Natural Rate of Unemployment Full Employment is not zero

Cyclical Structural 4-Types of Unemployment Seasonal Frictional

Natural Rate of Unemployment What: Unemployment that does not go away in long run Also called “Full Employment” (know this!) Rate without cyclical unemployment Also, total of frictional & structural (seasonal is adjusted out)

Calculating the Natural Rate Economists debate actual level Was considered to be 5-6% before the 1990’s 2006 considered 4-5% We will use 5% for Natural rate (Full Employment) Critical Thinking: Why is it lower today? Many Reasons: Improved Job. Info on internet Temporary Work Agencies New Welfare Laws

Unemployment Rate vs. Natural Rate When is the economy clearly strong below? Percent of Labor Force 10 Unemployment rate 8 6 Natural rate of unemployment 4 If unemployment rate is less than Full Employment, things are good! 2 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 BUT!---inflationary pressures rise

2-Types of Inflation Demand-Pull Inflation: Cost-Push Inflation Too many dollars chasing too few goods Spending increases faster than production Demand Side Inflation Cost-Push Inflation Increase in cost of any factors of production (input prices) examples: price of oil, labor, steel, etc….) Supply Side Inflation

Low Unemployment & Inflation Business competes for workers Wages begin to increase => The cost of doing business rises Leads to “cost push” inflation As unemployment rate falls Below full employment

Labor Force Participation: Men versus Women Rate (in percent) 100 Men 80 60 40 Women 20 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Labor-Market Participation

Economic History 1970-2007 Analyze GDP, Unemployment & CPI data