GDP and Unemployment Linus Yamane Gross Domestic Product Value of all (market value) Final (not intermediate) Goods and services (cars and haircuts) Produced (not buying stocks and bonds) For the marketplace (not home production) Over a given period of time (GDP is a flow) Within domestic borders (not imported) 1
Real vs Nominal Real and Nominal 2012 2013 Price Quantity Price Quantity Computers $50 6 $40 11 Gasoline $30 7 $100 4 Books $70 10 $90 12 2012 $50 6 $30 7 $70 10 $1,210 2012 $50 11 $30 4 $70 12 $1,510 2013 $40 6 $100 7 $90 10 $1,840 2013 $40 11 $100 4 $90 12 $1,920 2
GDP vs GNP Gross Domestic Product (GDP) produced within the domestic borders Gross National Product (GNP) produced by citizens (domestically owned factors of production) GDP GNP = net receipts of factor income from the rest of the world Which is larger, GDP or GNP in Saudi Arabia? Many foreign workers in Saudi Arabia (GDP) Saudis earn a lot of interest and profits on assets held abroad (GNP)* Circular Flow Diagram Product Approach Payment for Goods and Services These flows are equivalent Earnings Approach Payments for Factors of Production 3
Income and Output Income and Output are the same Example Barbershop cuts hair $12 per cut, 10 customers per day Barber s income = $120 Value of good produced and purchased = $120 Income = Output Income and Output Farmer grows grain Sells to miller for $1 Miller turns grain into flour Sells to baker for $1.75 Baker bakes flour into bread Sells bread to household for $3.00 GDP = $3.00 (one loaf of bread) Value added = $1.00 Value added = $0.75 Value added = $1.25 4
Income and Output Where does the $3.00 go? $1.75 for the flour $1.00 goes to the farmer for the grain Wages, rent, interest, and profit for running the farm $0.75 goes to wages, rent, interest, and profit for miller $1.25 goes to Wages for workers at the bakery Interest to those who lent money to the bakery Rent to the owner of the building and land Profit to the bakery owner Income and Output $3.00 $1.75 $1.25 Factor Payment Factor Payment $1.00 $1 $0.75 $1 Factor Payment Intermediate Good $1.75 Intermediate Good Grain Farmer Flour Miller Bread Baker 5
Product Approach Y = C + I + G + NX 2013 IV billions $ Consumption Food, cars, haircuts. 11,653.1 Gross Domestic Capital formation 2,773.7 Investment Government Goods and services 3,118.6 Net Exports Exports Imports 442.8 Gross Domestic Product $17,102.5 Product Approach Consumption 11,653.1 Durables 1,284.4 Nondurables 2,658.0 Services 7,710.6 Investment 2,773.7 Structures & equipment 2,087.4 Residential 529.6 Change in Inventories 156.7 Net Exports 442.8 Exports 2,329.7 Imports 2,772.5 Government 3,118.6 Federal 1,225.8 State & local 1,892.7 Gross Domestic Product GDP $17,102.5 6
Earnings Approach National Income Employee compensation + Corporate profits + Proprietor's Income + Rental income + Net Interest 2013 IV billions $ 14,765* Indirect Business Taxes Sales taxes? Depreciation Capital consumption allowance 2,691.2 Net Factor Payments to the rest of the world Payments of factor income to the ROW minus the receipt of factor income from the rest of the world? Gross Domestic Product $17,102.5 Earnings Approach employee compensation total of all salaries, wages, benefits, pensions, and social security contributions 8,964.7 rent total income earned from property ownership 602.2 net interest money earned by supplying capital 485 proprietor's income money earned by business owners, including incorporated businesses, partnerships and sole proprietorships 1,352.0 corporate profits income earned by stockholders 2,130* indirect business taxes all sales tax, business property tax and license fees minus subsidies? depreciation the decrease in the value of capital goods 2,691.2 net factor income Total payments to foreign entities for domestic production minus total payments received by domestic citizens from foreign entities? GDP Gross Domestic Product $17,102.5 7
Depreciation Depreciation: when capital assets wear out, they decline in value Gross Investment = Net Investment + Depreciation Corporate Profits = Total Revenue Total Costs Total costs include depreciation costs Barbershop example Pay $12 for one haircut $8 is the salary of the barber $4 is the profit for Hair, Inc. But Hair, Inc subtracts off depreciation of $1, and reports $3 in profit Need to add $1 back in to get GDP Gross Investment, Net Investment, & Depreciation Gross Investment = $2,773.7 Net Investment = $82.5 Capital Stock = $42.5 trillion Depreciation = $2,691.2 8
Net Investment has been rather low this century Three ways to calculate GDP Product (Expenditure) Approach C + I + G + NX Earnings (Factor Payments) Approach Wages + salaries + interest + rent + profit Value Added Approach Add up the value added of all firms 9
Income, Net Taxes, Savings Personal Income $14,295.6 billion Net Taxes $1,681.5 Taxes Transfers Disposable Personal Income $12,614.1 Consumption $12,069.0 Savings $545.1 Personal Savings Rate.,. Y = Yd + T = C + S + T 4.3% Important Identity Investment: purchases of new homes, buildings, plants, and equipment Savings: income which is not consumed (or paid in taxes) Let us ignore government and the foreign sector for a moment Product side Y = C + I Spending side Y = C + S Investment = Savings identity I = S 10
Important Identity When we include government and foreign sector Product side Y = C + I + G + NX Spending side Y = C + S + T I = S + (T G) NX Gross Investment Private Savings Gov Budget Surplus Net Exports $2,773.7 $3,540.9 $ 1,210.0 $ 442.8 An identity is always true by definition Important Identity NX = foreign savings when we import (without equivalent exports), foreigners are lending us money to cover the cost of the imports I = Sp + Sg + Sf Investment = Private Savings + Government Savings + Foreign Savings 11
International Comparisons Country GDP PC PPP Country GDP PC PPP China $9,210 Nigeria $2,420 India 3,840 Bangladesh 2,070 United States 50,610 Russia 22,720 Indonesia 4,810 Japan 36,290 Brazil 11,720 Mexico 16,680 Pakistan 3,030 World Average 12,129 Norway 66,960 Congo 370 Singapore 61,100 Burundi 560 Shortcomings of GDP Measurement Problems Quality changes are not well accounted for in GDP measures Underground economy Nonmarket activities Production shift from the home to the market GDP is not social welfare Pollution Crime Worker Safety Distribution of income 12
GDP is not everything 18 Worker Safety 16 14 12 10 8 6 4 Factory inspections and worker safety rules slow down production All production involves some risk So maximizing GDP does not necessarily maximize social welfare 2 0 0 5 10 15 20 25 GDP Green Growth Production uses natural resources and generates pollution More productive technologies may be less polluting and use fewer resources than old production methods Positive relationships Safe water and good sanitation usually rise with GDP/PC Negative relationships Municipal waste/person and carbon monoxide emissions usually rise with GDP/PC Mixed relationships Urban concentration of particulate matter, urban concentration of sulfur dioxide usually rise and then fall with GDP/PC 13
Net Economic Welfare NEW (Net Economic Welfare) Adjust GDP for the costs of pollution, crime, worker safety, congestion, etc GDP is still a useful measure of well being See Gapminder.org Robert F. Kennedy on GDP (1968) It does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strengths of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our courage, nor our wisdom, nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile, and it can tell us everything about America except why we are proud that we are Americans. 14
Unemployment Unemployed Not working Currently available for work Actively seeking employment or on temporary layoff (and expect to be recalled to old job) 16 years or older People with jobs, but not working due to illness, bad weather, labor disputes, and vacation are officially employed US Population (thousands) Labor Force 154,937 Employed 144,586 Civilian noninstitutional population 246,745 Unemployed 10,351 Population 317,477 Not in the Labor Force 91,808 Institutional Population 3,723 Military 1,439 Youngsters 65,570 15
Definitions Unemployment rate, 6.7%, Labor force participation rate Employment rate, 62.8%,, 58.6%, Not in Labor force Retired, school, disabled, rich, house spouse Institutional population Patient or inmate in prison, jail, hospital Unemployment Rates (Dec 2013) Men 6.8 Foreign Born 6.5 Women 6.5 Native Born 6.5 White 5.9 <HS 9.8 Black 11.9 HS 7.1 Hispanic 8.3 Some College 6.1 Asian 4.1 BA+ 3.3 Disabled 11.9 Veteran 5.5 Teenagers 20.2 Nonveteran 6.4 16
12 Unemployment Rates 11 10 9 8 Percent 7 6 women men 5 4 3 2 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Year 24 Unemployment Rates 21 18 15 Percent 12 9 white black hispanic asian 6 3 0 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 Year 17
Why is there Unemployment Auction markets vs Administered markets Sources of wage stickiness Heterogeneity of labor Difficulty of grading labor Premium on long term relationships Long term contracts Laws, institutions & customs Voluntary vs Involuntary Unemployment Are wages flexible? Minimum wage Government mandated minimum wage Affects market for young and/or unskilled workers Union contracts 3 year contracts, cover 12.4% of workers Union sets wages, firms choose level of employment Efficiency Wages Worker productivity depends on the wage Reduces labor turnover, decreases hiring & training costs Better applicant pool Workers less likely to shirk 18
Definitional Problems Discouraged workers Half of unemployment spells end in withdrawal from the labor force 6.111 million discouraged workers (Dec 2013) Part time workers 26.502 million part time workers 29.3% are part time for economic reasons Underemployment English PhDs driving taxis in NYC Economist defini on BLS defini on Labor Market Flows INFLOW entrants into labor force quits layoffs involuntary quits (fired) Unemployment Pool OUTFLOW new hires recalls withdrawal from the labor force (discouraged workers) 19
Empirical Facts about Unemployment In recession, more layoffs and more discouraged workers In boom, more new hires, more entrants to labor force, and more quits Job losers rarely make up over 50% of all unemployed. Usually over 1/3 of unemployed are individuals entering the labor force. The rest are quits. Most people who become unemployed are unemployed for short duration. Most unemployment is accounted for by people unemployed for long duration Duration and Frequency of Unemployment Case A: each worker is unemployed 5% of time (2.5 weeks). Duration is 2.5 weeks, frequency is once a year Case B: 95% of workers are never unemployed during the year. 5% are unemployed all year. Duration is 1 year, frequency is once every 20 years. You have 5% unemployment in both cases 20
Unemployment 1. Frictional Unemployment Time spent by workers searching for jobs 2. Structural Unemployment When regional and occupational patterns of job vacancies do not match the pattern of worker availability 3. Cyclical Unemployment The increase in unemployment that occurs during recessions and depressions Natural Rate of Unemployment Level of frictional and structural unemployment Unemployment rate which corresponds to practical full employment (potential output) Where the number of job vacancies is equal to the number of unemployed Where there is no pressure on wages or prices (inflation) to rise or fall 21
Natural Rate of Unemployment Probably around 5% Unemployment benefits and insurance Due to laws regulating eligibility and extent of extended benefits, insured rate has fallen over time (search more intensively) Multiple earners Trend toward two or more income earners in a household (search less intensively) Costs of Unemployment Human costs and economic costs When unemployment rises, we tend to get.. higher family conflict more child abuse increased divorce more wife beatings higher suicide rates higher homicide and more admission to prison 22
Psychological Costs Death of spouse 100 Go to jail 66 Fired from Job 49 Close friend dies 47 Laid off from job 40 Flunk out of school 37 Child runs away 29 Economic Costs of Unemployment Okun s Law (1961) When unemployment goes up, GDP goes down For every 1% point that unemployment is above the natural rate, there is a 2% point GDP gap. 1 2 For every 2% points of growth in real GDP above the trend rate that is sustained for a year, the unemployment rate declines by 1% point. 23
Okun s Law Decrease in GDP comes from Decrease in the labor force Decrease in average hours worked Decrease in productivity Increase in unemployment In the short run, Okun observed that all these factors move together. Thus the unemployment rate is a proxy for all of the above. Economic Costs of Unemployment year unemployment rate (percent) Unemployed (thousands) NILF want a job (thousands) 2007 4.6 7,073.1 4,697 2008 5.8 8,948.2 4,988 2009 9.3 14,294.5 5,895 2010 9.6 14,809.6 6,066 2011 8.9 13,736.2 6,436 2012 8.1 12,495.6 6,563 2013 7.4 11,448.9 6,380 24
Economic Cost of Great Recession year unemployment rate Real GDP GDP* GDP GAP 2008 5.8 $14,833.6 $15,070.9 $237.3 2009 9.3 14,417.9 15,653.1 1,235.1 2010 9.6 14,779.4 16,146.4 1,367.1 2011 8.9 15,052.4 16,236.5 1,184.1 2012 8.1 15,470.7 16,422.2 951.4 2013 7.4 15,767.1 16,508.2 741.1 Total loss for operating below potential output Total $5,716.2 $18,032 in additional goods and services for every American (Honda Civic) 25