Economic

Economic
Costs
Costs of
of
Unemployment
Unemployment
GDP Gap and Okun’s Law
 The basic loss of unemployment is forgone output.
• This is a set of goods and services that is
forever lost.
• We will be producing inside the PPC.
• We measure this as the GDP Gap.Gap
 Potential GDP is the capacity of the economy
assuming the Natural Rate of Unemployment. The
growth of the Potential GDP assumes the normal
growth rate of the real GDP.
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GDP Gap and Okun’s Law
GDP GAP
The amount by which actual GDP
falls short of potential GDP

Arthur Okun first to quantify the idea:

For every 1% unemployment
exceeds the natural rate...
Approximately a
2% GDP Gap occurs.
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GDP Gap and Okun’s Law
GDP Gap for recent years

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GDP Gap and Okun’s Law
The higher the unemployment rate the
larger the GDP Gap.
So… if the rate of unemployment is 4.3% and
we assume a natural unemployment rate of 4%,
we can use Okun’s Law to calculate a loss of
$64.8 billion (.003 x 2 x $10.8 Trillion)

But…if the rate of unemployment is 5.2% and

we assume a natural unemployment rate of 4%,
we use Okun’s Law to calculate a loss of $259.2
billion. (.012 x 2 x $10.8 Trillion)
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GDP Gap and Okun’s Law
At times, the economy’s actual output will exceed
its potential— “negative” GDP gap.
… when the statistics don’t agree with what’
happening because some facts are lost or missed.
… Extra shifts of workers, capital equipment
used beyond its design capacity, overtime work and
moonlighting are common statistics that cannot be
accurately counted.
In 1988-89, an economic expansion caused actual
GDP to exceed potential GDP. This condition
eventually caused inflation and could not be
sustained.
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Unequal Burdens of Unemployment
• Occupation
• Age
• Race and Ethnicity
• Gender
• Education
• Duration

8-7
 Dec 2007 DATA Source: http://www.bls.gov/home.htm
Labor force: 153,866,000 Employed 146,211,000 Unemployed 7,078,000
Labor force participation rate: 66.0% Unemployment Rate 4.6%
Discouraged 369,000
Demographic Group Unemployment Unemployment
Rate 2003 Rate 2007
Overall 5.9% 4.6
Occupation:
Managerial and 1.9 2.1
professional
Production 6.3 7.5
occupations
Age:
16-19 15.5 17.1
Male 20+ 5.2 4.4
Female 20+ 4.4 4.4
Race:
Black 10 9.0
White 5.2 4.4
Hispanic 7.4 6.3
Gender:
Female 5.1 4.2
Male 5.9 4.3
Education
Less than HS 8.5 7.6
High School only 5.4 4.7
College Degree or 3.1 2.2
more
Duration (average 20.1 16.8
weeks)
 Is There A Social Cost To
Extended Unemployment?
Non-Economic Costs of Unemployment
Cyclical Unemployment, when high, causes social
problems.
1. People out of work become depressed and crime rates
rise.
2. Violence in the home rises as well because of the
frustration factor.
3. Families suffer and often fall apart.
4. Severe depression can cause major political and social
change.
The Great Depression programs of the New Deal
changed American thinking about the role of
government in aiding citizens when they are
needy.
Social Cost of Unemployment
Crime rates move with the business cycle…rising
during periods of high unemployment and falling
during periods of low unemployment.
FBI crime statistics show
that both property crime
and violent crime QuickTime™ and a
TIFF (Uncompressed) decompressor
are needed to see this picture.
increased between 1985 and
1991 and fell dramatically
from 1993 to 2003 in
step with the decrease in Bureau of Justice Statistics
http://www.ojp.usdoj.gov/
unemployment.