Unit 2 Notes - Unemployment/Okun's Law and Rule of 70

1. What is unemployment?

- Unemployment is defined as the failure to use available resources particularly labor to produce desired goods and services

2. Basic Terms to know

Population - Number of people in a country
Labor Force - Number of people in a country classified as either employed or unemployed

3. How is someone considered to be employed or unemployed?

Employed - 16 years of age or older WITH a job, Must work at least one hour every two weeks, and does not matter if it is part time or full time
Unemployed - People who are 16 years of age or older that have no job, but have actively searched for a job in the last two weeks

4. Who is not included in the labor force?

• Kids
• Full Time Students (Even if you have a job, school is your #1 job)
• Institutionalized (Mental Institutions)
• Incarcerated (Prison/Jail)
• People with Disabilities
• Retirees
• Military Personnel
• Stay at home parents
• Discouraged Workers (Give up on finding a job)

5. Unemployment Rate - How to Calculate it??

# of unemployed/total labor force x 100

REMEMBER that the total labor force is equivalent to the # of unemployed + the # of employed

6. TYPES of Unemployment - What are they and what separates them from each other??

1. FRICTIONAL Unemployment

• Temporarily unemployed or in between jobs
• Qualified workers with transferable skills
• Typically high school or college graduates, or people looking for a better job

2. STRUCTURAL Unemployment 

• Changes in the structure of the labor force
• Makes some skills obsolete 
• Workers do not have transferrable skills and their original jobs will never come back
• Examples - VCR Repairman, Typewrite Fixers....

3. SEASONAL Unemployment 

• Unemployment simply due to the time of the year
• Examples - Lifeguards, Construction Workers, Easter Bunnies, Mall Santa...

4. CYCLICAL Unemployment

• DO NOT WANT!!!!!!
• Unemployment that results from economic downturns such as a recession
• As demand for goods and services falls, demand for labor falls and workers are laid off

What is Full Employment??

• Full employment simply means that there is NO CYCLICAL UNEMPLOYMENT!!!

Okun's Law - What in the world is that?

• When unemployment increases by 1% above the natural inflation rate of unemployment, then real GDP will fall by 2%

The Rule of 70 - 70 what??

• The rule of 70 determines the number of years that are required for GDP to double.
• Example - If the annual inflation rate is 2%, how many years will it take for GDP to double?

We use the number 70 and divide it by the rate of inflation given to us... so we end up with 70/2 and our final answer is 35, so it will take 35 years for GDP to double in this scenario.