Chapter 22 Unemployment and Inflation © 2009 South-Western/ Cengage Learning.
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Transcript of Chapter 22 Unemployment and Inflation © 2009 South-Western/ Cengage Learning.
![Page 1: Chapter 22 Unemployment and Inflation © 2009 South-Western/ Cengage Learning.](https://reader036.fdocuments.in/reader036/viewer/2022062407/56649e045503460f94af0c39/html5/thumbnails/1.jpg)
Chapter 22
Unemployment and Inflation
© 2009 South-Western/ Cengage Learning
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Unemployment
• Unemployment– Personal cost
– Cost on the economy
• Measuring unemployment– Civilian non-institutional adult population
– Labor force• Employed + Unemployed
– Unemployment rate• Percentage of unemployed in the labor force
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Unemployment
• Adult population– Employed
• Working full time or part time
– Not working• Unemployed (looking for work)• Not in labor force
– Retired; Students; Don’t want to work– Discouraged workers
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Exhibit 1The adult population sums: employed, unemployed, and those not in labor force, June 2007 (in millions)
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LABOR FORCE
(153.1)
Employed
(146.2)
NOT WORKING
(85.5)
Not in labor force
(78.6)
Unemployed
(6.9)
Labor force= employed + unemployed
Not working = not in the labor force + unemployed
Adult population = employed + unemployed + not in the labor force
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Unemployment
• Labor force participation rate– Number in labor force / Adult population
• Unemployment over time– Rise during contractions
– Fall during expansions
– Overall downward trend (1980s to 2000)• Growing economy• Fewer teenagers in workforce
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Exhibit 2The US unemployment rate since 1900
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Unemployment
• Unemployment in various groups– Age
• Higher unemployment among teenagers
– Race
– Gender
– Geography
– Occupation
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Exhibit 3 (a)Unemployment rates for 20 years of age and older
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Exhibit 3 (b)Unemployment rates for 16 to 19 years of age
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High school dropouts, labor market dropouts
• High unemployment rates – Poorly educated young black males
• 2000, 65% of high-school dropouts– Not working
» Unemployed» Not looking for jobs» In prison
• 2004, 72% of high-school dropouts– Not working
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High school dropouts, labor market dropouts
• Possible causes– Failing schools
– Absent parents
– Racial discrimination
– Fewer blue collar jobs
– Growing competition
– Stricter child-support enforcement
– Rising incarceration rate
– Subculture: downplay the value of work 11
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Unemployment
• Varies by occupation– Blue-collar workers
• Higher unemployment
• Varies across regions– Certain occupations
• Dominate certain regions
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Exhibit 4Unemployment rates differ: US metropolitan areas
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Sources of Unemployment
• Frictional unemployment– Bring together employers and job
seekers
– Doesn’t last long
– Better match workers and jobs
• Seasonal unemployment– Seasonal changes
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Sources of Unemployment
• Structural unemployment– Mismatch of skills or geographic location
– Problem
• Cyclical unemployment– Increases during recessions
– Decreases during expansions
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Full Employment
• Full employment– No cyclical unemployment
– Some unemployment• Frictional• Structural• Seasonal
– Estimates: 4-6%
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Unemployment Compensation
• Unemployment benefits– Half of the unemployed
– Criteria• Lost job• Looking for work
– Time limit: 6 months
– 40% of wages
– May reduce the incentive to find work
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International Comparisons
• Unemployment trends– US: down
– Japan: up• Low unemployment : Job security• Bankruptcy
– Western Europe: remained high• Higher unemployment benefits• Last longer• Government regulations
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Exhibit 5Since 1980, the US unemployment rate fell, Europe’s remained high, and Japan’s rose
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Europe
U.S.
Japan
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Problems with Unemployment Figures
• Understate unemployment• Discouraged workers
– Not counted
• Underemployed – Only part-time (want full-time)– Overqualified
• Overstate unemployment• Looking for work
– Qualify for unemployment benefits
• Only full-time (want part-time)• Underground economy 20
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Inflation
• Inflation• Sustained increase in price level
• Annual inflation rate• Percentage increase in price level
• Hyperinflation• Extremely high inflation
• Deflation• Sustained decrease in price level
• Disinflation• Decrease in inflation 21
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Hyperinflation in Brazil
• Price level in 1994• 3.6 million times higher than in 1988• People – don’t want to hold cruzeiro
• Workers• Paid daily; purchases• Exchanges for a stable currency
• Real Cruzeiro: larger denominations• Facilitate purchase• Reduce productivity
• Dropped since 1994 22
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Two Sources of Inflation
• Increase in AD– Demand-pull inflation
– Increased government spending
– Social programs
• Decrease in AS– Cost-push inflation
– Increase cost of production• Push up the price level
– Stagflation 23
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Exhibit 6Inflation caused by shifts of AD and AS curves
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Aggregate output0
Price
level
P’
P
AS
AD’
AD
(a) Demand-pull inflation: inflation caused by an increase of aggregate demand
An outward shift of the aggregate demand to AD’ “pulls” the price level up from P to P’.
Aggregate output0
Price
level
P’
P
AS
AD
(b) Cost-push inflation: inflation caused by a decrease of aggregate supply
A decrease of aggregate supply to AS’ “pushes” the price level up from P to P’.
AS’
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A Historical Look: Inflation; Price Level
• Price level, US, since 1913– Steady increase
• Inflation or deflation, US, since 1913– Before 1950s
• High inflation – war related– Followed by deflation
– Since 1950s• Inflation: 3.8% per year
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Exhibit 7 (a)Consumer price index since 1913
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Exhibit 7 (b)Inflation since 1913
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Anticipated vs. Unanticipated Inflation
• Anticipated inflation– Expected inflation
• If inflation > expected– Sellers lose
– Buyers gain
• If inflation < expected– Sellers gain
– Buyers lose
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Inflation
• Unpopular• Imposes transaction costs• Obscures relative price changes• Differ across metropolitan areas
– Housing prices
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Exhibit 8Average annual inflation between 2002 and 2006 differed across US metropolitan areas
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International Comparisons of Inflation
• First half of 1980s– Declining inflation
• Mid-1980s to early 1990s– Rising inflation
• Mid-1990s– Lower trend
• Similar trend– Overall: lower inflation
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Exhibit 9Inflation rates in major economies have trended lower over the last quarter century
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Europe
U.S.
Japan
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Inflation and Interest Rates
• Interest– Dollar amount
• Paid by borrowers to lenders
• Interest rate• As percentage
• Supply of loanable funds– Upward sloping
• Demand of loanable funds – Downward sloping
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Inflation and Interest Rates
• Nominal interest rate– Current dollars
• Real interest rate • =Nominal interest rate – Inflation rate
• Expected real interest rate
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Exhibit 10The market for loanable funds
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Loanable funds per period0
Nom
inal
inte
rest
rat
e
i
D
S The upward sloping supply curve, S, shows that more loanable funds are supplied at higher interest rates.
The downward-sloping demand curve, D, shows that the quantity of loanable funds demanded is greater at lower interest rates.
The two curves intersect to determine the market interest rate, i.
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Why is Inflation Unpopular?
• Pay higher prices– Inflation = Penalty
• Receive higher receipts– Higher income
• ‘well-deserved’ reward
• Fixed nominal income– Unadjusted for inflation
• Social Security– Adjusted for inflation (COLA) 36