Types of UnemploymentandInflation The BAD BOYS OF THE ECONOMY

The Bad Boys!!! Unemployment is the negative effect of a recession. If not held in check, it makes economic growth very difficult. Inflation is the possible negative consequence of prosperity. Ultimately, if inflation is not held in check, it can lead to a recession We tend to have one or the other. Fighting one can lead to causing the other

UNEMPLOYMENT

Types of Unemployment Frictional: in between jobs Structural unemployment: due to changing technology Seasonal unemployment: short term jobs; migrant workers, holiday retail jobs, outdoor resort work Cyclical: unemployment due to economic downturns

5 is considered Natural Rate/Full Employment 5 is considered Natural Rate/Full Employment Unemployment – the percentage of the civilian labor force that is not working at a given time. Civilian labor force – the total # of people 16 and up who are employed or actively seeking work (willing and able to work) Unemployment rate = # of unemployed # in the civilian labor force

26-6 Unemployment Under 16 And/or Institutionalized (71.8 Million) 2007 data Total Population (303.6 Million) Not in Labor Force (78.7 Million) Employed (146.0 Million) Labor Force (153.1 Million) Unemployed (7.1 Million) Source: Bureau of Labor Statistics

UGH!!!!!

Problems with the Unemployment Rate Discouraged workers – people who have held jobs but have given up looking for work Underemployed –Workers who have jobs beneath their skill level or who want full-time work and are working part-time. Full-time students are not part of the labor force, even if seeking work. Part Time Workers Uneven Burden

26-13 Cost of Unemployment Foregone output Potential output GDP gap (Actual output – potential output) (Actual output – potential output) Okun’s Law Each 1% above NRU creates negative 2% output gap Each 1% above NRU creates negative 2% output gap

INFLATION!!!!!

Inflation Inflation is an increase in the average price level of all products in an economy Inflation reduces the real purchasing power of the dollar. Inflation usually occurs when aggregate demand increases faster than aggregate supply. Deflation is possible but Rare.

Measuring Inflation Producer Price Index (PPI) The measure of the average change over time in the prices of goods and services used by producers. The measure of the average change over time in the prices of goods and services used by producers. Consumer Price index (CPI): about 2% Specifically measures a basket of 300 goods Specifically measures a basket of 300 goods The measure of the average change over time in the price of a fixed group of products. The measure of the average change over time in the price of a fixed group of products. Used to adjust wages and benefits such as Social Security and COLA’s. Used to adjust wages and benefits such as Social Security and COLA’s. COLA – Cost of Living Adjust. Protects you from the detrimental effects of inflation COLA – Cost of Living Adjust. Protects you from the detrimental effects of inflation

Types of Inflation Demand pull inflation: When aggregate demand increases faster than the economy’s productive capacity. “Too many dollars chasing too few goods” Cost-Push Inflation: When producers raise prices to cover higher resource costs. Wage price spiral: due to higher labor costs Price Expectations: Hyper Inflation

Effects of Inflation Changes in the purchasing power of the dollar: you can buy less Randomly reallocates wealth The value of real wages: wages rarely keep up with inflation Increased Interest rates: discourage spending and investment. FED often raises rates FED often raises rates Banks raise rates to protect against inflation (see next Slide) Banks raise rates to protect against inflation (see next Slide) Savings and investments: discourages savings Increased Production costs: more expensive to produce goods

Inflation Anticipated Inflation Nominal Interest Rate Nominal Interest Rate Real Interest Rate Real Interest Rate Inflation Premium Inflation Premium Nominal Interest Rate Real Interest Rate Inflation Premium 11% 5% 6% =+

Who is Helped – Who is hurt? Anticipated versus Unanticipated Helped “Sort of” Hurt uncertain/no impact Borrows – if at a fixed rates Banks – if lent at fixed rate “Lenders” Income with a COLA Government –debt and income taxes Government – fixed rate fees Adjustable rate Both lender and borrow Renters – if they have set lease rate Any income at a fixed rate *Elderly tend to be hit the hardest Flexible Incomes Homeowners – if paid off Savers