Unemployment

Who is unemployed? We need to understand the following terms first. Population, Labor Force, Civilian Labor Force, and Labor Force Participation Rate

Civilian Labor Force The population in the United States is 300,000,000 (Oct. 2006) The civilian labor force is the total number of people in an economy that are considered employed and unemployed. As of Oct. 2006 there were an estimated 151,998,000 people in the civilian labor force.

Employed vs. Unemployed To be considered employed a person must be 16 years old and noninstitutionalized and fit the following criteria: Get paid for work in the last week Work for a family business without pay Have a job, but not working for the following reasons: sickness, vacation, labor disputes, bad weather 145,287,000 Unemployed To be considered unemployed a person must be 16 years old noninstitutionalized, and fit the following criteria: Had no employment Were available for work (except illness) and had made specific efforts to find employment at sometime during the last 4 weeks 6,711,000 Civilian Labor Force=151,998,000

Labor Force Participation Rate The portion of the civilians 16 years and older that are in the civilian labor force. 151,998,000 the civilian labor force divided by 229,604,000 civilians able to work. Labor Force Participation Rate= 66.2%

Labor Force Participation Rate Important? This is one way that an economy can increase or decrease their production possibilities curve. Why do individuals drop out of the labor force? Discouraged worker, no line of work for them, back to school, homemaker, lack skills or schooling, increase or decrease in institutions, change in military enrollment

Unemployment Rate Percentage of labor force that fall in the unemployed workers criteria. 2006= 4.4% 2010=9.6%

Types of Unemployment Structural: Long-run Unemployment Jobs that become obsolete because of a change in market conditions or technology Ex. Miners, Milkman, Shipbuilder

Types of Unemployment Frictional Unemployment Short term unemployment Ex. People Fired, laid off, or quit their job and are out looking for another job. Or... Recent graduates looking for their first job.

Types of Unemployment Cyclical Unemployment Periodic Unemployment caused by fluctuations in the business cycle. Boom period= low cyclical unemployment Bust period= high cyclical unemployment

Natural Rate of Unemployment The unemployment rate where there is no cyclical unemployment. = structural + frictional AKA- Full Employment Potential Output- the amount of productivity that can be sustained in the long run by looking at the size of the labor force, natural rate of unemployment, and the expected productivity.

Natural Rate of Unemployment 4-6% over last 60 years

Inflation

Inflation General rise in the level of prices over time Effects of Inflation: Purchasing Power Income Nominal income= what you are actually receiving for wages, rent, or profits. Real income= what you can actually buy with the nominal income that you are receiving. Interest Rates Nominal Interest Rates- the amount of money a person pays to borrow money, or a person receives for lending money. Real Interest Rates- the amount of money a person pays to borrow money, or a person receives for lending money after inflation is subtracted.

Types of Inflation Demand-Pull Inflation: Excess spending in an economy beyond its capability of producing leads to a situation that pulls the prices up. This type of inflation does not cause huge implications with the economy except it slows the growth back within the economies capabilities. This type of inflation is depicted by an increase in demand. Cost-Push Inflation: Factors that raise the cost of production and pushes up the cost of goods being produced. This type of inflation has generally causes more unemployment, and can send an economy into a further contraction or recession because the real output being produced is slowed by the rising costs of production. This type of inflation generally causes “stagflation”, and is depicted by a decrease in supply.

Anticipated Inflation The effect of this inflation is very minimal, because different parties involved can adjust their incomes or price levels to minimize the effects of the inflation.

Unanticipated Inflation The effect is greater when business, banks, and individuals do not anticipate a level of inflation, and this unanticipated inflation affects how real income is distributed, helping some and harming others. This is the type of inflation we will spend the majority of our time discussing, because it has more of an impact.

Who is Hurt? Fixed Income Receivers Savers Creditors/Banks/Lenders Interest Rates Nominal Interest Rates- the amount of money a person pays to borrow money, or a person receives for lending money. Real Interest Rates- the amount of money a person pays to borrow money, or a person receives for lending money after inflation is subtracted.

Who is Helped or Unaffected? Flexible Income Receivers COLA’s Debtors/Borrowers Individuals who borrow Governments that borrow