ECONOMIC CHALLENGES CHAPTER 11

UNEMPLOYMENT The most closely watched and highly publicized labor force statistic is the unemployment rate, or the percentage of people in the labor force who are unemployed.

Some unemployment is unavoidable and a natural part of a healthy economy – economists consider an unemployment rate of about 5% to represent full employment.

4 TYPES OF UNEMPLOYMENT 1. Frictional unemployment – when workers are moving from one job to another – ex: Heather leaves her job as a receptionist to find a job as a data processor – during her search, she is considered frictionally unemployed.

2. Structural unemployment – occurs as a result of changes in technology or in the way the economy is structured – Ex; less demand for TV repair specialist because of better technology.

3. Seasonal unemployment – occurs from season to season as a result of holidays, the school year, harvest schedules, etc. – Ex: spring, summer, and fall are busy seasons for farm workers – however, they may lose their job during the winter months.

4. Cyclical unemployment – results from recessions and economic down turns – harms the economy more than any other type of unemployment – Ex: when sales decline, producers tend to reduce production and lay off workers.

INFLATION An increase in the average price level of all products in an economy is called inflation – occurs when the quantity demanded is more than the quantity supplied, consumers must compete for limited products and prices go up.

DEFLATION The opposite of inflation is deflation, which is a decrease in the average price level of all products in an economy – occurs when the quantity supplied is more than the quantity demanded.

Economists classify inflation into 2 general categories based on cause:

1. DEMAND - PULL INFLATION Occurs when prices are pulled up by high demand – Ex: during the 1996 holiday season, enormous demand for the Tickle Me Elmo doll caused widespread shortages which increased the market price for that good.

2. COST- PUSH INFLATION Occurs when prices are pushed up by high production cost – Ex: a car could be bought in the 1920’s for as little as $250, however, new technology has increased production cost and led to a higher price for cars.

POVERTY and INCOME DISTRIBUTION Another way to examine the economic well- being of a nation is to measure the number of people who are living in poverty – Ex: in 2006, 12.3% were living in poverty in the U.S.

According to the Census Bureau, individuals, families, or other households are living in poverty if their total incomes fall below designated income levels – the poverty threshold, or poverty level, is the lowest income that a family or household of a certain size needs to maintain a basic standard of living – Ex: 1n 2008 the poverty threshold for a family of 4 was $21,200.

The poverty rate is the percentage of individuals or families in the total population that are living in poverty.