CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 1 of 25 PowerPoint Lectures for Principles of Macroeconomics, 9e By Karl E. Case, Ray C. Fair & Sharon M. Oster ; ;

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 2 of 25

7 PART II CONCEPTS AND PROBLEMS IN MACROECONOMICS © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster Unemployment, Inflation, and Long-Run Growth Fernando & Yvonn Quijano Prepared by:

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 4 of UnemploymentMeasuring UnemploymentComponents of the Unemployment RateThe Costs of UnemploymentInflationThe Consumer Price IndexThe Costs of InflationLong-Run GrowthOutput and Productivity GrowthLooking Ahead CHAPTER OUTLINE Unemployment, Inflation, and Long-Run Growth 7 PART II CONCEPTS AND PROBLEMS IN MACROECONOMICS

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 5 of 25 Unemployment employed Any person 16 years old or older (1) who works for pay, either for someone else or in his or her own business for 1 or more hours per week, (2) who works without pay for 15 or more hours per week in a family enterprise, or (3) who has a job but has been temporarily absent with or without pay. Measuring Unemployment unemployed 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.

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 6 of 25 Unemployment not in the labor force A person who is not looking for work because he or she does not want a job or has given up looking. Measuring Unemployment labor force The number of people employed plus the number of unemployed. labor force = employed + unemployed population = labor force + not in labor force

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 7 of 25 Unemployment unemployment rate The ratio of the number of people unemployed to the total number of people in the labor force. Measuring Unemployment labor force participation rate The ratio of the labor force to the total population 16 years old or older.

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 8 of 25 Unemployment Measuring Unemployment TABLE 7.1 Employed, Unemployed, and the Labor Force, 1953–2007 (1)(2)(3)(4)(5)(6) Population 16 Years Old Or Over (Millions) Labor Force (Millions) Employed (Millions) Unemployed (Millions) Labor Force Participation Rate (Percentage Points) Unemployment Rate (Percentage Points) Note: Figures are civilian only (military excluded). Source: Economic Report of the President, 2008, Table B-35.

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 9 of 25 Unemployment Components of the Unemployment Rate Unemployment Rates for Different Demographic Groups TABLE 7.2 Unemployment Rates by Demographic Group, 1982 and 2008 YearsNov. 1982March 2008 Total White Men Women Both sexes16– African-American Men Women Both sexes16– Source: U.S. Department of Labor, Bureau of Labor Statistics. Data are not seasonally adjusted.

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 10 of 25 Unemployment Components of the Unemployment Rate Unemployment Rates in States and Regions TABLE 7.3 Regional Differences in Unemployment, 1975, 1982, 1991, and U.S. avg Cal Fla Ill Mass Mich N.J N.Y N.C Ohio Tex Sources: Statistical Abstract of the United States, various editions.

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 11 of 25 Unemployment Components of the Unemployment Rate Unemployment Rates in States and Regions A Quiet Revolution:Women Join the LaborForce If you are interested in learning more about the economic history of American women, read the book Understanding the Gender Gap: An Economic History of American Women by Harvard University economist Claudia Goldin.

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 12 of 25 Unemployment Components of the Unemployment Rate Discouraged-Worker Effects discouraged-worker effect The decline in the measured unemployment rate that results when people who want to work but cannot find jobs grow discouraged and stop looking, thus dropping out of the ranks of the unemployed and the labor force.

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 13 of 25 Unemployment Components of the Unemployment Rate The Duration of Unemployment TABLE 7.4 Average Duration of Unemployment, 1979–2007 Weeks Sources: U.S. Department of Labor, Bureau of Labor Statistics.

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 14 of 25 Unemployment The Costs of Unemployment Some Unemployment Is Inevitable When we consider the various costs of unemployment, it is useful to categorize unemployment into three types:  Frictional unemployment  Structural unemployment  Cyclical unemployment

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 15 of 25 Unemployment The Costs of Unemployment Frictional, Structural, and Cyclical Unemployment frictional unemployment The portion of unemployment that is due to the normal working of the labor market; used to denote short-run job/skill matching problems. structural unemployment The portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries.

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 16 of 25 Unemployment The Costs of Unemployment Frictional, Structural, and Cyclical Unemployment natural rate of unemployment The unemployment that occurs as a normal part of the functioning of the economy. Sometimes taken as the sum of frictional unemployment and structural unemployment. cyclical unemployment The increase in unemployment that occurs during recessions and depressions.

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 17 of 25 Unemployment The Costs of Unemployment Social Consequences In addition to economic hardship, prolonged unemployment may also bring with it social and personal ills: anxiety, depression, deterioration of physical and psychological health, drug abuse (including alcoholism), and suicide.

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 18 of 25 Inflation The Consumer Price Index consumer price index (CPI) 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.

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 19 of 25 Inflation The Consumer Price Index The CPI market basket shows how a typical consumer divides his or her money among various goods and services. Most of a consumer’s money goes toward housing, transportation, and food and beverages. Source: The Bureau of Labor Statistics  FIGURE 7.1 The CPI Market Basket

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 20 of 25 Inflation The Consumer Price Index TABLE 7.5 The CPI, 1950–2007 Percentage Change in CPICPI Percentage Change in CPICPI Percentage Change in CPICPI  Sources: Bureau of Labor Statistics, U.S. Department of Labor.

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 21 of 25 Inflation The Consumer Price Index producer price indexes (PPIs) Measures of prices that producers receive for products at all stages in the production process. The indexes are calculated separately for various stages in the production process. The three main categories are finished goods, intermediate materials, and crude materials, although there are subcategories within each of these categories.

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 22 of 25 Inflation The Costs of Inflation real interest rate The difference between the interest rate on a loan and the inflation rate. The indexes are calculated separately for various stages in the production process. The three main categories are finished goods, intermediate materials, and crude materials, although there are subcategories within each of these categories. Inflation May Change the Distribution of Income

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 23 of 25 Inflation The Costs of Inflation There may also be costs associated even with anticipated inflation. One is the administrative cost associated with simply keeping up. Administrative Costs and Inefficiencies Economists have debated the seriousness of the costs of inflation for decades. No matter what the real economic cost of inflation, people do not like it. Public Enemy Number One?

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 24 of 25 Long-Run Growth output growth The growth rate of the output of the entire economy. per-capita output growth The growth rate of output per person in the economy. productivity growth The growth rate of output per worker.

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 25 of 25 Long-Run Growth Output and Productivity Growth Productivity grew much faster in the 1950s and 1960s than since.  FIGURE 7.2 Output per Worker Hour (Productivity), 1952 I–2007 IV

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 26 of 25 Long-Run Growth Output and Productivity Growth Capital per worker grew until about 1980 and then leveled off somewhat.  FIGURE 7.3 Capital per Worker, 1952 I–2007 IV

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 27 of 25 consumer price index (CPI) cyclical unemployment discouraged-worker effect employed frictional unemployment labor force labor force participation rate natural rate of unemployment not in the labor force output growth per-capita output growth REVIEW TERMS AND CONCEPTS producer price indexes (PPIs) productivity growth real interest rate structural unemployment unemployed unemployment rate 1. Labor force = employed + unemployed 2. Population = labor force + not in labor force 3. 4.