Business Cycle and

Unemployment
Group 3
Three (3)
Economics Goals
01 Promote Economic Growth

02 Prevent Unemployment

03 Limit Inflation
What is the Business Cycle?
Business cycles are recurring periods of recession and prosperity which are
widespread throughout a nation and which feed upon themselves.
Business cycle is the visualization of economic conditions.
The existence of a business cycle can be best observed in the number of people who
are laid off and have a difficult time to find a job. During peak periods of economic
activity, this is less likely to happen. But, in period of recession, this is very common.
The Phases of Business Cycle
Peak
Contraction
Recession
Trough
Recovery
Expansion

At a peak, business activity has reached a temporary maximum. Here the economy is
near or at full employment and the level of real output is at or very close to the
economy’s capacity. The price level is likely to rise during this phase.
 A recession is a period of decline in total output, income, and employment. This
downturn, which lasts 6 months or more, is marked by the widespread contraction
of business activity in many sectors of the economy. Along with declines in real GDP,
significant increases in unemployment occur.
While an Economic Contraction can be called recession,
An Economic Recession is classified as 2 straight quarters of Real GDP Contraction
and a Depression is a severe and prolonged recession with High unemployment and
deep contraction.

In the trough of the recession or depression, output and employment “bottom out”
at their lowest levels. The trough phase may be either short-lived or quite long.

A recession is usually followed by a recovery and expansion, a period in which real

GDP, income, and employment rise. At some point, the economy again approaches
full employment. If spending then expands more rapidly than does production
capacity, prices of nearly all goods and services will rise.
 Growth Trend Line is upward slopping because it represents
the optimal rate of Real GDP growth over time that the
economy wants to achieve with full employment of an
available resources.
The higher the peak the more
excessive the inflation is.
The deeper the trough the more
excessive the unemployment is.
The longer the Real GDP returns
to the growth trend line, the longer
the excessive inflation or unemployment
persists in the economy.
Two (2) Causes of the Real GDP Functions
1. Static Effect -natural market fluctuations caused by changes in the free market
conditions, changes in consumer behavior or productivity of firms.
2. Shocks -unpredictable events such as wars, financial panics or natural
disasters that serve as sudden abnormal catalysts of contraction or
expansion in the economy.
SIGNS OF THE PHASES OF
THE BUSINESS CYCLE
Expansion Recession
Economic growth Fear and panic
Confidence Demand and spending fall
Low Unemployment Business profit declines
Prices Rise Unemployment rises
Investment Increased Investment and prices fall
Peak Trough
Economy is producing at its Lowest point in GDP
maximum Decline in Growth curbs
Demand exceeds supply Requires fiscal and monetary
Economy begins to overheat intervention
UNEMPLOYMENT
It is the labor force seeking employment and unable to find it. The cost of
unemployment can be measured by the deficiency in the potential output of a
nation:
Some of those who are unemployed have been laid off, while others are new
entrants to the labor force, such as graduating young people and women, seeking
their first jobs.

CAUSE OF UNEMPLOYMENT
Incompatible work
Policies of a country
Economy implation
Job dissatisfaction
Discrimination
Using technology
TYPES OF UNEMPLOYMENT
1. Frictional unemployment represents the employees switching jobs for more productive
and higher paying positions. Such labor mobility is desirable since it assures that the labor
force is more efficiently utilized and income is enhanced.

2. Structural unemployment is due to changes is various sectors of the economy. These

continuous changing conditions in different industries are due to changes in tastes of
consumers and are part of any changing society.
While structural unemployment can be reduced by retraining, for most part it
is desirable since it is a reflection of a society seeking improvements in its products.

3. Cyclical unemployment is attributable solely to a deficiency in the level of economic

activity. This form of unemployment is the most undesirable because it is avoidable.
FULL EMPLOYMENT AND NATURAL RATE OF
UNEMPLOYMENT
Full Employment
It is employment is an economic situation in which all available labor resources are being
used in the most efficient way possible.
Full employment is something less than 100 percent employment of the labor force.
Full employment doesn't mean a 0% unemployment rate.
Economy is “fully employed” when it is experiencing only frictional and structural
unemployment. That is, full employment occurs when there is no cyclical unemployment.

Natural Rate of Unemployment

Economists describe the unemployment rate that is consistent with full employment as
the full- employment rate of unemployment, or the natural rate of unemployment (NRU).
At the NRU, the economy is said to be producing its potential output. This is the real GDP
that occurs when the economy is “fully employed.”
DISCOURAGE WORKERS
The presence of discouraged workers causes the official rate of unemployment
to be understating the real extent of unemployment. This is especially a serious
problem during recessions because a larger number of discouraged workers
will be leaving the labor force.
Because of the lack of skills or because of disabilities, some individuals are,
unfortunately, very unlikely to be able to find full time employment no matter
how hard they may seek work. Some may eventually give up looking for work.
These are the individual classified as discouraged workers.
 February January February
Philippines
2021F 2022P 2022P

Labor Force Participation

Rate (%)
63.5 60.5 63.8

Employment Rate (%) 91.2 93.6 93.6

Underemployment Rate (%) 18.2 14.9 14.0

Unemployment Rate (%) 8.8 6.4 6.4

CALCULATING THE UNEMPLOYMENT RATE

Working Age Population 3,500

Currently Employed 2,000

Not working but looking for

400
work/Unemployment

Want to work but no longer looking for

50
work/Discourage
A. Calculate the Labor force. C. Calculate the Employment to
LF= Employed + Unemployment Population Ratio.
= 2,000 + 400= 2,400 EMP= Employed x100
Working age Population
B. Calculate the Unemployment rate =2000 x100
UR= Unemployment x100 3,500
Labor force = 57.1%
=Unemployed x100 Calculate the labor force participation
Employed + Unemployment rate.
= 400 LFPR= Labor force x100
2,000+ 400 Working age Population
= 400 x100, = 2,400 x 100
2400 3,500
=16.7% = 68.6%
What is Economic Costs of Unemployment?
Unemployment imposes economic, psychological, and social costs on
the nation. The main economic cost of unemployment is the decline of
the nation’s output and reduced income and some skills of the
unemployed. However, the society at large also bears part of the
economic cost through loss of tax revenue and an increase in
government support payments such as unemployment compensation.

The basic economic cost of unemployment is forgone output. When the

economy fails to create enough jobs for all who are able and willing to
work, potential production of goods and services is irretrievably lost.
ECONOMICS
➢ Age teenagers have much higher unemployment rates than adults. Teenagers have lower skill
levels, quit their jobs more frequently, are more frequently “fired,” and have less geographic
mobility than adults. Many unemployed teenagers are new in the labor market, searching for
their first jobs.
➢ Education less-educated workers, on average, have higher unemployment rates than
workers with more education. Less education is usually associated with lower-skilled,
less-permanent jobs; more time between jobs; and jobs that are more vulnerable to cyclical
layoff.
➢ Duration the number of persons unemployed for long periods—15 weeks or more—as a
percentage of the labor force is much lower than the overall unemployment rate. But that
percentage rises significantly during recessions
NONECONOMIC COSTS
Severe cyclical unemployment is more than an economic malady; it is a social catastrophe.
Unemployment means idleness. And idleness means loss of skills, loss of self-respect,
plummeting morale, family disintegration, and sociopolitical unrest. Widespread joblessness
increases poverty, heightens racial and ethnic tensions, and reduces hope for material
advancement.

History demonstrates that severe unemployment can lead to rapid and sometimes violent
social and political change. At the individual level, research links increases in suicide,
homicide, fatal heart attacks and strokes, and mental illness to high unemployment.

Stability of a family
Danger of Social Unrest
Drug Abuse
Divorce
Crime