Other Measures of Total Production and Total Income The Division of Income FIGURE 7-5 The Division of Income

Labor force The sum of employed and unemployed workers in the economy. Employed can be in any job -- part-time, underemployed Unemployment rate The percentage of the labor force that is unemployed: not working and looking. Measuring the Unemployment Rate and the Labor Force Participation Rate The Household Survey Discouraged workers: Available for work but haven’t looked for a job (for the past four weeks) because they believe no jobs are available for them.

The Employment Status of the Civilian Working-Age Population, April 2007

The Employment Status of the Civilian Working-Age Population, July 2009 Measuring the Unemployment Rate and the Labor Force Participation Rate The Household Survey In July 2009, the working-age population of the United States was million. The working-age population is divided into those in the labor force (154.5 million) and those not in the labor force (81.4 million). The labor force is divided into the employed (140.0 million) and the unemployed (14.5 million). Those not in the labor force are divided into those not available for work (75.0 million) and those available for work but not currently working (6.4 million). Finally, those available for work but not in the labor force are divided into discouraged workers (0.8 million) and those not currently looking for work for other reasons (5.6 million).

Unemployment rate: the percentage of the labor force that is unemployed … not working and looking. Labor force participation rate: the percentage of the working-age civilian population in the labor force.

Trends in the Labor Force Participation Rates of Adult Men and Women Since 1948 Measuring the Unemployment Rate and the Labor Force Participation Rate Trends in Labor Force Participation

Household and Establishment Survey Data for March and April 2007 HOUSEHOLD SURVEYESTABLISHMENT SURVEY MARCHAPRILCHANGE MARCHAPRILCHANGE EMPLOYED 146,254,000145,786,000−468,000137,596,000137,684,000+88,000 UNEMPLOYED 6,724,0006,801,000+77,000 LABOR FORCE 152,979,000152,587,000−392,000 UNEMPLOYMENT RATE 4.4%4.5%+0.1% The Establishment Survey: Another Measure of Employment

Frictional Unemployment and Job Search Frictional unemployment Short-term unemployment that arises from the process of matching workers with jobs. Types of Unemployment Structural unemployment Unemployment because of persistent mismatch between worker skills and characteristics and job requirements. Declining industries and regions / Expanding industries and regions Cyclical unemployment Unemployment caused by a business cycle recession. Cyclical Unemployment Structural Unemployment

Full Employment and “Natural” Rate of Unemployment Natural rate of unemployment A normal rate of unemployment, consisting of frictional plus structural unemployment.

Average Unemployment Rates in the United States, Canada, Japan, and Europe, 1997–2006 Government Policies and the Unemployment Rate

Unemployment Insurance and Other Payments to the Unemployed Explaining Unemployment Minimum Wage Laws Labor Unions / Work Rules Seniority / Probation Periods Efficiency Wages : higher-than-market wage that a firm pays to increase worker productivity  wait unemployment. Reduce hiring costs, turnover, monitoring costs, shirking Increase morale

Measuring Inflation Price level (= P) A measure of the average prices of goods and services in the economy. Inflation rate (= π) The percentage increase in the price level from one year to the next. Π = 100 x (P t - P t-1 ) / P t-1 Price Indices of Note GDP Deflator Consumer Price Index Core CPI: CPI excluding energy and food Producer Price Index

Measuring Inflation The Consumer Price Index The CPI Market Basket, December 2006

Consumer price index (CPI) An average of the prices of the goods and services purchased by the typical urban family of four. The Consumer Price Index BASE YEAR (1999) PRODUCT QUANT- ITY PRICE EXPEND- ITURESPRICE EXPENDITURE S (ON BASE- YEAR QUANTITIES)PRICE EXPENDITU RES (ON BASE-YEAR QUANTITIES) Eye exams 1$50 $100 $85 Pizzas Books Total$750$900$915

The Consumer Price Index APPLIED TO 2008APPLIED TO 2009 CPI = Inflation Rate = Π = 100 x (P P 2008 ) / P 2008 Π =

Is the CPI Accurate? Substitution bias. Increase in quality bias. Outlet bias. New product bias. CPI inflation overstates the increase in the “Cost of Living”

Calculating Real Average Hourly Earnings YEAR NOMINAL AVERAGE HOURLY EARNINGS CPI ( = 100) 2006$ YEAR NOMINAL AVERAGE HOURLY EARNINGS CPI ( = 100) REAL AVERAGE HOURLY EARNINGS ( DOLLARS) 2006$ $

Real versus Nominal Interest Rates Nominal interest rate The stated interest rate on a loan. Real interest rate The nominal interest rate minus the inflation rate. Real interest rate = Nominal interest rate − Inflation rate Deflation A decline in the price level.

Real versus Nominal Interest Rates The real interest rate is equal to the nominal interest rate minus the inflation rate. The real interest rate provides a better measure of the true cost of borrowing and the true return on lending than does the nominal interest rate. The nominal interest rate in the figure is the interest rate on three-month U.S. Treasury bills. The inflation rate is measured by the percentage change in the CPI from the same quarter during the previous year.

Does Inflation Impose Costs on the Economy? Inflation Affects the Distribution of Income –Arbitrary redistribution Debtors gain / Creditors lose  disincentive to save Pensioners lose The Problem with Anticipated Inflation Menu costs The costs to firms of changing prices. The Problem with Unanticipated Inflation Price Uncertainty  fear  Stagnation Deflation: Debtors Lose... Creditors Lose... Vicious Downward Spiral

Consumer price index (CPI) Cyclical unemployment Deflation Discouraged workers Efficiency wage Frictional unemployment Inflation rate Labor force Labor force participation rate Menu costs Natural rate of unemployment Nominal interest rate Price level Producer price index (PPI) Real interest rate Structural unemployment Unemployment rate K e y T e r m s