENTY-
FIVE PERCENT. THAT'S REAL SEVERE, OF COURSE. AND SO WHAT
HAPPENED WAS, AT THE RECESSION -- OR THE DEPRESSION ENDED REALLY
WHEN THE UNITED STATES GOT INTO WORLD WAR II.
AFTER THE WAR WAS OVER -- IT ENDED, OF COURSE, IN 1945 -- NEXT
YEAR, 1946, THE CONGRESS IS LOOKING BACK AND SORT OF GOING, "BOY,
WE'VE GONE THROUGH SOME VERY DIFFICULT TIMES HERE, YOU KNOW?
NOT ONLY DID WE FIGHT THIS THREAT TO OUR SAFETY AND FREEDOM, BUT
BEFORE THAT WE WERE IN SORT OF AN ECONOMIC STRUGGLE FOR
SURVIVAL, FOR EXISTENCE. WE WERE TRYING TO OVERCOME THIS
DEPRESSION AND NOT HAVING VERY MUCH LUCK AT IT. SO WHAT WE NEED
TO DO" -- THIS IS THE CONGRESS -- "WHAT WE NEED TO DO IS, WE NEED TO
PASS A LAW THAT SHOWS OUR COMMITMENT, OUR PERMANENT, OUR ECO 155 750 LECTURE FOURTEEN 24
ONGOING COMMITMENT. WE TAKE RESPONSIBILITY FOR PREVENTING
ANYTHING LIKE THIS BEFORE -- BEFORE -- AGAIN." IT HAD ALREADY
HAPPENED BEFORE.
WHEN WE GOT INTO THAT DEPRESSION THE IDEA WAS, "WELL, YOU
KNOW, THE ECONOMY WILL KIND OF FIX ITSELF. YEAH, WE DON'T LIKE THIS
PROBLEM, BUT IT'LL GO AWAY ON ITS OWN." THAT WAS KIND OF THE
ATTITUDE. AND THEN FRANKLIN ROOSEVELT WAS ELECTED AND HE SAID,
"OH, YOU KNOW, WHAT WE GOTTA DO IS WE GOTTA BE BOLD, WE GOTTA
EXPERIMENT." SO HE CAME TO OFFICE AND HE WAS BOLD AND
EXPERIMENTED; DIDN'T FIX IT. AND SO WE WENT THROUGH A PERIOD -- AH,
DEPENDS ON WHEN YOU DATE THIS, BUT ROUGHLY 1929 TO 1941, ABOUT A
TWELVE-YEAR PERIOD WHEN THE ECONOMY WAS REALLY SORT OF DOWN.
NOT DOING VERY GOOD AT ALL.
AND SO THEN IN 1946 THE CONGRESS PASSES A FULL EMPLOYMENT
ACT, AND THAT FULL EMPLOYMENT ACT HAD SEVERAL COMPONENTS. BUT
ONE IS JUST A COMMITMENT: THE UNITED STATES GOVERNMENT WILL TAKE
RESPONSIBILITY FOR KEEPING THE UNEMPLOYMENT RATE FROM GETTING
OUT OF HAND THE WAY IT DID IN THE '30S. WE'RE GONNA FIGHT
DEPRESSIONS." OKAY.
AND THE SECOND THING THEY DID IS THEY ESTABLISHED SOMETHING
CALLED THE COUNCIL OF ECONOMIC ADVISORS, CEA COUNCIL, ECONOMIC
ADVISORS. AND WHAT THE COUNCIL OF ECONOMIC ADVISORS IS IS A THREE-
PERSON GROUP OF ECONOMISTS THAT ADVISED THE PRESIDENT. THE ECO 155 750 LECTURE FOURTEEN 25
PRESIDENT, SINCE 1946, HAS HAD HIS OWN STAFF OF ECONOMISTS AND
THEIR JOB IS TO BASICALLY STUDY THE ECONOMY ALL THE TIME AND TALK
ABOUT THE PROBLEMS WITH THE PRESIDENT, TALK ABOUT THE PROBLEMS
THAT ARE BEING ENCOUNTERED, TALK ABOUT SOME OF THE SOLUTIONS,
PROPOSALS THAT ARE COMING FORTH, AND SO FORTH. THEY'RE A SOURCE
OF ECONOMIC DATA.
EVERY YEAR THE PRESIDENT PUTS OUT SOMETHING CALLED THE
ECONOMIC REPORT OF THE PRESIDENT AND THE COUNCIL OF ECONOMIC
ADVISORS HAVE REALLY DONE MOST OF THE WORK IN PREPARING THAT
ECONOMIC REPORT OF THE PRESIDENT. IT'S GOT THE PRESIDENT'S MAIN
INITIATIVES, HIS ECONOMIC INITIATIVES IN THERE. IT'S GOT AN EXPLANATION
FOR 'EM, A COMMENTARY ON HOW THE ECONOMY'S PERFORMING, MAJOR
PROBLEMS THE ECONOMY'S FACING. THERE'S A LOT OF ECONOMIC DATA IN
THE BACK.
BUT ANYWAY. SO IN 1946, THAT'S WHEN WE SAID, "OKAY. WE'RE
GONNA GET TOUGH AGAINST THIS." AND WHAT'S HAPPENED SINCE 1946 -- IT
DOESN'T MEAN THAT WE'VE -- THAT THERE'S ANY PERMANENT SOLUTION.
WE DON'T KNOW WHAT'S PERMANENT. WE DON'T KNOW WHAT'LL HAPPEN
NEXT YEAR. BUT SINCE 1946 WE HAVE NOT HAD ANY SEVERE DOWNTURNS
IN THE ECONOMY OF THE NATURE THAT WE HAD IN THE 1930S. AND SO FOR
MORE THAN FIFTY YEARS, YOU KNOW, THAT'S WORKED OUT PRETTY WELL.
BUT WHO KNOWS, LIKE I SAY, ABOUT TOMORROW.
BACK WHEN WE HAD THIS DEPRESSION, BASICALLY WHAT HAPPENED ECO 155 750 LECTURE FOURTEEN 26
WAS PEOPLE DID NOT TALK ABOUT THE ECONOMY VERY MUCH, DID NOT
STUDY THE ECONOMY VERY MUCH, WEREN'T VERY FAMILIAR WITH IT. THERE
WERE SOME ECONOMISTS OUT THERE, BUT THEY WERE MORE INTERESTED
IN MICROECONOMICS THAN THEY WERE MACROECONOMICS. AND SO WHEN
THE DEPRESSION CAME ALONG, MOST ECONOMISTS, MOST POLICYMAKERS,
THEIR ATTITUDE WAS, "AW, THIS WILL GO AWAY. IT ALWAYS HAS IN THE
PAST." AND I'M SAYING THAT IS NOT OUR ATTITUDE NOW. I DON'T EXPECT
WE WILL HAVE ANOTHER DEPRESSION ANYTIME SOON AND THE REASON FOR
THAT IS, WE STUDY THIS STUFF A LOT MORE NOW. THERE'S A LOT OF
ECONOMISTS AROUND THE COUNTRY, REALLY AROUND THE WORLD, WHO
ARE STUDYING THESE SAME TYPE OF ISSUES THAT WERE SO CRITICAL AND
MISUNDERSTOOD BACK IN THE '30S, AND THOSE MISUNDERSTANDINGS DON'T
EXIST NOW. WE'VE GOT NEW MISUNDERSTANDINGS NOW.
AND SO IF WE DO HAVE -- HERE'S THE TYPE OF DEPRESSION WE
WOULD HAVE IF WE HAD ONE NOW. IT WOULD BE TRIGGERED FROM
SOMETHING LIKE THIS. SOME BIG BANK IN, LET'S SAY, JAPAN OR EUROPE
DOES NOT PAY SOME BIG BANK IN THE UNITED STATES WHEN IT WAS
SUPPOSED TO. AND THIS MONEY, BY THE WAY, MOVES ELECTRONICALLY
BETWEEN BANKS. IT'S NOT LIKE THEY'VE GOT SOME COURIER WITH A BAG
AND YOU FILL IT UP WITH CASH, AND THEN JUMP IN YOUR, YOU KNOW, FORD
AND DRIVE ACROSS TOWN AND HAND IT OVER. IT'S ALL DONE
ELECTRONICALLY.
SO IF WE WERE GONNA HAVE A DEPRESSION, IT MIGHT GET STARTED ECO 155 750 LECTURE FOURTEEN 27
LIKE THIS. SOME BIG BANK, LET'S SAY IN GERMANY, FAILS TO PAY FIVE
BILLION DOLLARS TO A BIG BANK IN THE UNITED STATES WHEN IT WAS
SUPPOSED TO. BUT THAT BIG BANK IN THE UNITED STATES WAS COUNTING
ON THAT FIVE BILLION DOLLARS COMING IN IN ORDER TO PAY SOMEBODY IT
OWED MONEY TO. AND IT WAS THINKING THAT MONEY WAS GONNA COME
TODAY. "OH, HERE COMES THE SIGNAL. WE'RE SENDING YOU MONEY RIGHT
NOW." SO NOW THIS BIG BANK IN NEW YORK SENDS OUT SOME MONEY, AND
MAYBE THAT BIG BANK IN GERMANY JUST DOESN'T COME THROUGH ON THE
PROMISE. SO NOW THIS BIG BANK IN NEW YORK HAS ALREADY SENT SOME
MONEY TO SOMEBODY ELSE, THINKING IT WAS GONNA BE REPLENISHED
BEFORE THE DAY WAS OUT AND IT WASN'T. SO NOW YOU'VE GOT A BIG BANK
HERE IN NEW YORK THAT DIDN'T GET THEIR FIVE BILLION DOLLARS, SENT
OUT FIVE BILLION DOLLARS SOMEPLACE, IT'S NOW FIVE BILLION DOLLARS IN
THE HOLE.
MAYBE SOMETHING HAPPENS LIKE THIS. SOMEBODY HEARS ABOUT IT.
MAYBE A COUPLE OF OTHER SMALL BANKS SAY, "HEY, HOW COME YOU'RE
NOT PAYING US ON TIME?" AND THE BIG BANKER SAYS, "WELL, I PAID THIS
FIVE BILLION DOLLARS OUT AND THAT RAN ME OUT OF CASH, AND I'M NOT
GONNA BE LIQUID UNTIL THAT BIG BANK FROM GERMANY PAYS ME. SO I
CAN'T PAY YOU." AND SO THESE BANKS START TALKING ABOUT IT AND WORD
STARTS SPREADING, AND PEOPLE START GETTING A LITTLE PANICKY, AND
THEY RUN DOWN TO THIS BIG BANK, THE ONE THAT'S NOT PAYING ITS
CREDITORS, AND THEY RUN DOWN HERE AND SAY, "HEY, I HEARD THAT ECO 155 750 LECTURE FOURTEEN 28
YOU'RE HAVING TROUBLE PAYING YOUR CREDITORS. I WANT ALL MY MONEY
OUT OF MY CHECKING ACCOUNT." AND SO THEN THE BANK STARTS SAYING,
"WELL, OKAY. HERE YOU GO." BUT, YOU KNOW, THEY'RE NOT REAL FLUSH
WITH CASH. THEY JUST PAID OUT FIVE BILLION DOLLARS THEY DIDN'T HAVE.
AND SO THEN MAYBE REAL QUICK THEY JUST RUN OUT OF CASH AND
THEN THE PANIC STARTS. NOT ONLY THE PANIC TOWARD THAT BANK BUT
IT'S LIKE, "HEY, IF THIS HAS HAPPENED TO SUCH-AND-SUCH A BIG BANK,
COULD THAT BE HAPPENING TO MY BANK? IT'S A MUCH SMALLER BANK.
MMMM, I BETTER GO DOWN TO MY BANK AND GET MY CASH." SO EVERYBODY
IN THE COUNTRY STARTS RUNNING TOWARD THEIR BANK TO GET CASH. THE
BANKS ARE HANDING OUT THE CASH AND AFTER AWHILE THE BANKS SAY,
"WE HAVE NO MORE CASH. WE HAVE TO CLOSE OUR DOORS."
AND NOW THE BUSINESSES WHO NEED TO BORROW MONEY IN ORDER
TO JUST FINANCE THEIR ONGOING BUSINESS ACTIVITIES -- PAY THE BILLS,
PAY THE EMPLOYEES -- THOSE BUSINESSES GO DOWN TO THE BANK TO
BORROW BUT THE BANK'S GOT ITS DOORS CLOSED. IT'S OUT OF BUSINESS.
AND SO BORROWING CAN'T TAKE PLACE. AND COMPANIES THAT CAN'T
BORROW, THEY CAN'T PAY THEIR EMPLOYEES SO THEY TELL THE
EMPLOYEES TO GO HOME. AND THE EMPLOYEES WHO GO HOME NOW HAVE
NO PAYCHECK, SO THEY CAN'T AFFORD TO BUY ANYTHING.
AND SO THIS JUST SORT OF GETS STARTED THROUGH AN ACCIDENT.
THIS IS HYPOTHETICAL, ADMITTEDLY. BUT SOME ACCIDENT COMES ALONG
AND CREATES A SITUATION WHERE THIS BANK DOESN'T HAVE MONEY ECO 155 750 LECTURE FOURTEEN 29
COMING IN, THE MONEY WENT OUT, IT'S CAUGHT IN A FINANCIAL BIND, THE
PANIC STARTS, IT SPREADS TO OTHER BANKS, ALL OF A SUDDEN IT'S
NATIONWIDE, IT'S A HUGE THING, AND IT'S VERY DIFFICULT TO STOP.
IF WE HAVE A DEPRESSION RIVALING THE ONE WE HAD BACK IN THE
1930S, IT'D BE SOMETHING LIKE THAT. IT WON'T GET STARTED THE WAY THE
ONE DID IN THE 1930S BUT IT WOULD GET STARTED IN A NEW WAY WHICH IS
MORE UNIQUE TO OUR OWN SITUATION, ELECTRONIC PAYMENTS AND SO
FORTH.
IN ADDITION TO UNEMPLOYMENT -- I MEAN, WE'RE TALKING ABOUT
UNEMPLOYMENT HERE, BUT YOU SHOULD KEEP SOMETHING ELSE IN MIND.
IT'S NOT JUST UNEMPLOYED PEOPLE. BUT THERE ARE BANKRUPTCIES,
CORPORATE FAILURES -- THERE'S A LOT OF OTHER THINGS THAT GO ON
DURING THESE TIMES. WHEN THE ECONOMY TURNS DOWN AND
UNEMPLOYMENT PICKS UP, SO DOES THE NUMBER OF BANKRUPTCIES, SO
DOES THE NUMBER OF CORPORATE FAILURES, AND SO FORTH.
SO WHAT WE'RE REALLY TALKING ABOUT WHEN WE SAY THERE'S A
HIGH UNEMPLOYMENT RATE, USUALLY WE'RE TALKING ABOUT A HIGH
AMOUNT OF SORT OF ECONOMIC MISERY, RIGHT? IT'S NOT JUST FOCUSED
ON THOSE PEOPLE WHO ARE OUT OF WORK. BUT LET'S SAY YOU OWN
STOCK IN A COMPANY AND THERE'S A LOT OF PEOPLE OUT OF WORK, BUT
ALSO NOW THE COMPANY'S NOT SELLING ITS PRODUCTS AND ITS PROFITS
ARE DOWN, MAYBE HAVING TO SHED, SELL OFF SOME DIVISIONS. THAT
WOULD BE BAD FOR YOUR SHARES OF STOCK. SO THIS WOULD COME BACK ECO 155 750 LECTURE FOURTEEN 30
AND AFFECT YOU, EVEN IF YOU'VE STILL GOT YOUR JOB. AND SO THE
UNEMPLOYMENT RATE BEING HIGH IS A SIGN, REALLY, THAT THINGS ARE
WRONG IN THE ECONOMY AND THERE'S A LOT OF PEOPLE SUFFERING.
LET'S TALK ABOUT UNEMPLOYMENT INSURANCE. AND SOMETIMES
PEOPLE CALL IT UNEMPLOYMENT COMPENSATION. BUT IT IS AN INSURANCE
TYPE OF A POLICY. NOT A PRIVATE INSURANCE, A GOVERNMENT INSURANCE.
BUT BASICALLY HERE'S WHAT HAPPENS. WE WON'T TRY TO GET INTO THE
TECHNICAL DETAILS OF THIS. BUT BASICALLY THE IDEA IS THIS: IF YOU'RE A
FULL-TIME WORKERS AT A CERTAIN POINT, AFTER YOU'VE WORKED FOR A
FEW MONTHS, YOU BECOME ELIGIBLE FOR UNEMPLOYMENT COMPENSATION
IF YOU WOULD LOSE YOUR JOB, CERTAINLY THROUGH NO FAULT OF YOUR
OWN. IF YOU GET LAID OFF -- THERE ARE CERTAIN CIRCUMSTANCES UNDER
WHICH YOU CAN GET FIRED FOR, LET'S SAY, BEING DISHONEST OR BITING OR
WHATEVER. YOU CAN LOSE YOUR JOB AND NOT QUALIFY FOR
UNEMPLOYMENT COMPENSATION.
BUT GENERALLY SPEAKING, PEOPLE WHO'VE WORKED FULL-TIME FOR
SEVERAL MONTHS, THEY ARE INSURED WHERE THAT IF THEY LOSE THEIR
JOBS -- LET'S SAY THE COMPANY SHUTS DOWN OR LAYS OFF EMPLOYEES
FOR A FEW MONTHS -- THEN THE WORKERS GO ON UNEMPLOYMENT
COMPENSATION AND RECEIVE A FEW HUNDRED DOLLARS A WEEK, IF YOUR
EARNINGS ARE SIGNIFICANT. A FEW HUNDRED DOLLARS A WEEK TO TIDE
YOU OVER.
HERE'S ONE EFFECT. I WANT YOU TO THINK ABOUT THIS. IF WE HAVE ECO 155 750 LECTURE FOURTEEN 31
UNEMPLOYMENT COMPENSATION OR UNEMPLOYMENT INSURANCE, THAT
SORT OF TELLS PEOPLE, "HEY, THE GOVERNMENT'S GONNA BAIL YOU OUT IF
YOU GET INTO A LITTLE BIT OF A FINANCIAL PROBLEM." AND SO PEOPLE
THEN -- THEY START SAYING, "YOU KNOW, I CAN BARGAIN A LITTLE HARDER
FOR HIGHER WAGES THAN BEFORE. AND THE REASON I CAN BARGAIN FOR
HIGHER WAGES -- AH, IF I GO OVERBOARD AND I LOSE MY JOB, STILL I HAVE
SOMEBODY THAT WILL HELP ME OUT OF THIS SITUATION."
SO WHAT I'M SAYING TO YOU IS, UNEMPLOYMENT COMPENSATION, IT'S
GOT THE COMPASSION INSIDE OF IT. BUT THE OTHER SIDE IS, IT MAY LEAD
EMPLOYEES TO BARGAIN A LITTLE HIGHER FOR WAGES AND MAY CAUSE
THEM TO BE UNEMPLOYED OR A LITTLE MORE LIKELY TO BE UNEMPLOYED.
FINAL POINT, I WANT TO TALK ABOUT SOMETHING CALLED THE MISERY
INDEX OR THE DISCOMFORT INDEX. THEY'RE JUST TWO DIFFERENT NAMES
FOR THE SAME THING. THE INDEX ITSELF IS EQUAL TO THE INFLATION RATE
PLUS THE UNEMPLOYMENT RATE. AND I DON'T REMEMBER THE SPECIFIC
NUMBERS, BUT THE LAST YEAR JIMMY CARTER WAS PRESIDENT, I THINK THE
UNEMPLOYMENT -- OR THE INFLATION RATE WAS ON THE ORDER OF
THIRTEEN PERCENT AND I THINK THE UNEMPLOYMENT RATE WAS ON THE
ORDER OF SEVEN PERCENT, AND SO THE MISERY INDEX THEN WAS TWENTY
PERCENT DURING THAT YEAR. THESE ARE JUST TWO SORT OF BAD THINGS
THAT MAKE LIFE UNCOMFORTABLE AND WE ADD 'EM TOGETHER. THIS YEAR
THE RATE IS CLOSER TO TWO AND FOUR, CLOSER TO SIX PERCENT THAN
THE TWENTY THAT IT WAS BEFORE, SO THERE'S A MUCH HIGHER LEVEL OF ECO 155 750 LECTURE FOURTEEN 32
ECONOMIC SATISFACTION WITH THE PERFORMANCE OF THE ECONOMY.
NEXT TIME WE'LL TALK ABOUT THE THIRD OF THESE TOPICS, GROSS
DOMESTIC PRODUCT. SO LONG.