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Copyright 2013 Worth Publishers A Very British Dilemma 2011: English inflation is high; so is unemployment. The Bank of England cannot simultaneously target both—so which should it choose? Copyright 2013 Worth Publishers

The U.S. Unemployment Rate, 1948–2011 Unemployment always rises during recessions and usually (but not always) falls during periods of economic expansion. Purple Lines on the graph represent U.S. Recessions. Unemployment is represented by the orange line, and the graph shows that unemployment ALWAYS increases during a recession. Sources: Bureau of Labor Statistics; National Bureau of Economic Research. Copyright 2013 Worth Publishers

Measuring Unemployment Every month the Census Bureau contacts 60,000 households to determine their economic activity. It asks a series of questions that the Bureau of Labor Statistics uses to determine unemployment. Copyright 2013 Worth Publishers

Defining Unemployment Measuring the labor force participation rate The percent of the adult (16+) noninstitutionalized civilian population who are working or actively looking for work. Measuring unemployment The unemployment rate is the percent of the labor force without a job Labor force participation rate It is important for the students to understand: The Labor Force = (Unemployed + Employed). Then you can calculate the Unemployment Rate as: (Unemployed/Labor Force) x 100 Copyright 2013 Worth Publishers

Copyright 2013 Worth Publishers In your country, there are 24 million people in the labor force. 21.5 million people are employed. What is the unemployment rate in your country? 10.4% 2.5% 89.6% 21.5% Labor Force = 24mm – Employed(21.5mm). So Unemployed = 2.5mm. Formula for Unemployment Rate = Unemployed/Labor Force, so, (2.5/24) x 100 = 10.4 To Next Active Learning Copyright 2013 Worth Publishers

Copyright 2013 Worth Publishers In your country, there are 24 million people in the labor force. 21.5 million people are employed. What is the unemployment rate in your country? 10.4% 2.5% 89.6% 21.5% Labor Force = 24mm – Employed(21.5mm). So Unemployed = 2.5mm. Formula for Unemployment Rate = Unemployed/Labor Force, so, (2.5/24) x 100 = 10.4 To Next Active Learning Copyright 2013 Worth Publishers

Defining Unemployment Unemployment rate: the percent of the total number of people in the labor force who are unemployed. Labor force: all workers, employed or unemployed. Labor force participation rate: the percentage of adults (people 16 and over) in the labor force. Labor Force Participation Rate = Labor Force / Adult Population Copyright 2013 Worth Publishers

Problems with Unemployment Statistics Discouraged workers: nonworking people who have given up looking for work for the time being. Not considered unemployed. The deeper the recession, the more discouraged workers there are. Marginally attached workers: those who were available and actively looked for work recently but are not currently looking (in the past 12 months but NOT in the past 4 weeks) Underemployed workers: people who work part time because they cannot find full-time jobs. Most important is to understand what a Discouraged Worker is. If your told “No” enough times, you give up looking for a job, and you are not calculated in the unemployment rate. Copyright 2013 Worth Publishers

Copyright 2013 Worth Publishers Adult population 200 million Labor force 150 million Employed persons 138.75 million Discouraged workers 10.5 million According to the table, the unemployment rate is _________ and the labor force participation rate is __________. 7%; 60.4% 0.7%; 99.3% 5.6%; 69.4% 7.5%; 75% Unemployed = 138.75 – 150 = 11.25mm. So the Unemployment Rate = (11.25/150) x 100 = 7.5%. Labor Force Participation Rate = Labor Force / Adult Population = 150mm / 200mm = 75%. The answer is “d”. To Next Active Learning Copyright 2013 Worth Publishers

Copyright 2013 Worth Publishers Adult population 200 million Labor force 150 million Employed persons 138.75 million Discouraged workers 10.5 million According to the table, the unemployment rate is _________ and the labor force participation rate is __________. 7%; 60.4% 0.7%; 99.3% 5.6%; 69.4% 7.5%; 75% Unemployed = 138.75 – 150 = 11.25mm. So the Unemployment Rate = (11.25/150) x 100 = 7.5%. Labor Force Participation Rate = Labor Force / Adult Population = 150mm / 200mm = 75%. The answer is “d”. To Next Active Learning Copyright 2013 Worth Publishers

Copyright 2013 Worth Publishers Which of the following individuals can be counted as unemployed? Darren, a 10-year-old child Nazma, a stay-at-home mom Moesha, a full-time college student Carl, who works part time at the Olive Garden but would prefer more hours None of the answers is correct. The answer is “e”. Don’t include people under age 16. Don’t include people not seeking a job. Don’t include institutionalized (Students and Prisoners). Working part time still means working. To Next Active Learning Copyright 2013 Worth Publishers

Copyright 2013 Worth Publishers Which of the following individuals can be counted as unemployed? Darren, a 10-year-old child Nazma, a stay-at-home mom Moesha, a full-time college student Carl, who works part time at the Olive Garden but would prefer more hours None of the answers is correct. The answer is “e”. Don’t include people under age 16. Don’t include people not seeking a job. Don’t include institutionalized (Students and Prisoners). Working part time still means working. To Next Active Learning Copyright 2013 Worth Publishers

Defining Unemployment So how good an indicator is the unemployment rate? It isn’t perfect. It doesn’t measure the quality of jobs or how well people are matched to their jobs. Economists also look at other indicators: Labor force participation rate Number of full-time jobs Average wages Copyright 2013 Worth Publishers

Copyright 2013 Worth Publishers Failure to Launch Unemployment rate for recent college graduates, 1995–2010 Times of high unemployment are especially hard on new graduates. During the 2008 Great Recession, many college graduates returned to school for their masters degrees because the job market was so weak. Copyright 2013 Worth Publishers

The Natural Rate of Unemployment Some unemployment is natural. Over the past 50 years, the national unemployment rate has never dropped below 2.9%. There are three types of unemployment: frictional structural cyclical Natural Unemployment is actually a good thing. It is considered to be Full Employment. It ranges between about 2.9% - 5.0%. We don’t want 0% Unemployment, it would cause other bigger problems in the economy like huge inflation. Understanding these 3 types of unemployment is important. Copyright 2013 Worth Publishers

Frictional Unemployment Frictional unemployment: unemployment due to the time workers spend in job search. Scarcity of information creates frictional unemployment. Matching people to jobs takes time. Economists usually refer to Frictional Unemployment as a description for someone who is upgrading to a better job. It is one of the good types of unemployment. Copyright 2013 Worth Publishers

Structural Unemployment Structural unemployment: more people are seeking jobs in a particular labor market than there are jobs available at the current wage rate, even when the economy is at the peak of the business cycle. Some causes: Labor unions Labor unions sometimes increase wages above the equilibrium. Efficiency wages Efficiency wages: wages that employers set above the equilibrium rate as an incentive for better employee performance. Side effects of government policies Unemployment insurance Mismatches between employees and employers Geography or skills Structural Unemployment is bad, but it is not caused by recessions. Copyright 2013 Worth Publishers

Structural Unemployment Effect of minimum wage on low-skilled unemployment Wage rate Structural unemployment Labor supply Minimum wage Minimum wage Equilibrium wage Some people say the Minimum Wage causes Structural Unemployment. For example, the demand for labor would be at QE (Equilibrium). But since the minimum wage raises wages above equilibrium, employers now only demand labor at QD Which is less than QE . The are many economists who don’t agree, and we will study this issue in more detail later in the semester. Labor demand QD QE QS Quantity of labor Copyright 2013 Worth Publishers

Copyright 2013 Worth Publishers Jasmine has recently moved to Florida because she loves the warm climate there. Being new to the area, she will need to spend a few weeks looking for a new job. This is an example of: frictional unemployment. cyclical unemployment. structural unemployment. underemployment. Frictional Unemployment To Next Active Learning Copyright 2013 Worth Publishers

Copyright 2013 Worth Publishers Jasmine has recently moved to Florida because she loves the warm climate there. Being new to the area, she will need to spend a few weeks looking for a new job. This is an example of: frictional unemployment. cyclical unemployment. structural unemployment. underemployment. Frictional Unemployment To Next Active Learning Copyright 2013 Worth Publishers

The Natural Rate of Unemployment Frictional and structural unemployment are always present; they are “natural.” Natural rate of unemployment: the unemployment rate that arises from the effects of frictional plus structural unemployment. Natural unemployment = frictional unemployment + structural unemployment. Actual unemployment = natural unemployment + cyclical unemployment. Important to understand that: Actual Unemployment – Natural Unemployment = Cyclical Unemployment Copyright 2013 Worth Publishers

Cyclical Unemployment Cyclical unemployment: unemployment correlated with the business cycle—the deviation from the natural rate. Lower growth is usually correlated with higher unemployment for two reasons: When GDP falls, firms lay off workers. Idle labor and capital → economic growth not being maximized → ↓ ability of the economy to create more jobs. Instructor Note: This is a “vicious circle” argument. When the economy slows down, unemployment rises. Rising unemployment implies idle capital and labor and growth slows even more. Fighting for jobs in the Great Depression Copyright 2013 Worth Publishers

Copyright 2013 Worth Publishers Which of the following statements is true? The natural rate of unemployment equals a country’s unemployment rate during a recession. The natural rate of unemployment equals a country’s unemployment rate during an expansion. The natural rate of unemployment is the sum of frictional and structural unemployment. The natural rate of unemployment is the sum of frictional and cyclical unemployment. (C) Natural Unemployment = Frictional + Structural To Next Active Learning Copyright 2013 Worth Publishers

Copyright 2013 Worth Publishers Which of the following statements is true? The natural rate of unemployment equals a country’s unemployment rate during a recession. The natural rate of unemployment equals a country’s unemployment rate during an expansion. The natural rate of unemployment is the sum of frictional and structural unemployment. The natural rate of unemployment is the sum of frictional and cyclical unemployment. (C) Natural Unemployment = Frictional + Structural To Next Active Learning Copyright 2013 Worth Publishers

Inflation and Deflation Inflation hurts the economy, but most people misunderstand how. Copyright 2013 Worth Publishers

The Level of Prices Doesn’t Matter Inflation does not make everyone poorer because incomes often rise with prices. A better measure? Real wages. Real wage is the wage rate divided by the price level. Real income is income divided by the price level. Just like with Nominal GDP compared to Real GDP. Real Wages means Nominal Wages were adjusted for inflation. Real Wages = Nominal Wages / Price Index. Copyright 2013 Worth Publishers

The Rate of Change of Prices Does Matter   The Inflation Rate is simply the percent change. Copyright 2013 Worth Publishers

Winners and Losers from Inflation If inflation is different from predictions, some will lose and some will benefit. Interest rate: the price (calculated as a percentage of the amount borrowed) that a lender charges for the use of his or her savings for one year. Nominal interest rate: the interest rate expressed in dollar terms. Real interest rate: the nominal interest rate minus the rate of inflation. Borrowers can be the winners of inflation. Lenders are the losers of inflation. If I take out a car loan with an interest rate of 6%, and the inflation rate ends up being 2%, then my REAL INTEREST RATE will be 4%. Copyright 2013 Worth Publishers

Winners and Losers from Inflation Americans who took out mortgages in the early 1970s quickly found their real payments reduced by higher-than-expected inflation. (By 1983, the purchasing power of a dollar was only 45% of what it had been in 1973.) Copyright 2013 Worth Publishers

Copyright 2013 Worth Publishers You have just been awarded a cost-of-living increase tied to the CPI. The CPI has gone from 110 to 112. If your salary is $30,000 per year before the increase, what will it be after the CPI increase is factored in? $29,464 $30,545 $30,600 $33,600 First calculate the inflation rate: [(112-110)/110] x 100 = 1.82%. So $30,000 x 1.82% = $545. The answer is “b” $30,545. Copyright 2013 Worth Publishers

Copyright 2013 Worth Publishers You have just been awarded a cost-of-living increase tied to the CPI. The CPI has gone from 110 to 112. If your salary is $30,000 per year before the increase, what will it be after the CPI increase is factored in? $29,464 $30,545 $30,600 $33,600 First calculate the inflation rate: [(112-110)/110] x 100 = 1.82%. So $30,000 x 1.82% = $545. The answer is “b” $30,545. Copyright 2013 Worth Publishers