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Unemployment and Inflation Chapter 9
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The Annual Unemployment Rate in the United States, 1950–2010
Types of Unemployment
•Labor force The sum of employed and unemployed workers in the economy.
•Unemployment rate The percentage of the labor force that is unemployed.
Measuring the Unemployment Rate and the Labor Force Participation Rate The Household Survey
• Discouraged workers People who are available for work but have not looked for a job during the previous four weeks because they believe no jobs are available for them.
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The Employment Status of the Civilian Working-Age Population, September 2011
Measuring the Unemployment Rate and the Labor Force Participation Rate The Household Survey
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100Number of unemployed
Unemployment rateLabor force
• The unemployment rate measures the percentage of the labor force that is unemployed.
Measuring the Unemployment Rate and the Labor Force Participation Rate The Household Survey
• The labor force participation rate measures the percentage of the working-age population in the labor force.
100Labor force
Labor force participation rateWorking-age population
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Solved Problem What Happens if You Include the Military?
In the BLS household survey, people on active military service are not included in the totals for employment, the labor force, or the working-age population. Suppose people in the military were included in these categories.
100Number of unemployed
Labor force
100Labor force
Working-age population
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Trends in the Labor Force Participation Rates of Adult Men and Women Since 1948
The labor force participation rate of adult men has declined gradually since 1948, but the labor force participation rate of adult women has increased significantly, making the overall labor force participation rate higher today than it was in 1948.
Trends in Labor Force Participation
•What Explains the Increase in “Kramers”?
Making the
Connection
Why do more men seem to be adopting Kramer’s lifestyle?
Duration of Unemployment
LENGTH OF TIME UNEMPLOYED PERCENTAGE OF TOTAL UNEMPLOYED
Less than 5 weeks 35.6%
5 to 14 weeks 31.3
15 to 26 weeks 15.7
27 weeks or more 17.5
(a) Duration of unemployment during an economic expansion.
Less than 5 weeks 22.0%
5 to 14 weeks 24.2
15 to 26 weeks 19.9
27 weeks or more 33.8
(b) Duration of unemployment during an economic recession.
How Long Are People Usually Unemployed?
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How Unusual Was the Unemployment Situation Following the 2007–2009 Recession?
The average period of unemployment was twice as high following the 2007–2009 recession as following any other recession since the end of World War II.
Household and Establishment Survey Data for March and April 2007
HOUSEHOLD SURVEY ESTABLISHMENT SURVEY
MARCH APRIL CHANGE MARCH APRIL CHANGE
EMPLOYED 146,254,000 145,786,000 −468,000 137,596,000 137,684,000 +88,000
UNEMPLOYED 6,724,000 6,801,000 +77,000
LABOR FORCE 152,979,000 152,587,000 −392,000
UNEMPLOYMENT RATE 4.4% 4.5% +0.1%
Measuring the Unemployment Rate and the Labor Force Participation Rate
The Establishment Survey: Another Measure of Employment
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Household and Establishment Survey Data for June and July 2009
HOUSEHOLD SURVEY ESTABLISHMENT SURVEY
JUNE JULY CHANGE JUNE JULY CHANGE
Employed 140,196,000 140,041,000 −155,000 131,735,000 131,488,000 −247,000
Unemployed 14,729,000 14,462,000 −267,000
Labor force 154,926,000 154,504,000 −422,000
Unemployment rate 9.5% 9.4% −0.1%
The Establishment Survey: Another Measure of Employment
Frictional Unemployment and Job Search
Frictional unemployment: Short-term unemployment that arises from the process of matching workers with jobs.
Types of Unemployment
Structural unemployment: Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of jobs.
Cyclical unemployment: Unemployment caused by a business cycle recession.
Cyclical Unemployment
Structural Unemployment
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Natural rate of unemployment: The normal rate of unemployment, consisting of frictional unemployment plus structural unemployment.
Full Employment
Types of Unemployment
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Average Unemployment Rates in the United States, Canada, Japan, and Europe, 1999–2008
International Comparisons
Government Policies and the Unemployment Rate
The unemployment rate in the United States is usually lower than the unemployment rates in most other high-income countries, other than Japan. This is partly because the United States has tougher requirements for the unemployed to receive government payments. These requirements raise the costs of searching for a better job and lower the unemployment rate.
Unemployment rates, February 2011–June 2013
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Unemployment rates, February 2011–June 2013
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Minimum Wage Laws
Government Policies and the Unemployment Rate
Explaining Unemployment
In 1938, the federal government enacted a national minimum wage law.
If the minimum wage is set above the market wage determined by the demand and supply of labor, the quantity of labor supplied will be greater than the quantity of labor demanded.
Economists agree that the current minimum wage is above the market wage for some workers, but they disagree on the amount of unemployment that has resulted.
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•Why Does Costco Pay Its Workers So Much More Than Wal-Mart Does?
Costco’s relatively high wages and health benefits reduce employee turnover and raise morale and productivity.
Efficiency Wages
Efficiency wage A higher-than-market wage that a firm pays to increase worker productivity.
Inflation a tax that no one can avoid
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Measuring Inflation
Price level: A measure of the average prices of goods and services in the economy. Measured by the Consumer Price Index CPI.
Inflation rate : The percentage increase in the price level from one year to the next. Measured by the change in CPI
Expenditures in the current yearCPI= 100
Expenditures in the base year
2 1
1
CPI CPIInflation rate=Change in CPI= 100
CPI
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Measuring Inflation- The Consumer Price Index
The CPI Market Basket, December 2010
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Measuring Inflation
Consumer price index (CPI): An average of the prices of the goods and services purchased by the typical urban family of four.
The Consumer Price Index
BASE YEAR (1999) 2008 2009
PRODUCT QUANTITY PRICE EXPENDITURES PRICE
EXPENDITURES
(ON BASE-YEAR
QUANTITIES) PRICE
EXPENDITURES
(ON BASE-YEAR
QUANTITIES)
Eye
examinations 1 $50.00 $50.00 $100.00 $100.00 $85.00 $85.00
Pizzas 20 10.00 200.00 15.00 300.00 14.00 280.00
Books 20 25.00 500.00 25.00 500.00 27.50 550.00
Total $750.00 $900.00 $915.00
Price level (CPI) CPI2008= CPI2009=
Inflation (change in CPI) (CPI2009CPI2008)/CPI2009x100%=
Measuring Inflation
The Consumer Price Index
FORMULA APPLIED TO 2008 APPLIED TO 2009
120100750$
900$
122100
750$
915$
CPI =
Expenditures in the current year100
Expenditures in the base year
122 120100 1.7%
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Don’t Let This Happen to YOU! Don’t Miscalculate the Inflation Rate
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A Simple Year-Year Market Basket Comparison
Basket of Goods Prices
2003 2004
10 Pairs of Jeans $20/pair $25/pair
12 Flannel Shirts $15/shirt $20/shirt
100 lb of apples $0.80/lb $1.05/lb
80 lbs of oranges $1.00/lb $1.00/lb
Total Expenditures
a. Calculate the CPI in 2003.
b. Calculate the CPI in 2004.
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Measuring Inflation
Is the CPI Accurate?
• Substitution bias.
• Increase in quality bias.
• Outlet bias.
• New product bias.
It is important that the CPI be as accurate as possible, but there are four biases that make changes in the CPI overstate the true inflation rate:
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Other ways to measure inflation
The Producer Price Index
Producer price index (PPI): An average of the prices received by producers of goods and services at all stages of the production process.
GDP deflator
Based on all prices in the economy
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Using Price Indexes to Adjust for the Effects of Inflation
1980in CPI
2006in CPIdollars 1980in Valuedollars 2006in Value
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Solved Problem Calculating Real Average Hourly Earnings
YEAR
NOMINAL AVERAGE
HOURLY EARNINGS
CPI
(1982-1984 = 100)
2004 $15.69 188.9
2005 16.13 195.3
2006 16.76 201.6
YEAR
NOMINAL
AVERAGE HOURLY
EARNINGS
CPI
(1982-1984 = 100)
REAL AVERAGE
HOURLY EARNINGS
(1982-1984 DOLLARS)
2004 $15.69 / 188.9 x100%= $8.31
2005 16.13 / 195.3 x100%= 8.26
2006 16.76 / 201.6 x100%= 8.31
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Real versus Nominal Interest Rates
Nominal interest rate : The stated interest rate on a loan.
Real interest rate: The nominal interest rate minus the inflation rate.
Real interest rate = Nominal interest rate − Inflation rate
Deflation: A decline in the price level.
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Real versus Nominal Interest Rates
Nominal and Real Interest Rates, 1970–2008
The real interest rate is equal to the nominal interest rate minus the inflation rate. The real interest rate provides a better measure of the true cost of borrowing and the true return on lending than does the nominal interest rate. The nominal interest rate in the figure is the interest rate on three-month U.S. Treasury bills. The inflation rate is measured by the percentage change in the CPI from the same quarter during the previous year.
What should you do when economy is experiencing deflation?
Does Inflation Impose Costs on the Economy?
Inflation Affects the Distribution of Income
The Problem with Anticipated Inflation
Menu costs The costs to firms of changing prices.
The Problem with Unanticipated Inflation
The extent to which inflation redistributes income depends in part on whether the inflation is anticipated.
Leads to stronger effects on distribution
Like many of life’s other problems, inflation is easier to manage if you see it coming.
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-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
1.4
CPI core CPI
Core CPI does not include expenditure on food and energy
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Source: “Inflation ‘s last hurrah”, The Economist print edition, Aug 21st 2008. http://www.economist.com/world/unitedstates/displaystory.cfm?story_id=11967019
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