[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

industries are shrinking—jobs are being lost—at the same time that new jobs are
being created. Workers voluntarily quit jobs to relocate or look for better positions.
In the United States, analysts estimate that 8 to 10 percent of workers—more than
10 million people—change jobs each year. Unemployment also varies seasonally. We
call these normal patterns in unemployment structural, frictional, and seasonal
unemployment. But at times the unemployment rate becomes much higher than
usual, as the economy experiences periods of slow job growth and rising unemployment.
Labor markets seem not to clear—the demand for labor is less than the supply.
At other times, unemployment drops to unusually low levels, plant and equipment
operate at high rates of utilization, and the economy booms. We call the fluctuations
of the unemployment rate around its normal level cyclical unemployment. These
fluctuations in the economy are the primary focus of Part Seven.
The key to understanding cyclical unemployment is the recognition of two
important “facts” about modern economies. First, prices and wages do not always
adjust quickly. As a result, the demand for labor and the supply of labor will not
always balance—the economy can depart from full employment. Second, wages and
prices eventually do adjust in response to demand and supply, bringing markets—
including the labor market—back into balance. Given enough time, wages will normally
adjust to restore full employment, returning the economy to the long-run
equilibrium we studied in Part Six.
In this and the next four chapters, we will examine how the economy behaves
when prices and wages have not adjusted to balance demand and supply in the labor
market. This study will enable us to understand what causes cyclical unemployment,
why the economy experiences fluctuations, and how monetary and fiscal policy
affect inflation and cyclical unemployment.
Economic Fluctuations
All industrialized market economies experience fluctuations in the general level of
economic activity. Panel A of Figure 29.1 shows the fluctuations in U.S. GDP over the
past forty years. A smooth trend line has been drawn through the data, tracing out a
hypothetical path the economy would have taken had it grown uniformly throughout
this forty-year period. This trend line provides an estimate of the path of potential
output—what the economy would produce if full employment were always maintained.
The economy is sometimes above the trend line and sometimes below. The shaded
bars in the figure mark out economic recessions, or periods during which output
declines significantly. Over the time period shown, there were seven recessions; the most
recent was in 2001. Panel B shows the percentage by which the economy has been
above or below the trend line. As discussed in Chapter 22, the percentage deviation
between actual and potential GDP is called the output gap; when the output gap is
negative, the economy experiences higher than normal unemployment as firms scale
back production and workers lose jobs. When output rises above potential and the
output gap is positive, unemployment drops to low levels as employment rises and the
economy’s capital stock is utilized intensively. The close (negative) relationship between
the unemployment rate and the output gap is illustrated in the figure.
638 ∂ CHAPTER 29 INTRODUCTION TO MACROECONOMIC FLUCTUATIONS