Chapter 13: Economic Challenges

Unemployment 4 Types of Unemployment Frictional Unemployment People are taking time to find another job Dissatisfied with current job Time off for education, or personal reasons

Unemployment 4 Types of Unemployment Seasonal Unemployment Industry regularly shuts down during a particular season Ex. – Farm laborers travel across the country to work seasonal crops Ex. - Tax preparation jobs

Unemployment 4 Types of Unemployment Structural Unemployment Structure of the economy changes, changing types of jobs available New technologies (farm jobs disappear, new factory jobs) Consumer demand changes Globalization – companies relocate jobs to other countries

Unemployment 4 Types of Unemployment Cyclical Unemployment Contraction and recession cause loss of jobs Consumers have less money, demand shifts left for most products Companies lay off workers to accommodate this decrease

Unemployment The Unemployment Rate U.S. Bureau of the Census polls 50,000 families to calculate % of Americans who are looking for work, but cannot find a job # of ppl. unemployed / # of civilians polled

Unemployment The Unemployment Rate An unemployment rate of 0% is impossible Full Employment is when there is no cyclical unemployment Economies are considered healthy with an unemployment rate of 4-6%

Unemployment Problems with using Unemployment Rate as a Measure Does not factor in underemployment – people working in jobs that are beneath their qualifications Ex. – someone with a college degree working part time for $8.00 an hour Does not factor in discouraged workers – people who can’t find a job, and are so frustrated that they quit looking

Inflation Inflation is a general increase in prices Movie Ticket in 1950 - $0.25 Movie Ticket in 2005 - $7.50

Inflation Inflation reduces Purchasing Power – the ability of your money to purchase goods and services Say you have $3.00, and tacos cost $1.00 each Your money is worth 3 tacos

Inflation Inflation reduces Purchasing Power – the ability of your money to purchase goods and services If you hold your $3.00 for a few years, and prices inflate to $1.50 for tacos… Your money is worth 2 tacos!

Inflation Measuring Inflation Level of Prices is calculated by using Price Indexes Consumer Price Index – Bureau of Labor Statistics chooses a “market basket” of commonly bought goods, and tracks changes in price

Inflation CPI = Current Price X 100 Base Period Price

Inflation Types of Inflation Creeping Inflation Chronic Inflation 1-3% per year, causes no problems Chronic Inflation Steady increase each month, takes away incentive to save and invest Hyperinflation Out of control, prices could double every month Leads to total economic collapse

Inflation Causes of Inflation Quantity Theory Having too much money in the economy causes inflation Money supply should be tightly regulated by the government

Inflation Causes of Inflation Demand-Pull Theory Demand for goods exceeds existing supplies Businesses, thus, raise their prices

Inflation Causes of Inflation Cost-Push Theory As costs go up for producers, they increase their prices Ex. – Employees get a raise, so to cover the additional cost, JC Penny raises its prices by 5% This trend is called a wage-price spiral

Poverty Poverty can mean different things to different people Defined by the Census Bureau as “total income less than the amount needed to satisfy the family’s minimum needs” Census Bureau sets the poverty threshold – income level below which family is considered impoverished

Poverty Sample Poverty Thresholds (U.S.) Single parent, one child = $13,020 Two parents, two children = $19,257

Poverty Poverty Rate - % of a group that falls below the poverty threshold U.S. poverty rate is 12.7% (2004) Poverty Rates help show factors that may contribute to poverty

Poverty Poverty Rates of Various Population Groups (U.S.) White = 8.6% Black = 24.7% Hispanic = 21.9% 2 Parent Households = 5.5% Single Parent (Female) Household = 31.6%

Poverty Causes of Poverty Lack of Education Median income for high school dropout = $18,144 Median income for high school grad or GED = $25,360 Median income for 4 year college grad = $42,404

Poverty Causes of Poverty Location Higher income jobs are located in suburban areas Large numbers of minorities concentrated in inner cities, with no means to commute

Poverty Causes of Poverty Racial/Gender Discrimination Women earn $0.75 for every dollar men make Blacks and Hispanics make $0.60 for every dollar whites make Result of education, location disparities, but also discrimination

Poverty Causes of Poverty Economic Shifts Laborers frequently lose their jobs as new technology replaces them Without education and training, they can become left out of the new workforce

Poverty Causes of Poverty Shifts in Family Structure Divorce rate continues to rise, and single parent families are much more likely to be impoverished

Income Distribution Income Distribution – how the nation’s total income is distributed among the population Shows gap between rich and poor

Income Distribution Calculating Income Distribution Divide the nation into 5 parts based on income (ex. Highest 5th, next highest 5th, etc.) Total the incomes of each of the 5 parts Compute % of income each group has

Income Distribution Graphing Income Distribution The Lorenz Curve shows how “unequal” the distribution is

Income Distribution U.S. Income Distribution Lowest 5th – 3.6% Second 5th – 8.9% Third 5th – 15% Fourth 5th – 23.2% Highest 5th – 49.4%

Why the Income Gap? Differences in Skill and Effort – Workers with higher skill levels work more hours at more demanding jobs Inheritances – many Americans inherit large sums of money and invest it, producing more income

How to Fix Poverty No “for sure” solution, but many suggestions Enterprise Zones – government lifts all taxes in run-down areas, thus encouraging new businesses

How to Fix Poverty No “for sure” solution, but many suggestions Employment Assistance – government creates job-training programs for workers who lack skills and institutes a minimum wage

How to Fix Poverty No “for sure” solution, but many suggestions Welfare Reform Welfare – government gives poor people money to cover basic needs, such as food, health care, etc.

How to Fix Poverty No “for sure” solution, but many suggestions Welfare Reform Reform is labeled “workfare” – a program to give temporary assistance until the recipient can find a job