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3. Cyclical unemployment – due to downturns in the business cycle. The economy does not<br />

always operate at full employment. When there is a downturn in the business cycle, output<br />

falls below the level produced at full employment. If the economy is not producing enough<br />

output to achieve full employment, the actual unemployment rate will be higher than the<br />

natural rate. The difference between the actual unemployment rate and the natural<br />

unemployment rate is the cyclical unemployment rate.<br />

Example 11: If the actual unemployment rate is 7.3% and the natural unemployment rate is<br />

5.6%, the cyclical unemployment rate is 1.7%.<br />

Economic Growth and Job Destruction<br />

One of the three macroeconomic goals is full employment. Another goal is economic growth. In<br />

the short run, these two goals may be in conflict. The technological advances that cause<br />

economic growth may result in the destruction of jobs and the displacement of workers.<br />

We saw in Chapter 2 that economic growth can be achieved either by an increase in the quantity<br />

of resources or by an advance in technology. Technological advance is the ability to produce<br />

more output per resource.<br />

Example 12: Between 1992 and 1999, employment in the U.S. steel industry decreased from<br />

about 240,000 workers to about 150,000 workers. But steel production in the U.S. increased from<br />

92.9 million tons to 107.4 million tons. Thus, labor productivity increased by 85 percent (from 387<br />

tons annually per worker to 716 tons annually per worker).<br />

Technological advance destroys jobs. Consider the agricultural industry. Two hundred years ago,<br />

about 75 percent of the American labor force was employed in agriculture. Over the last two<br />

hundred years, labor productivity in agriculture has greatly increased due to technological<br />

advances (more and better capital equipment, improved seeds, improved fertilizers, improved<br />

farming techniques, etc.) Today, less than 2 percent of the American labor force is employed in<br />

agriculture. Technological advance has destroyed tens of millions of jobs in agriculture.<br />

Technological advance has also destroyed millions of other jobs. There aren’t many scriveners<br />

today. Scriveners made hand-written copies of important documents. Copy machines have<br />

destroyed the demand for scriveners. ATMs have eliminated many jobs for bank tellers. Far more<br />

long distance phone calls are made today than were made eighty years ago. And with far fewer<br />

telephone operators.<br />

Individually, we don’t want our jobs to be destroyed. The job that we currently have is the best job<br />

currently available to us. If it were not, we would have already switched to another job. But from<br />

an overall standpoint, job destruction is good. Job destruction frees up labor for new types of<br />

production. The destruction of jobs allows the newly unemployed labor to be re-allocated to more<br />

valuable production.<br />

But won’t technological advance lead to increasing unemployment? Temporarily, it might. The<br />

development of a weed-resistant, self-fertilizing lawn grass would throw a lot of lawn service<br />

employees out of work. But remember that human wants are unlimited. We want food and copies<br />

and bank services and long distance phone calls and beautiful lawns. And we want an unlimited<br />

amount of other goods and services. And we would like to produce these goods and services with<br />

as few resources (including labor) as possible.<br />

Individually, we want jobs to enable us to earn income. We don’t want our jobs to be destroyed.<br />

This is a fallacy of composition situation. Job destruction is bad for the individual whose job is<br />

destroyed. But as a society, we want to destroy jobs, to free up labor to produce more goods and<br />

services. Job destruction is good for society. Job destruction makes economic growth possible.<br />

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4 - 7 Inflation and Unemployment

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