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LERNER INDEX: The difference between price (p) and marginal cost (mc) as a fraction of price, that is [p-mc]/p. The Lerner index is usually taken as an indicator of market power because the larger the index, the larger the difference between price and marginal cost, that is, the larger the distance between the price and the competitive price. The Lerner index depends on the elasticity of demand. The Lerner index is also called the price-cost margin.
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                           UNEMPLOYMENT PROBLEMS: The two key problems resulting from unemployment of resources, especially the unemployment of labor, are personal hardships and lost production. The owners of the unemployed resources suffer personal hardships due to the lack of income. The rest of society also suffers from unemployment due to the lack of available production. The unemployment of resources, especially labor, is one of the more important macroeconomic issues facing economists and government leaders. The other macroeconomic issue with the same status is inflation. Concerns over unemployment that emerged during the Great Depression of the 1930s was largely responsible for developing the modern study of macroeconomics.The devastating economic conditions of the 1930s, which at its depth saw one out of four workers unemployed, brought to the forefront the problems of unemployment and induced economists to develop theories to explain the unemployment and to suggest corrective policies. The reason that economists and policy makers have been and continue to be so concerned with unemployment stem from two key problems: personal hardships and lost production. Personal HardshipsUnemployment creates personal hardships for the owners of the unemployed resources. When resources do not produce goods, their owners do not earn income. The loss of income results in less consumption and a lower living standard. While this problem applies to any resource, it is most important for labor. The owners of capital, land, and entrepreneurship often earn income from more than one resource. Thus a loss of income from one resource is not a total loss of income. Many workers, however, often earn income only from labor. The loss of income from labor might mean a total loss of income.Many government programs and policies developed since the Great Depression have been designed explicitly to address personal hardships. One of the most noted programs is unemployment compensation, which is specifically designed to relieve personal hardships by providing workers with a source of income when they are unemployed. While other transfer payments (welfare and Social Security) are primarily designed to address other problems, they also provide a source of income to the unemployed. The personal hardships suffered by the unemployed are of concern to government leaders for reasons that are both in the common good and somewhat more selfish. - In terms of the common good, the unemployed are members of society just like everyone else and deserve the opportunities to enjoy the fruits of a productive economy. An affluent society "should" be able to provide for everyone. In addition, social problems that cause personal hardships to other members of society tend to increase with the personal hardships of the unemployed, including crime, divorce, suicides, etc.
- Government leaders are also concerned with the personal hardships of the unemployed for more selfish reasons. When the voting public is unhappy, they tend to elect new leaders and toss the old ones out of office. There are few things that voters like less than suffering the personal hardships that come with unemployment. Presidential elections have been decided on a few million votes. A typical business-cycle contraction can add four to five million workers to the ranks of the unemployed, enough votes to change the "employment" status of any incumbent President seeking re-election.
Lost ProductionUnemployment also causes total production in the economy to decline. If fewer resources are engaged in production, fewer goods and services are produced. As suggested by the circular flow model, the severity of the connection between lost production and unemployment is magnified by the multiplier effect. An initial decline in the income, consumption, and production associated with unemployment triggers further declines in income, consumption, and production. As such, members of society, who might escape the direct immediate personal hardships of unemployment, often succumb to the indirect, multiplicative problems of lost production. Number-crunching economists have estimated that for each 1 percent rise in the unemployment rate, that gross domestic product declines by 3 percent.Lost production is especially troublesome because it is an opportunity that is lost forever. This lost production delays society's efforts to increase living standards and address the problem of scarcity. That is, when an unemployed worker does NOT produce output today, that output can never be recouped. If a worker is unemployed on Monday, Monday's production is lost forever. "But," someone might counter, "once an unemployed worker returns to work on Tuesday, then Monday's lost output can be produced, right?" Unfortunately the worker could have been employed producing Tuesday's output regardless. If Tuesday is spent producing Monday's output, when is the output for Tuesday produced? Wednesday? If so, when is Wednesday's output produced? Had the worker been employed on both Monday and Tuesday, then output would have been produced on both days.
Recommended Citation:UNEMPLOYMENT PROBLEMS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2023. [Accessed: December 1, 2023].
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APT
Arbitrage Pricing Theory
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