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Unemployment and Inflation

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Title: Unemployment and Inflation


1
  • Unemployment and Inflation
  • i.e. two evils of the economy will be discussed.

2
Component Parts GDP
  • Consumption
  • Investment
  • Government Spending
  • Exports- Imports (Net Exports)
  • CIG(X-M) GDP

3
GDP 2007 to 2010
4
(No Transcript)
5
Unemployment to August 2011
6
Now- was that a bad recession????
7
Why does growth matter?
  • Allows wages and incomes to rise.
  • Standard of living increases
  • Takes the pressure of scarce resources (why?)

8
Main Sources of Growth
  • Two ways that society can increase its real
    output and income
  • 1) increase inputs of resources
  • 2) increase productivity of those inputs
  • BLS Latest Numbers

9
Macroeconomic Problems
  • High inflation rate
  • High unemployment rate
  • High interest rates
  • Low economic growth or stagnation

10
Macroeconomic Policies
  • Fiscal Policy deals with changes in government
    expenditures and/or taxes. to achieve particular
    macroeconomic goals.
  • Monetary Policy deals with. changes in the money
    supply, or the rate of growth of the money
    supply, to achieve particular macroeconomic
    goals.

11
Different Views of How the Economy
Works-Stable-Unstable
  • The economy is inherently stable and
    self-regulating.-Classical
  • The economy is inherently unstable and requires
    intervention to correct problems.-Keynesian

12
Macro deals with entire economySubject matter
includes
  • Macroeconomic problems high unemployment
  • Macroeconomics theories government spending
  • Macroeconomics policies- use fiscal policy
  • Different view on how the economy works-
    self-correcting, government stimulus

13
What really is macroeconomics?
  • Is the study of the aggregate economic behavior
    of the economy as a whole to determine what
    causes the swings in the business cycle.
  • Example imagine everyone is paid on the same
    day. With incomes in hand, people enter the
    product market.
  • The question is How much will people buy?
  • Answer is we have to know something about
    prices. (if cheap, we buy more) vice-versa
  • We are not talking about prices of a single good,
    but rather the average price level.

14
The Idealized Course of Business Fluctuations
15
What are component parts of GDP?
  • ?

16
Consensus among Economists says swings due to
  • Changes in REAL levels of output and employment
    brought about by changes in levels of TOTAL
    SPENDING.
  • Spending
  • Businesses no longer produce at current level
  • Output, employment and income fall
  • In reverse the opposite results.

17
Important economic fact
  • As the economy gets close to
  • FULL EMPLOYMENT
  • It is more difficult to obtain further gains in
    REAL OUTPUT.
  • Continued increasing levels of spending bring
    about INFLATION

18
SRAS
P R I C E L E V E L
AD
GDP
QF
LRAS
19
REAL GDP (as opposed to what???)
  • Real GDP
  • The value of the entire output produced
    annually within a countrys borders, adjusted for
    price changes.

20
REAL VS NOMINAL GDP
  • What is the difference??
  • Inflation-----------
  • Inflation is BAD!

21
Countries Compare
  • Countries can assess the growth of other
    countries for means of
  • Foreign investment
  • Trade potential
  • Currency stabilization

22
Most recent data
  • Growth Estimates for 2010 by Country
  • http//seekingalpha.com/article/178096-2010-countr
    y-gdp-growth-estimates

23
What will we focus on?
  • This will focuses on economic growth, the
    business cycle, unemployment and inflation.
  • When is a person unemployed?
  • What are the costs of unemployment?
  • -When will money not buy as much?

24
Unemployment since 1990
25
  • Current Unemployment Rate today is????????
  • 9.2

26
What is the labor force?
  • The labor force includes all persons over age
    sixteen who are either working for pay or
    actively seeking paid employment.
  • People who are not employed or are not actively
    seeking work are not considered part of the labor
    force.
  • When is a person unemployed?
  • What are the costs of unemployment?

27
How is unemployment measured?
  • U.S. Census Bureau surveys about 60,000
    households a month to determine how many people
    are actually unemployed.
  • This translates into approximately 110,000
    individuals, a large sample compared to public
    opinion surveys which usually cover fewer than
    2,000 people.

28
Sampling for unemployment
  • Every month, one-fourth of the households in the
    sample are changed, so that no household is
    interviewed more than 4 consecutive months.
  • Similarly, interviewers do not decide the
    respondents' labor force classification. They
    simply ask the questions in the prescribed way
    and record the answers. Based on information
    collected in the survey and definitions
    programmed into the computer, individuals are
    then classified as employed, unemployed, or not
    in the labor force.

29
Bureau Labor Statistics determines perimeters for
unemployment.
  • Persons over 16 are considered employed IF
  • They worked at all for pay or profit even if for
    an hour
  • Worked 15 hours or more w/out pay in a
    family-operated enterprise.
  • Have a job which they did not work during (survey
    week) due to illness, vacation, industrial
    disputes, bad weather, time off or personal
    reasons.

30
BLS Continued
  • Persons are considered unemployed IF (during the
    survey week)
  • Do not have a job
  • Are available for work
  • Have actively looked looked for work during
    past four weeks (this requirement is very weak)

31
Reason for unemployment
  • How long a person remains unemployed is affected
    by the nature of the joblessness.
  • Job leavers
  • Job losers
  • Re-entrants
  • New entrants

32
What happens if you cant find work.
  • If unemployment persists workers often give-up
    looking.
  • Discouraged workers are not counted as part of
    the unemployment problem after they give up
    looking for a job.
  • Some people are forced to take any job available
    which meansno longer unemployed, but now
  • underemployed.

33
How could one be underemployed?
  • Underemployment exists when people seeking
    full-time paid employment, work only part time,
    or are employed at jobs below their capability.
  • Underemployed workers represent labor resources
    that are not being fully utilized.

34
Unemployment Cont.
  • Seasonal unemployment is the unemployment due to
    seasonal changes in employment or labor supply.
    What would be an example?
  • At the end of each season, thousands of workers
    must go searching for new jobs, experiencing
    seasonal unemployment in the process.

35
Three basic kinds of unemployment
  • 1. Frictional Unemployment
  • Frictional unemployment is the brief periods of
    unemployment experienced by people moving between
    jobs or into the labor market.
  • Frictional unemployment differs from other
    unemployment in three ways
  • Demand is there
  • Frictionally unemployed have the skills required
  • Job search relatively short

36
3 Kinds of Unemployment Cont.
  • 2. Structural Unemployment
  • Structural unemployment is the unemployment
    caused by a mismatch between the skills (or
    location) of job seekers and the requirements (or
    location) of available jobs.
  • Periods between jobs will be lengthened when the
    unemployed lack the skills that employers
    require.

37
3 Kinds of Unemployment Cont.
  • 3. Cyclical Unemployment
  • Cyclical unemployment is the unemployment
    attributable to the lack of job vacancies i.e.,
    to an inadequate level of aggregate demand.
  • Cyclical unemployment occurs when there are
    simply not enough jobs to go around.

38
More Than a Century of Unemployment
Source U.S. Department of Labor, Bureau of Labor
Statistics
39
OKUNS Law
  • Okuns Law
  • Arthur Okun quantified the relationship between
    the shortfall in real output and unemployment.
  • High unemployment in 1992 left the U.S. 240
    billion short of its production possibilities a
    loss of 920 of goods and services for every
    American.

40
Labor Force? Okuns Law
  • Slow Growth.
  • The economy must grow at least as fast as the
    labor force to avoid cyclical unemployment.
  • Relationship between the shortfall in output and
    unemployment.
  • When you have unemployment of any significance,
    your economy will have reduced output. Ratio
    accepted today is 1 of unemployment yields 2
    less output.
  • A 2/1ratio then allows economists to put a
    amount on the cost of unemployment to the
    economy.

41
Think about this!
  • Unemployment 5 (NARU)
  • Unemployment 8 (x 2 16 less production)
  • Unemployment 25 (depression era x 2) 50
    less production!
  • Today (2010) 9.2 x 2 18.4 less

42
So what is full employment?
  • Full employment is not the same as zero
    unemployment.
  • The economy strives to reach its potential which
    means that full employment is essential.
  • When the actual rate of unemployment exceeds the
    natural rate, the actual output of the economy
    will fall below its potential.
  • Resources are underutilized (inside production
    possibility curve.)

43
Full Employment
  • The condition that exists when the
    unemployment rate is equal to the natural
    unemployment rate.

44
Image Cylinder Economy
Businesses, factories, economynot working at
full capacity
45
Full Employment
AD
AS
LRAS
46
Full Employment Act of 1946
  • The Full-Employment Goal
  • In the Employment Act of 1946, Congress committed
    the federal government to pursue a goal of
    maximum employment.
  • Congress didnt specify what the rate of
    unemployment should be.

47
Congress creates confusion
  • First attempt to define full employment came
    about 1960- Council of Advisors decided that full
    employment meant watching prices ..
  • Rising prices they said would signal that full
    employment was being reached. believed inverse
    relationship unemployment/inflation
  • In 1970-80 Full employment potential was
    considered overly optimistic.
  • Unemployment rates stayed far above 4 even when
    the economy expanded.
  • Inflation began to accelerate at higher levels of
    unemployment.

48
Confusion Continued
  • The redefinition of full employment goal needed
    to be addressed.
  • Needed to realize more youth and women in the
    labor force
  • Needed to acknowledge the increased transfer
    payments
  • Needed to acknowledge the structural changes in
    demand (for such things as technology and trade)
    old industries were not in such demand (steel,
    textiles, auto)\
  • Most economists say 5 today

49
Humphrey-Hawkins Act of 1978
  • This Act was passed to require the Federal
    Reserve to maintain a 4 rate of unemployment
    without inflation while holding the inflation to
    a goal of 3 by implementing monetary policy
    where needed.
  • Fiscal policy might undo this law, but it is
    still a focus of the Fed and the Fed has to
    report to Congress twice a year on the health of
    the American economy.

50
Natural Rate of UnemploymentNARU
  • NARU the difference between full employment and
    100 employment.
  • A level of unemployment that will not trigger
    inflation. i.e. this figure will not bid up
    wages.
  • The natural rate of unemployment is not a
    temporary high or low it is a rate that is
    sustainable into the future.

51
Depression Unemployment
  • Our greatest failure occurred during the Great
    Depression, when as much as one-fourth of the
    labor force was unemployed.
  • The Historical Record
  • Unemployment rates fell dramatically during World
    War II the civilian unemployment rate reached a
    rock bottom 1.2 percent.
  • Since 1950, unemployment rate has fluctuated from
    a low of 2.8 percent during the Korean War (1953)
    to a high of 10.8 percent during the 1981-82
    recession.

52
  • From 1982 to 1989, unemployment fell, but shot up
    again in the 1990-91 recession.
  • In2002unemployment was circa 5.7
  • In2004unemployment was circa 6.5
  • February, 2005 5.4
  • September, 2005.5.1
  • February, 2006.. 4.8
  • January, 2007.4.6
  • October, 2007.4.7
  • October, 2008.6.1
  • February, 2009 ..7.6
  • July, 2009 . 9.5
  • September 2009.9.7
  • October, 2009 10.1
  • February. 2010 9.7
  • May, 2010 9.3
  • June, 2010- 9.7October, 2010 9.6

53
  • New Jobs
  • The new jobs of tomorrow will require increasing
    levels of education and skill.
  • And, new type skills no doubt.
  • Old Skills
  • As the skills gap widens, structural unemployment
    increases.
  • The skills gap is the gap between skills required
    for emerging jobs and the skills of workers.

54
What about the other evil?

Inflation
55
Inflation and Deflation
  • Inflation
  • A sustained increase in the average of all prices
    of goods and services in an economy
  • Deflation
  • A sustained decrease in the average of all prices
    of goods and services in an economy

56
Looking at the past
  • In 1923, prices in Germany rose a trillion times
    over.
  • Prices in Russia, Bulgaria, and some other
    nations have witnessed a tenfold increase in a
    year.
  • In the 1990s the U.S. inflation rate has risen 1
    to 4 percent a year.

57
Inflationis badis bad..is bad!
  • What is inflation?
  • A continuing rise in the average level of
    prices.(it costs more to purchase the typical
    bundle of goods and services that is produced
    or consumed or both.)
  • Bottom line Too many chasing too few goods.

58
  • The CPI is based on what it costs an average
    family to live.
  • Just think Inflation enables us to live in more
    expensive neighborhoods without having to move

59
Inflation is bad see???
  • Shortened Time Horizons
  • During the German hyperinflation, workers were
    paid two or three times a day so that they could
    buy goods in the morning before prices increased
    in the afternoon.
  • Speculation
  • People may be encouraged to withhold resources
    from the production process, hoping to sell them
    later at higher prices.
  • Bracket Creep
  • Under our progressive tax system, taxes go up
    when prices rise.
  • Savings, investment, and work effort decline.

60
Inflation discussion
  • Notice we said an increase in the Average Level
    of prices. Not a change in any specific price
  • Statisticians calculate the average then look for
    changes in the average. The Consumer Price Index
    for All Urban Consumers (CPI-U) decreased 0.4
    percent in August, before seasonal adjustment,
    the Bureau of Labor Statistics of the U.S.
    Department of Labor reported today. The August
    level of 219.086 (1982-84100) was 5.4 percent
    higher than in August 2007.
  • A decline in average prices deflation.
  • Relative price means an increase in the price of
    apples (relative to other fruits) apples cost
    more than pears.
  • Inflation does not make ALL persons worse off.
  • .

61
Nominal Income vs. Real Income
  • What is the difference between nominal income and
    real income.
  • Nominal income you receive in a particular
    period
  • Real income what you can use for purchasing
    stuff.
  • If you nominal income does not change and
    there is an increase in the average level of
    prices.. You cannot buy as much stuff.
  • If the number of dollars you receive every year
    is always the same, your nominal income doesnt
    change- but your real income will rise or fall
    with price changes.

62
Another rule
  • If you put your money into savings and keep it
    there rather than spending it, and inflation
    comes along
  • your money in savings will not buy as much as it
    would prior to the wave of inflation that hit.

63
Uncertainty and Misconception
  • Money Illusion
  • Even people whose nominal incomes keep up with
    inflation often feel oppressed by rising prices.
  • They feel cheated when they discover that their
    higher nominal wages dont buy additional goods.
  • Uncertainty
  • One of the most immediate consequences of
    inflation is uncertainty.
  • Uncertainties created by changing price levels
    affect consumption and production decisions.

64
Inflation discussion
  • Uncertainty on the part of the consumer in trying
    to outguess the price of goods and services.
  • If consumers or producers postpone or cancel
    their expenditure plans, the demand for g s
    will fall. Eventually production falls, and
    unemployment occurs
  • What Causes Inflation?
  • Nearly all economists believe that rapid
    expansion in the supply of money is the cause of
    inflation.

65
What happens if incomes go up to keep pace with
inflation?
  • Bracket creep is the movement of taxpayers into
    higher tax brackets (rates) as nominal incomes
    grow.
  • Deflation Dangers
  • Deflation a falling price level might not
    make people happy either.
  • Deflation reverses the redistributions caused by
    inflation. (Example people today upside down
    on their houses.)

66
Speculations from consumption and production
  • If you expect prices to rise, it makes sense to
    buy things now for resale later.
  • People may be encouraged to withhold resources
    from the production process, hoping to sell them
    later at higher price
  • As such behavior becomes widespread, production
    declines and unemployment rises.

67
Measuring Inflation
  • Measuring inflation serves two purposes
  • Gauges the average rate of inflation.
  • Identifies its principal victims.
  • Consumer Price Index (CPI)
  • The CPI is the most common measure of inflation.
  • The consumer price index (CPI) is a measure
    (index) of changes in the average price of
    consumer goods and services.

68
Macroeconomic Measures - Prices
  • Price Level - A weighted average of the prices of
    all goods and services.
  • Price Index - A measure of the price level.
  • Consumer Price Index (CPI) - A widely cited index
    number for the price level the weighted average
    of prices of a specific set of goods and services
    purchased by a typical household.

69
How to measure rate of inflation
  • Measuring the Rate of Inflation
  • Market Basket
  • Representative bundle of goods and services
  • Base Year
  • The point of reference for comparison of prices
    in other years

70
Macroeconomic Measures - Prices
  • Base Year - The year chosen as a point of
    reference or basis of comparison for prices in
    other years a benchmark year.

71
Computing the Consumer Price Index
72
Consumer Price Index (CPI)
  • By observing the extent of price increases, we
    can calculate the inflation rate.
  • The inflation rate is the annual percentage rate
    of increase in the average price level.

73
Changes in Prices
Percentage change in prices Current year -
later year x100
later year
In 2005 the CPI was 195.3 in 2006 the index was
201.6. What was the percentage change in prices
from 2005-2006? Click below for answer.
3.22
Heres a little hint if you forgetC-L/L
74
CPI determined
  • Calculates the inflation rate
  • Market basket of goods and services (same each
    year.)
  • Bureau of Labor Statistics determines cost in 85
    cities by shopping 184 items.
  • 19,000 stores visited and 60,000
    landlords,renters and homeowners surveyed each
    month
  • Statistics released each month.
  • Yearly average compiled.
  • CPI expressed in base year 82-84
  • Constructing the CPI
  • The base period is the time period used for
    comparative analysis the basis of indexing, for
    example, of price changes.

75
Shopping for CPI
  • CPI is constructed by identifying a typical
    bundle of goods that the average consumer buys.
    This bundle stays the same each year.
  • The base year is changed periodically. The base
    year used is 82-84 and prior to that it was
    63.The price level in the base period is
    designated as 100.
  • The market basket (bundle) can be changed if BLS
    research shows that the average consumer no
    longer is purchasing that good or service.
  • Each item in the bundle is weighted percent-wise
    in the market basket figures.

76
The Market Basket
77
What is the difference?
  • Soif it cost you 225 in 2002 to buy the same
    bundle of goods that you bought in 1983, you
    would be paying 225 more for the same stuff.
  • Look at the inflationary costs of cars, health
    care, housing, (house 4 bedrooms, 2 baths, in
    Highland Park in 1960 cost approximately
    30,000.) (Today?????)

78
Calculations
  • Rate of Inflation of PI(price index)
    from one year to the next.
  • When prices are rising, on average, the price
    index will rise.
  • i This years PI Last years PI
  • Last years PI x100
  • If price index this year was 220 compared to 200
    last year, the inflation rate would equal 10
  • 220 200
  • 200 x 100 10
  • Formula hint c-l/l x 100 (current-last/last x
    100)

79
Lets try another calculation
  • In 2008 CPI measured 215.3
  • In 2004 CPI measured 188.9
  • What was the rate of inflation from 04 08?
  • Ans. 13.9

80
Is there a safety shield against inflation?
  • Answer not much!!!
  • But Congress has passed the Cost-of-living
    adjustment (COLA) provision for those receiving
    Social Security Checks.
  • Checks are indexed each Januaryin the amount
    equal to inflation the previous year.
  • If inflation was 3 then the checks are adjusted
    accordingly.
  • Unions also negotiate for this COLA in their pay
    proposals

81
Bankers in business to make a profit.
  • Some bankers build in that same philosophy-
    Adjustable-rate mortgage (ARM) stipulates an
    interest rate that changes during the term of the
    loan.
  • Actually, banks build the inflation factor into
    all their loansthe number of points depends on
    many variables we will discuss later.
  • The real interest rate is the nominal interest
    rate minus the anticipated inflation rate.

82
Inflation and Deflation (cont'd)
  • Real-world price indexes
  • Consumer Price Index (CPI)
  • Producer Price Index (PPI)
  • GDP deflator
  • Personal Consumption Expenditure (PCE)

83
What is stagflation?
  • High inflation and high unemployment.
  • A period during which an economy is experiencing
    both substantial inflation and either declining
    or slow growth in output.
  • Economists used to say this would and could never
    happen it did in the 80s
  • Paul Volker entered the scene as Fed chairman and
    held court on monetary policy.. More of this
    story later

84
CAUSES of inflation
  • 1. Demand pull (too much aggregate demand and
    not enough aggregate supply.
  • Cost Push (production costs rise) supply
    decreases

S1
S
S
D1
D
D
85
Explanations
  • Demand pull
  • Economy producing at capacity
  • Consumers willing and able to buy more goods
  • Can buy goods because of accumulated savings or
    easy access to credit (refinancing the house,
    second mortgages in Texas, low interest loans,
    credit card interest rates low, prime rate very
    low.)
  • Pull to have more goods and only limited amount
    of goods available causes prices to rise!
  • Hence, a demand-driven rise in average prices or
    demand-pull

86
Explanations Continued
  • Cost Push
  • When producers have to pay more for inputs
    (resources for production), the price of the good
    produced increases.
  • OPEC- prices of crude escalates any product
    dependent on crude (including heating costs,
    increases).-News Flash! Winter of 2007-2008
    heating home costs rose 22

87
Explanation of Dollars in Cost-push
  • Labor has generally been the most expensive of
    inputs for production up till now in our economy.
  • If wage rates are pushed upward. The good or
    service would have an increase in price
    (longshoremans union, pilots,) Note that most of
    these are union connected. Tech industry workers
    took about a 50 cut to get jobs in 2002 as
    opposed to their salaries in 1999.
  • If the Fed releases too much money in the economy
    (continually pushing down interest rates, the
    value of that money is not as solid as if there
    were less circulating more later on that) ?

88
  • Check the current inflation rate..
  • http//inflationdata.com/inflation/
  • Bureau of Labor Statistics

89
Another way to measure U.S. economic health
  • Producer Price Index
  • The PPIs keep track of average prices received by
    producers.
  • October 20, 2005.PPI up highest in 15 years.
  • 3 indicescrude materials, intermediate goods,
    finished goods.
  • Identified in monthly surveys just like CPI is.
  • In SR, PPI increases before CPI (takes a little
    while for the prices to be reflected in products
    we buy.

90
Is the Growth of GDP real or inflated?
  • This is the real test!!!!!!!
  • Was there actual increase in production and
    services or did the prices just skew the GDP
    statistics when CIG was added?
  • Have to correct GDP for price changes so we can
    measure actual production.
  • CPI tells the consumer if they have to spend more
    dollars to get that loaf of bread but other
    measures have to be evaluated.

91
Still another way to test the health of the U.S.
economy
  • The GDP Deflator. The broadest price index and
    covers all output including consumer goods,
    investment goods and government services. (CIG)
  • The GDP deflator isnt a pure measure of price
    change. Its value reflects both price changes AND
    market responses to those price changes as
    reflected in new expenditure patterns.
  • The GDP deflator typically registers a lower
    inflation rate than CPI and the government
    watchdogs use this barometer more readily than
    current CPI

92
Year (base Price of good Quantity GDP Real GDP
1 10 100 1,000 1,000
2 12 120 12x120 1,440 10 x 120 1,200
3 14 140 14 x 140 1,960 10 x 140 1,400
93
Bottom Line
  • CPI is designed to measure the impact of price
    changes on the cost of a typical bundle of goods
    purchased by households(remember, market basket
    and only for urban purchasers.)
  • GDP deflator is a broader price index and is
    designed to measure the change in the average
    price of the market basket of goods included in
    GDP (in addition to consumer goods it includes
    capital goods, g s by government.)
  • CPI measures money income of consumers in
    relation to rising prices (only consumer goods.)
  • GDP deflator measures economy wide inflation-
    more g s included in measurement.

94
Personal Consumption Expenditure
CPE
  • More accurate than CPI
  • Quantifies changing expenditure patterns for
    consumers.
  • Is a weighted measure
  • Doesnt always have same items calculated
  • BEA uses continually updated surveys of consumer
    purchases to determine index
  • Federal Reserve uses this measure for their
    predictions and assessments.

95
Historical Record Graph
96
What really is the goal of fiscal and monetary
planners?
  • The CPIs market basket of goods and services was
    overhauled in 1998.
  • Price Stability..
  • Major changes in the general level of prices
    indicate upsets in the economic system.
  • Prices act as allocators of economic goods, they
    are the mechanism that determines the answer to
    the three basic questions, What, How and For
    Whom.
  • Prices act as the basic force in a capitalistic
    economy ?

97
What does a pair of Nike shoes cost compared to a
pair of Keds?
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