Economic Challenges Chapter 13

Unemployment Chapter 13, Section 1

Unemployment Unemployment is a nat’l economic issue –Helps measure how economy is doing Economists characterize unemployment in four categories –Frictional –Seasonal –Structural –Cyclical

Frictional Unemployment Unemployment that occurs when people take time to find a job –Switching jobs –Just finished school –Left labor force and trying to return –It is expected that A LOT of people are in this category bec of US size & diversity

Seasonal Unemployment Unemployment that occurs due to seasons –Growing seasons (farmers grow crops) –Construction –Vacation or resort industries –Students who find summer work are “seasonally unemployed” during school –No steps can prevent this type –Again: A LOT of people in this category

Structural Unemployment Workers skills do not match the jobs available –5 causes of structural unemployment Development of new technology pushes out old ways of doing things Discovery of new resources replace old ones Changes in consumer demand: stop purchasing one product for another Globalization: relocation for cheap labor Lack of education: Needed for success

Cyclical Unemployment Unemployment that changes with business cycles –People lose jobs with decrease in production (contraction) –This will rise w/economic downturns –This will fall when economy improves –Example: Great Depression  ¼ of workers were unemployed during GD

Measuring Employment Unemployment is an important indicator in the economy BLS (Bureau of Labor Statistics) polls the population and reports on unemployment (50,000 families) each month…creates a sample –This computes the unemployment rate Supposed to represent the entire population Represents the % of people unemployed

Determining Unemployment Rate Divides the total number unemployed by the labor force Monthly rates are seasonally adjusted Labor Force = civilians 16 and older who have a job or are seeking a job Example  April 2001…6.4 million are unemployed divided by (labor force) x 100 = 4.5 % unemployment

Full Employment Although it seems desirable, full employment is not a characteristic of a strong economy –Full employment will lead to some inefficiency –A strong economy exhibits an unemployment rate of 4-6 percent Economies will always experience cyclical unemployment so full employment is highly unlikely

Underemployment & Discouraged Workers In various cases, people may have a job but be overqualified for that position. This is underemployment. –Example: low skill, low wage job for an educated person Discouraged Workers are those who have stopped looking for a job –They do not appear in the unemployment rate bec they are not “actively” seeking employment

Unemployment that is too low?? Very low unemployment can lead to: –Unneeded positions Too many people working in the same field –High competition by companies to find workers Higher wages Higher prices & inflation because more money paid out in salaries and wages

Review 1. Unemployment that occurs when workers’ skills do not match the jobs that are available is known as –(a) frictional unemployment. –(b) structural unemployment. –(c) seasonal unemployment. –(d) cyclical unemployment. 2. The unemployment rate –(a) is the percentage of the labor force that is unemployed. –(b) is the number of people who are unemployed. –(c) includes only discouraged workers. –(d) is the percentage of the labor force that is underemployed.

Inflation Chapter 13, Section 2

Inflation Inflation is the term used to describe a general increase in prices –It does not always mean that things have become more expensive. –If wages increase with inflation, the change in prices is not felt. Purchasing Power is the power to purchase goods and services. –If prices increase and wages do not, one loses purchasing power. $$ loses power.

Price Indexes Price indexes are measurements that show the average price of a collection of goods Consumer Price Index (CPI) –Best known price index –Calculated monthly and focuses on consumer goods –Uses the market basket The market basket is a collection of representative goods

Market Basket Updated every 10 years Market basket helps economists calculate the average inflation rate for the country Includes products in the categories of: –Food and drink- Housing –Apparel- Transportation –Medical care- Entertainment –Education- Other services

Calculating CPI Base period is set by economists –Currently set at –Cost for the market basket at this time is set at 100 CPI= updated cost / base period cost x 100 As costs rise, the index rises

Inflation Rate Inflation rate measures the percent in price changes over time Can be determined yearly or monthly Calculation: –CPI for year A minus CPI for year B / CPI for year B x 100 –Can change “year A” to “month A”

Types of Inflation Creeping inflation...low inflation rate (1- 3% per year) for a long period of time. – not harmful to the economy (can plan for this) Chronic Inflation...steady accelerating inflation over a period of time –Hard on an economy (things are unpredictable) – planning is difficult Hyper Inflation...out of control inflation ( %)  Money loses value –Extremely hard on the economy – can lead to collapse of economy

Causes of Inflation Many factors can cause a rise in prices. –Quantity Theory...too much money causes inflation (FED must monitor) –Demand-Pull Theory...there is higher demand and prices & wages rise –Cost-Push Theory...cost of production goes up so prices rise (wage increases caused by low unemployment, raw materials)

Wage-Price Spiral Occurs when higher wages cause higher prices and higher prices cause higher wages –One increase in costs leads to an increase in price, which leads to another increase in costs and so on…

Effects of Inflation High inflation can cause many problems for an economy –With high inflation, it is hard to predict the future Purchasing Power...the dollar loses value and one cannot buy as much –Because of inflation, the dollar will not be able to buy the same amount of goods as it did in years past

Effects of Inflation Income...if prices increase but wages do not, your disposable income decreases (troublesome for those on a fixed income-pension) Interest Rates...if inflation increase faster than interest rates, savings and investments may lose money –Opposite if interest rates increase faster

Recent Trends Prices have steadily increased for the past thirty years There was a short period of deflation (falling prices) in the late 90’s –Unemployment very low in late 90’s –Inflation was only at 3% in late 90’s ation_Rate/CurrentInflation.asp ation_Rate/CurrentInflation.asp

Review 1. Inflation is –(a) the process by which rising wages cause higher prices. –(b) the price increase of a typical group of goods. –(c) a general increase in prices. –(d) the ability to purchase goods and services. 2. Chronic inflation occurs when the inflation rate –(a) drops to zero. –(b) remains low for a long time. –(c) grows out of control. –(d) rises steadily over an extended period.

Poverty Chapter 13, Section 3

Poverty Poverty Threshold...income level that is too low to support a family –This will vary with size of family Poverty rate...percentage of households below the poverty line –Used by gov’t to see how many people are poor and what creates this problem

Causes of Poverty Lack of Education –College grad. 3x as much as H.S. grad. Location: suburban higher than city Racial and Gender Discrimination Economic Shifts...layoffs etc...last hired, first fired Family Structure...single parent families are usually living in poverty

Income distribution Median income for US...$51,107 in 2012, yet millions live in poverty –This is due to uneven income distribution –20% of US households make 50% of the income –Lorenz Curve represents the distribution of income in US economy Top 20% of population makes 50% of income

Antipoverty Policies Enterprise zones...companies are encouraged to locate in areas and receive incentives to do so –Benefits businesses and residents bec people can find jobs near their homes Employment Assistance... –Programs to place workers (state level) –Minimum wage –On the job Training

Antipoverty Policies Welfare Reform –Personal Responsibility and Work Opportunity Reconciliation Act (1996) Aimed at reducing reliance on welfare assistance (signed by President Clinton) Set a 5 year limit on benefits Sent responsibility to the states –Block grants...money to the states for distribution rather than directly to the people –Workfare...exchange of work for assistance. This increases the number of low-skilled people w/jobs

Review 1. An income level below which income is insufficient to support a family or household is known as the –(a) income gap. –(b) poverty rate. –(c) poverty threshold. –(d) income inequality. 2. The Personal Responsibility and Work Opportunity Act of 1996 –(a) provides lump sums of money to poor families. –(b) provides federal payments to poor families to supplement state payments. –(c) set a 5-year limit on receipt of benefits. –(d) provides direct cash payments to poor families.