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Chapter 8 Unemployment and Inflation

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Title: Chapter 8 Unemployment and Inflation


1
Chapter 8 Unemployment and Inflation
2
The Production Possibilities Frontier and
Unemployment
50
  • An economy is trying to produce ON the curve.
  • At anything less than full employment of
    resources the economy produces inside the curve,
    in the inefficient region.
  • Full employment of ALL resources includes labor.
  • If the economy isnt using all its available
    labor, we arent at our most efficient output
    level.

43
A
34
B
Consumer Goods
(millions of units per year)
20
10
0
0
10
20
30
40
50
Capital Goods
(millions of units per year)
3
Exhibit 1 The Adult Population Sums the
Employed, the Unemployed, and Those Not in the
Labor Force (in millions)
4
Measurements of the Labor Force Unemployment
  • The labor force consists of both those people
    with jobs and those looking for jobs.
  • The Unemployment Rate is calculated by dividing
    those looking for a job divided by the total
    labor force B/(AB)
  • The Labor Force Participation Rate is the share
    of adult population that in the labor force.

C
B
A
Labor Force A B
UR B / (A B)
LFPR A B / (A B C)
5
Who do not get counted as Unemployed
  • Populations in institutions (mental and prisons).
  • Military personal (deployed or not)
  • Discouraged workers
  • Part-time workers (they are considered employed).
  • Retired
  • Adult homemakers
  • Students not working
  • People who dont want to work

C
B
A
6
How Unemployment is Measured The Household
Survey
  • Monthly survey by US Census Bureau
  • Begun in 1940
  • 60,000 individuals across the US
    (90 response rate)
  • Reported the 1st Friday of each month

7
Types of Unemployment
  • The type of unemployment depends on WHY or How an
    individual becomes unemployed.
  • There are four types currently identified by
    economists.
  • Frictional
  • Structural
  • Cyclical
  • Seasonal (Somewhat newly defined)

8
Frictional Unemployment
  • Short-term unemployment that is by choice of the
    worker.
  • People who are in between jobs.
  • People who quit their job.
  • People entering and re-entering the job market
    looking for higher pay or a better situation (new
    graduates).
  • Actively looking for work but just not yet in a
    job yet…but, will be soon
  • (accounts for about 4-6 of the unemp rate.)

9
Structural Unemployment
  • Longer-term unemployment that is due to changes
    in the structure of the economy.
  • Jobs lost to another country.
  • Blue collar jobs (steel, cars, textiles)
  • Service (customer service reps)
  • Sometimes requires re-education or training to
    move back into a job.
  • Innovations occurs that makes jobs obsolete
  • Elevator operators
  • Seamstress
  • Wagon wheel makers

10
Cyclical Unemployment
  • A reduction in the demand for inputs (including
    labor) during economic downturns or low points in
    the business cycle.
  • Unemployment increases economy slips into the
    contractionary phase of the business cycle.
  • Unemployment decreases as production picks back
    up during the expansion phase of the business
    cycle.
  • Cyclical unemployment can add several points to
    the frictional unemployment rate

11
Seasonal Unemployment
  • Loss of a job due to seasonal fluctuations in an
    industry.
  • Some jobs are only available for a portion of the
    year, and workers become unemployed during the
    slow season
  • Construction
  • Tourism
  • Theme parks
  • Fishing and agricultural seasonal workers
  • Summer and Christmas retail jobs

12
Looking at some of the components of unemployment
Structural unemp is difficult/impossible to spot
on a graph
A zero rate of employment is not require for us
to be at full employment.
13
Four reasons the official unemployment rate my
under count the actual unemployment in the economy
  • Discouraged workers arent counted…If you arent
    looking (in the last 4 weeks), you arent
    counted.
  • Disability…people on disability may be able to
    work at least to some extent, but do not.
  • Prison…2 million people are in prison, 2/3rds
    were not working when they entered prison. If
    they werent in prison, most would be counted as
    unemployed.
  • Part-time employment may be underemployment in
    that it doesnt fully employ some that desire
    full-time employment.

14
Exhibit 2 The U.S. Unemployment Rate Since 1900
Lowest level of unemployment 2 during WWII
Supply Side Technology boom
Upward trend after WWII
15
Not all of the unemployment is equally
distributed among the population or across the
country
  • Some groups have been disproportionately affected
    by unemployment.
  • Some areas of the US have been particularly
    plagued by persistently high unemployment rates.

16
Exhibit 3 Unemployment Rates for Various
Groups - 20 years of age or older
17
Other differences in unemployment that have shown
up in research
  • Geographic
  • Urban/Suburban/Rural
  • Southern/Northern
  • Demographic
  • Minority/Majority
  • Male/Female
  • Educational attainment
  • Age

18
Education and unemployment are highly related
  • Young, low-skilled, less educated workers are
    more likely to be unemployed because they are the
    first to be fired if demand declines.
  • They typically do not have special skills or
    training.
  • Jobs that require few skills are the first to be
    outsourced to other countries or eliminated.
  • Conversely, occupations in the technical and
    professional fields (engineers, doctors, etc.,)
    have the lowest unemployment rates.
  • People with a college degree have a greater range
    of skills than those with just HSD or less.

19
Exhibit 4 Unemployment Rates Differ Across U.S.
Metropolitan Areas
Old Data!!!
20
Exhibit 5 In the Last Two Decades, Unemployment
Rates Fell in the United States, Rose in Japan,
and Remained High in Western Europe
21
Unemployment Benefits
  • Benefits for up to 6 mo
  • Not fired for cause or quit.
  • About 40 of take home
  • Pros and cons of Unemp. Benefits
  • Incentives to find work reduced
  • Time available for job search can be higher and
    this can result in a better job match.

22
Inflation…Remember?!
  • Inflation is the sustained increase in the
    overall price level in an economy.
  • Other terms
  • Deflation A sustained decrease in the overall
    price level in an economy
  • Hyperinflation A very high rate of inflation,
    often associated with countries in crisis like
    Germany after WWII or Brazil in the 1980s.

23
Types of Inflation
  • There are two different types of inflation and
    they are identified by where in the AS/AD the
    price changes originate. They are called
  • Demand Pull
  • Cost Push

24
Exhibit 6 Inflation Caused by Shifts of
Aggregate Demand and Aggregate Supply Curves
25
AS/AD at different parts of the Aggregate Supply
Curve
  • At AD, the economy is slack. We can increase
    aggregate demand without too much inflation.
  • However, as we move along the AS curve, increases
    in output are acompanied by a rise in the price
    level.
  • remember the PPF, we are getting close to the PPF
    curve as we push output up and up in the current
    period.
  • Once we get past the bend in AS, any attempt to
    increase output causes prices to increase and
    output stays almost the same…pure inflation.

P
P
P
Q
Q
Q
Full Emp
26
AS/AD at different parts of the Aggregate Supply
Curve
  • When we were in the Great Depression, where along
    the AS curve were we?
  • The low end.
  • When we were experiencing Stagflation, what
    happened to the AS curve?
  • Left shift in AS.
  • This is not in your book!!!

P
P
P
Q
Q
Q
27
Exhibit 7 Consumer Price Index Since 1913
28
Exhibit 7 Consumer Price Index Since 1913
No periods of deflation since the 50s
29
Exhibit 8 Average Annual Inflation from 1994 to
2004 Differed across U.S. Metropolitan Areas
4 in the last two months
30
Anticipated versus Unanticipated Inflation
  • Because the future is uncertain, people have to
    form expectations as to what the inflation rate
    will be.
  • When the rate of inflation is stable or growing
    at a stable rate, its relatively easy to
    predict.
  • When the rate of inflation is unstable,
    predicting what prices will look like in the near
    future becomes more difficult.

31
Who does unanticipated inflation hurt?
  • People on fixed incomes (all inflation hurts
    these people)
  • Sellers who agreed to sell a good delivered in
    the future for a fixed price in todays dollars.
  • Workers who have a COLA below the inflation
    rate…this includes those that have no COLA.
  • Employers with COLAs above inflation rate.
  • Consumers…more time price shopping.

32
Who does unanticipated inflation benefit?
  • Buyers who agreed to buy a good delivered in the
    future for a fixed price in todays dollars.
  • Workers who have a COLA above the inflation rate…

33
Exhibit 10 The Market for Loanable Funds
You cant talk about inflation without talking
about interest rates. Loans are just contracts
for the payment for the use of money. Interest
is the dollar amount paid by borrowers to lenders
for giving up current consumption. The greater
the interest rate, all else constant, the greater
the reward for lending money.
34
Interest Rates and Inflation
  • Interest rates (i) and quantity of loanable funds
    demanded is inversely related.
  • Interest rates and the supply of loanable funds
    is positively related.
  • This is just supply and demand…youve seen it
    before.

35
Real versus Nominal Interest Rates
  • The nominal interest rate measures the interest
    paid on a loan in terms of current dollars. Its
    the interest rate stated on the loan.
  • The real interest rate is the return on the loan
    once inflation is factored in.
  • Real Interest Rate Nominal Interest Rate The
    rate of inflation
  • So, if you received a loan…

36
Inflations effect on borrowers and lenders
  • Mortgage lenders Get back less than loaned
  • Borrowers Pay back less than borrowed
  • The extent differs by loan type
  • Loans types
  • ARM
  • Interest-only
  • Fixed-Rate
  • Short-term
  • Long term

37
Why is inflation generally unpopular???
  • Wage increases by workers are viewed as well
    deserved because of increases in productivity
    and experience over time.
  • BUT, inflation silently reduces the buying power
    of the wage increases.
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