Unemployment%20and%20Inflation

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Unemployment and Inflation

• EVERYONES NIGHTMARE
• Chapter 6

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Unemployment and Inflation

• The two key concepts of Macroeconomics
• Either can destabilize the economy.
• When BOTH happen together REALLY, REALLY BAD.
• STAGFLATION

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Unemployment

• People who are looking for work but have no jobs.
• ACTIVELY LOOKING is critical to the definition.

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Definitions for Unemployment

• Labor Force Employed unemployed
• Unemployment Rate number of unemployed / total
  labor force
• Labor Force Participation Rate labor force /
  population 16 and over

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Definitions of Unemployment

• Discouraged Workers
• People who left the labor force because they
  could not find jobs.
• Underemployed
• Workers holding part-time work, but prefer
  full-time work OR hold jobs that are far below
  their capabilities.

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The reasons for unemployment

• Frictional Unemployment
• Structural Unemployment
• Seasonal Unemployment
• Cyclical Unemployment

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Cyclical Unemployment

• When GDP fluctuates demand in the economy is not
  sufficient to provide jobs for all those who seek
  work.
• Recession
• Depression

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Frictional Unemployment

• People in between jobs.
• Short period of time while changing jobs.
• 3 - 4 frictional employment is considered
  normal.

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Structural Unemployment

• When changes in market supply or demand
  conditions affect major industries or regions.
• The part of unemployment that results from the
  mismatch of skills and jobs.

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Causes of Structural Unemployment

• Decline in demand for a product
• Increased foreign competition
• Automation of production
• Increased raw material costs
• Lack of labor mobility between occupations or
  regions.

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Seasonal Unemployment Not included in your book
but in most other Econ texts

• Most seasonal unemployment is tends to occur in
  certain industries.
• Hotel and catering
• Tourism
• Fruit picking
• Christmas

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Suspicious Unemployment Statistics

• Natural Rate of Unemployment
• Level of unemployment at which there is no
  cyclical unemployment.
• Full Employment
• Level of employment that occurs when the
  unemployment rate is at the natural rate.

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QOD

• Why do we need unemployment to make the economy
  healthy?

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The Natural Rate of Unemployment

• Depending on whom you talk to
• 4 to 5 is considered the natural rate.
• Consists of only structural and frictional
  unemployment.

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Historic Unemployment Rates

• 1933 during the Great Depression 25
• 1998 Unemployment fell to 3.9
• October 2009 10.2 - highest in 26 years!

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3.9 Unemployment

• Why wouldnt this be good for the economy???

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Wage Inflation

• How do employers attract or keep employees if
  there is not enough workers?
• Higher Wages
• More Benefits
• 1999, Amigos was paying 9 per hour and McDonalds
  offered 500 signing bonuses.

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Why would that be bad?

• Costs go up (labor), so prices have to be upped
  to cover labor.
• Higher prices make workers demand more money.
• Cost Push Inflation

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BTW Current Data on Unemployment for the US

• According to the Bureau of Labor Statistics
  (www.bls.gov)
• Unemployment Rate in October 10.2
• Average Hourly Earnings are up .01 in
  September.

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Unemployment Data

• Previously 303,000 new jobless claims were filed
  in March 2009.
• October 2009 claims dropped 3000 to 523700.

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How does the US compare? 07-September 09
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BRIC Country Unemployment

• Brazil 9.7 (est.)
• Russia 6.4 (est.)
• India 6.8 (DOWN)
• China 4.0 (UNRELIABLE!)

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BTW

• Top 3 of unemployment
• Nauru
• Liberia
• Zimbabwe

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Stuff I know Christa wants to know -

• Countries with the lowest unemployment
• Andorra
• Monaco
• Qatar

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Review

• How do economists measure the unemployed?
• Previously unemployed individuals who have
  stopped looking for work are called ____ workers.
• What are the types of unemployment?
• The natural rate of unemployment consists solely
  of _______ and ____ unemployment.

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The Consumer Price Index and the Cost of Living

• The INFLATION Indicators

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What do you think?

• 1976 Starting salary for an economics professor
  was 15,000
• 2001 Starting salary for an econ prof was
  55,000.
• Considering the REALITY PRICIPLE, who had a
  better life?

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Reality Principle

• What matters to people is the real value of money
  its PURCHASING POWER not the nominal or face
  value of money.

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CPI

• Consumer Price Index
• A price index that measures the cost of a fixed
  basket of goods chosen to represent the
  consumption pattern of individuals.
• Tracks the cost of living over time.

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What is in the market basket?

• Food and Beverages
• Housing
• Apparel
• Transportation
• Medical Care
• Recreation
• Education
• Other goods and services

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Food and Beverages

• Breakfast Cereal
• Milk
• Chicken
• Wine
• Coffee
• Service meals
• Snacks

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Housing

• Rent for primary residences
• Owners equivalent rent
• Fuel Oil (home heating)
• Bedroom furniture

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Apparel

• Mens shirts and sweaters
• Womens dresses
• Jewelry

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Transportation

• New cars
• Airline fares
• Gasoline
• Car insurance

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Medical Care

• Prescription drugs
• Medical supplies
• Doctor services
• Eyeglasses
• Eyeglass services
• Hospital care

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Recreation

• Television
• Pets
• Pet products
• Sports equipment
• Admissions

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Education and Communication

• College Tuition
• Postage
• Telephone Services
• Computer Software
• Computer accessories

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Other Goods and Services

• Tobacco and smoking products
• Haircuts
• Other personal services
• Funeral Expenses

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BTW

• CPI - U for 2009
• UP .1 so far for the year.
• CPI U for 2009 w/o fuel costs and food. UP
  .2
• How does that compare with our wages?
• Statistics from bls.gov

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CPI

• Used by both government and the private sector to
  measure changes in prices facing consumers.
• SEE PAGE 122 to calculate CPI

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CPI versus Chained GDP

• CPI measures goods produced in prior years (older
  cars) as well as imported goods.
• Chained GDP does not measure either of these.
  ONLY new goods and those produced in the country.

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CPI v. Chained GDP

• Because consumers will cut back on goods that
  cost more the CPI will tend to overstate true
  changes in cost of living.
• If chicken goes up in price, we switch to
  hamburger.

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CPI Problems

• Does not cut back on higher priced goods like
  consumers do.
• Would still count the same share of chicken as it
  did before the price index.

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What Economists THINK

• CPI may be overestimated by .5 to 1.5 each
  year.
• BIG argument among the econ community.

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Cost of Living Adjustments

• Automatic increases in wages or other payments
  that are tied to a price index.
• For Future Reference on contract negotiations
  Called COLA.

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COLA and CPI

• As CPI goes up, our wages or Social Security
  makes adjustments to keep up with the cost of
  living.
• SEE PAGE 124 THE CPI AND SOCIAL SECURITY

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INFLATION!!!

• Inflation Rate
• The percentage rate of change of the price level
  of the economy.

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Calculating Inflation Rates

• Inflation Rate percentage rate of change of a
  price index.
• See page 124 for more on how to calculate!

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Looking Ahead

• Two Schools of Macroeconomics
• Classical Economics
• Keynsian Economics

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Classical Economics

• A school of economic thought that provides
  insights into the economy when it operates at or
  near full employment.
• Popular thought so far in 2006.
• Picture of David Ricardo (Travis favorite
  economist)
• Darwin meets Economics

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Keynsian Economics

• A school of economic thought that provides
  insights into the economy when it operates away
  from full employment.
• Economic fluctuations, business cycles, sharp
  changes in the economy.

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THIS Concludes what the book has on unemployment
and inflation

• I THINK you need and deserve more info on
  inflation!

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So what is so wrong if everyone who wants a job
has a job?
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THE ANSWER????

• INFLATION
• The trade-off with more employment.

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What is the CPI pattern in 2009?

• CPI measures the dollars worth.
• Check out the website
• http//minneapolisfed.org/Research/data/us/calc/in
  dex.cfm
• TRY THE professors salary from the beginning
  with this site!

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Types of Inflation

• Demand-Pull Inflation
• Cost-Push Inflation
• Monetary Inflation
• Stagflation
• Hyperinflation

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Demand-Pull Inflation

• When the demand for goods and services exceeds
  the production capacity.
• Prices rising because of shortages.

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Cost-Push Inflation

• Inflation can arise from changes in the costs of
  production of goods and services.
• Increase in the price of raw materials
• Increase in the price of labor
• Increase in the cost of capital.

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Cost-Push v. Demand Pull

• They push and pull prices up.
• Labor contracts containing COLA clauses.
• Cost-Of-Living Adjustments.

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Monetary Inflation

• Inflation caused by excessive growth in the money
  supply.
• Value of money decreases if it isnt that rare.

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Rule for Monetary Inflation VELOCITY

• Quantity Equation
• M x V T x P
• Money supply times the velocity at which it
  changes hands equals the number of transactions
  times the average level of prices.

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M x V T x P

• Direct relationship between the money supply and
  the price level.

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What happens when the quantity equation is off?

• Hyperinflation
• Money supply increases much, much faster than an
  economys output of goods and services.
• THINK RUSSIA in 1990s.
• Zimbabwe in 2000s
• Germany post WWI

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Phillips Curve The relationship between
unemployment and inflation.
INVERSE relationship. Unemployment goes UP, then
inflation goes DOWN.
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Stagflation When things REALLY go wrong on the
Phillips Curve

• Inflation and unemployment were at higher levels.
• Combination of stagnation and inflation.
• Both were increasing.

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1970s What caused Stagflation?

• Spending on the Vietnam War PLUS spending on
  domestic social programs.
• Inflationary expectations
• Rise in energy costs caused by OPEC
• Monopolistic pricing

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What is wrong with Inflation?

• Inflation reduces REAL INCOME of those whose
  incomes do not rise as fast as the price level.
• Hurts
• People holding assets in MONEY
• Lenders

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Special Note Phillips Curve International

• Europe 1970s had higher inflation and
  unemployment.
• Worse because
• Labor union practices
• Tax structures
• Government economic policies

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Consequences of Unemployment

• Real Output Effects
• Each 1 of unemployment results in a reduction of
  100-billion in output.
• Lower real investment means less growth and
  reduced future output.
• OKUNS LAW!

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Consequences of Unemployment

• Income Effects
• Loss of income and benefits (Health insurance)
• Loss of income to others because of reduced
  purchasing power
• Reduced tax income and increased outlays of
  government.

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Consequences of Unemployment

• Social Effects
• Health Problems
• Increased suicides
• Break up of families
• Increased child abuse
• Increased crime

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Consequences of INFLATION

• Income Effects
• Reduced purchasing power of the dollar
• Reduced real income for fixed income receivers
• Reduced real wealth of savings

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Income Effects of Inflation (cont.)

• Benefits those whose incomes rise faster than the
  inflation rate.
• Benefits owners of real assets (real estate,
  precious metals (kinda!))
• Benefits debtors

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How Inflation effects Real Output

• Inflation initially stimulates output
• Near full employment, there arise bottlenecks in
  supplies
• Costs begin rising faster than prices
• Interest rates accelerate, discouraging new
  investment.