The Business Cycle and Unemployment

Chapter 13

The Business Cycle Expansion Peak Recession Trough

Expansion Phase GDP rises More jobs are available Unemployment rate falls National income expands People borrow to buy goods

Peak Phase Expansion halts Causes that prevent continued growth:

› Limited raw materials – overproduction?› Limited labor - price of labor rises› Limited financial capital – rising interest

rates

› Shortages of land, labor, and capital result, creating high prices and cooling demand, beginning the recession phase.

Recession Consumers slow their spending. First durable goods Sellers reduce inventory by cutting

prices Production orders drop Production drops Workers aren’t needed and are laid off Whirlpool effect! Downward spiral.

Trough Phase Low prices High unemployment Depressed incomes Over an extended period of time, the

recession becomes a depression.

Causes of the Business Cycle

Sunspot Theory – affects agriculture Psychological Theory – degree of

confidence Monetary Theory – Changes in the

money supply and interest rates Technology/Political Theories

Milton Friedman – Monetary Theory A Monetary History of the United States

Unemployment

Two problems that come with the business cycle:

1. Unemployment (comes with recession)2. Inflation (comes with expansion)

Employment One goal of a nation is “full

employment.” Why is employment important? What are some effects of

unemployment?

Unemployment Rate Definition: the percentage of the

LABOR FORCE that is not employed but is LOOKING FOR WORK.

Excluded from Unemployment Statistics

Those under 16 and over 65. Those in the armed forces. Those in school, prison, or asylums.

Who else is NOT counted in the labor force?

Homemakers and others who do not work for money.

Discouraged workers.

Unemployment Rate Unemployment Rate = # of

unemployed/# of people in the labor force.

Why is the unemployment rate important?› It is an indicator of the health of the

economy.

Flaws in Unemployment Statistics

Some workers don’t get counted. Doesn’t include discouraged workers. Doesn’t take into account the

“underemployed.” May count people who are between

jobs as unemployed.

Types of Unemployment Frictional – those who are between jobs,

demonstrates a competitive labor market Structural – workers’ skills don’t match

available jobs Seasonal – Some jobs are available only

at certain times of the year. Ex. Christmas tree farm workers.

Cyclical – result of a downturn in the business cycle, cuts in production

Should the government do something about unemployment?

Texas Workforce Commission Job Training Drawbacks? Can government eliminate

unemployment by controlling the business cycle?

Unemployment & the Market

Free market answer to the cause of unemployment?

Supply and demand Difference between price that sellers of

labor (workers) are asking and the price that buyers of labor (businesses) are willing to pay.

Minimum Wage What effect does a government-

mandated minimum wage have on employment?

A Christian’s Role What is a Christian’s role in

unemployment?