CPI, Employment & Unemployment Lecture 10 Dr. Jennifer P. Wissink ©2018 Jennifer P. Wissink, all rights reserved. September 25, 2018 1

i>clicker questions Can I use a cell phone or a smart phone or graphing calculator or anything like that for the prelim? Yes No Can I use a help sheet during the prelim? Yes No Should I buy a simple function calculator before Prelim 1? Yes No

Using An Index Like the Implicit GDP Deflator Index In 1975/76 Cornell tuition + fees + room & board cost approximately $5,000 per YEAR! So, based solely on the implicit GDP deflator index, what should Cornell have cost in 2015/2016? 3

ANOTHER Measure of Inflation: The Consumer Price Index The consumer price index (CPI) is a price index computed each month by The Bureau of Labor Statistics using a bundle that is meant to represent the “market basket” purchased monthly by the typical urban consumer. It’s probably the most popular/well known price index. The CPI market basket shows how a typical consumer divides his or her money among various goods and services.

FIGURE 7.1 The CPI Market Basket

Percentage Change in CPI Percentage Change in CPI TABLE 7.5 The CPI, 1950–2012 Percentage Change in CPI CPI Percentage Change in CPI 1950 1.3 24.1 1971 4.4 40.5 1992 3.0 140.3 1951 7.9 26.0 1972 3.2 41.8 1993 144.5 1952 1.9 26.5 1973 6.2 44.4 1994 2.6 148.2 1953 0.8 26.7 1974 11.0 49.3 1995 2.8 152.4 1954 0.7 26.9 1975 9.1 53.8 1996 156.9 1955 -0.4 26.8 1976 5.8 56.9 1997 2.3 160.5 1956 1.5 27.2 1977 6.5 60.6 1998 1.6 163.0 1957 3.3 28.1 1978 7.6 72.6 1999 2.2 166.6 1958 28.9 1979 11.3 65.2 2000 3.4 172.2 1959 29.1 1980 13.5 82.4 2001 177.1 1960 1.7 29.6 1981 10.3 90.9 2002 179.9 1961 1.0 29.9 1982 96.5 2003 184.0 1962 30.2 1983 99.6 2004 2.7 188.9 1963 30.6 1984 4.3 103.9 2005 195.3 1964 31.0 1985 3.6 107.6 2006 201.6 1965 31.5 1986 109.6 2007 207.3 1966 2.9 32.4 1987 113.6 2008 3.9 215.3 1967 3.1 33.4 1988 4.1 118.3 2009 214.5 1968 4.2 34.8 1989 4.8 124.0 2010 218.1 1969 5.5 36.7 1990 5.4 130.7 2011 224.9 1970 5.7 38.8 1991 136.2 2012 2.1 229.6 Note: 1982-1984=100

Calculating the Consumer Price Index Define a Base Year. Define a Base Year Bundle. Get cost of base year bundle in base year prices. Get cost of base year bundle in current year’s prices. Construct the CPI.

The IGDPDI vs The CPI

The IGDPDI vs The CPI P P B E B P2 P2 C A P1 A P1 O Q2 Q1 Q O Q2 Q1 Q Demand Demand B E B P2 P2 C A P1 A P1 O Q2 Q1 Q O Q2 Q1 Q

Cool Tool: The BLS “Inflation Calculator” About the CPI inflation calculator: http://www.bls.gov/ The CPI inflation calculator uses the average Consumer Price Index for a given calendar year. This data represents changes in prices of all goods and services purchased for consumption by urban households. This index value has been calculated every year since 1913. For the current year, the latest monthly index value is used.

Why Do We Care So Much About Inflation? Its potential to change the distribution of income. Its special effects on debtors & creditors. The costs of “keeping up” might be self-fulfilling. Resources (time and money) are used up in the mere act of posting and keeping up with price changes and searching for low prices. Increased likelihood that people don’t know (or can’t keep up with) changing relative prices, so they don’t allocate efficiently. Increased uncertainty, pessimism and risk, perhaps making people tentative and investment riskier depresses expenditure on consumption and investment. Real Culprit: asymmetric and unanticipated inflation

And What About Deflation? Its potential to change the distribution of income. Its special effects on debtors & creditors. Can often lead to periods of economic stagnation and high unemployment since people put off buying “stuff” today expecting prices to get lower in the future. Seemed to be a significant part of Japan’s financial crises from circa 1990-2000, the “lost decade”. If it’s hard to cut nominal wages, since everyone moans about that, then real wages will rise during deflations and can lead to unemployment pressure.

Unemployment

Defining & Measuring Unemployment Who does it in the U.S.? United States Department of Labor, Bureau of Labor Statistics… is the principal Federal agency responsible for measuring labor market activity, working conditions, and price changes in the economy. Its mission is to collect, analyze, and disseminate essential economic information to support public and private decision-making. As an independent statistical agency, BLS serves its diverse user communities by providing products and services that are objective, timely, accurate, and relevant. An employed person is any person 16 years old or older who: works for pay, either for someone else or in his or her own business for 1 or more hours per week, works without pay for 15 or more hours per week in a family enterprise, or has a job but has been temporarily absent, with or without pay.

Defining & Measuring Unemployment An unemployed person is a person 16 years old or older who: is not working, is available for work, and has made specific efforts to find work during the previous 4 weeks. NOTE: Persons who were waiting to be recalled to a job from which they had been laid off need not have been looking for work to be classified as unemployed. A person who is not looking for work, either because he or she does not want a job or has given up looking, is not in the labor force.

Defining & Measuring Unemployment *Included are persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces.

Computing Unemployment Computing the unemployment rate for the month of July 2003: Labor force: 141.39 million Employed: 133.47 million Unemployed: 7.92 million

i>clicker question Which one of the following individuals is considered unemployed according to the way the US calculates their official unemployment statistics? John, who works without pay for 30 hours per week in the family owned tax accounting business. Jill, who works 2 hours a week at Walmart as a greeter. Rose, who is currently a full time student at Cornell and working 60 hours a week on her studies to please her parents. Leyton, a former NFL football player just released from his contract who is now actively searching for some other job while taking a night class at TC3 (the local community college). His resume states, “Put me in coach, I’m ready to play!” Lucy, a female with a Ph.D. in physics who decides to stay home and take care of her children until they go to kindergarten.