Macroeconomic Instability: Unemployment

1
Macroeconomic InstabilityUnemployment
Inflation
Chapter 8
2
The Business Cycle
Phases of the Business Cycle
Level of business activity
Time
3
The Business Cycle
Phases of the Business Cycle
PEAK
Level of business activity
Time
4
The Business Cycle
Phases of the Business Cycle
PEAK
RECESSION
Level of business activity
Time
5
The Business Cycle
Phases of the Business Cycle
PEAK
RECESSION
TROUGH
Level of business activity
Time
6
The Business Cycle
Phases of the Business Cycle
PEAK
RECESSION
TROUGH
RECOVERY
Level of business activity
Time
7
The Business Cycle
Phases of the Business Cycle
PEAK
RECESSION
TROUGH
RECOVERY
SECULAR TREND
Level of business activity
Time
8
The Business Cycle
Phases of the Business Cycle
PEAK
RECESSION
TROUGH
RECOVERY
SECULAR TREND
Level of business activity
Time
9
US Recessions since 1950
Duration, months
Depth (Decline in real output)
Period
1953-54 10 -3.7 1957-58
8 -3.9 1960-61
10 -1.6 1969-70 11
-1.0 1973-75 16
-4.9 1980 6 -2.3 1981-82
16 -3.3 1990-91
8 -1.6 March-Nov 2001 8
-2.0
10
UNEMPLOYMENT
3 Types of Unemployment....
Frictional Structural Cyclical
11
Types of Unemployment....
Frictional Unemployment
- Workers in between jobs - Voluntarily
quit but searching - Involuntarily
fired and searching - A reflection of a highly
mobile work force. Career choices, new degrees.,
etc. - Tends to be of short duration
12
Types of Unemployment....
Structural Unemployment
-Workers who do not have the minimum skills
(social and/or technical) to meet the
ever-changing workplace requirements. - A
mismatch between workers location and the
locations of job openings. - Tends to be more
permanent and with devastating social implications
13
Types of Unemployment....
Cyclical Unemployment
- Unemployment caused by recessions. - Caused by
a deficiency in total spending - It ends when
companies start hiring - Its duration depends on
the length of the recession
14
Defining Full Employment
Full- employment - Unemployment rate Natural
Rate of Unemployment Potential output 1-
Not Automatic 2- Not Immutable
15
UNEMPLOYMENT
Measurement of Unemployment, 2002
74,700,000
71,400,000
Total Population 288,600,000
134,200,000
Labor Force 142,500,000
8,300,000
16
Measuring Unemployment
Criticisms of the rate calculation.... 1-
Part-time Employment 2- Discouraged Workers 3-
False Information
17
Unequal Burdens of Unemployment
1- Occupation 2- Age 3- Race 4- Gender 5- Duration
Non-economic Costs
18
GLOBAL PERSPECTIVE
Unemployment Rates 5 Industrial Nations - 1992 -
2002
15 10 5 0
France
U.K.
Germany
U.S.
Japan
1997
1992
2002
Source Economic Report of the President, 2003
19
INFLATION

• A rising general level of prices
• Rate of inflation calculated using index numbers
• Used for establishing salary levels

Rule of 70 If we divide the number 70 by the
annual rate of inflation, the quotient is the
number of years it takes for inflation to double
the price level
70 -----------------------------
------------ Annual rate of inflation
Number of years required to double price level

20
GLOBAL PERSPECTIVE
Inflation Rates in Five Industrial Nations - 1992
- 2002
10 5 0
Italy
Germany
U.S.
France
Japan
1997
1992
2002
Source Bureau of Labor Statistics
21
What Causes Inflation?
DEMAND-PULL INFLATION
P
Price level
Q
Real domestic output employment
22
What Causes Inflation?
DEMAND-PULL INFLATION
P
Price level
Range 1
Q
Real domestic output employment
23
What Causes Inflation?
DEMAND-PULL INFLATION
P
Price level
Range 2
Range 1
Q
Real domestic output employment
24
What Causes Inflation?
DEMAND-PULL INFLATION
P
Range 3
Price level
Range 2
Range 1
Q
Real domestic output employment
25
What Causes Inflation?
DEMAND-PULL INFLATION
P
Range 3
Price level
Range 2
Range 1
Full- employment output
Q
Real domestic output employment
26
ANTICIPATED INFLATION

11
Nominal Interest Rate
27
ANTICIPATED INFLATION

11
5
Nominal Interest Rate
Real Interest Rate
28
ANTICIPATED INFLATION
6


11
Inflation Premium
5
Nominal Interest Rate
Real Interest Rate
29

• discouraged workers
• GDP gap
• Okuns Law
• inflation
• rule of 70
• demand-pull inflation
• cost-push inflation
• per-unit production costs
• nominal income
• real income
• anticipated inflation
• unanticipated inflation
• COLAs
• inflation premium
• real interest rate
• nominal interest rate
• hyperinflation

• business cycle
• peak
• recession
• trough
• recovery
• seasonal variation
• secular trend
• frictional unemployment
• structural unemployment
• cyclical unemployment
• full-employment unemployment rate
• natural rate of unemployment
• potential output
• labor force
• unemployment rate