1. 1 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics Prepared by: Fernando Quijano & Shelly Tefft CASE FAIR OSTER P R I N C I P L E S O F ECONOMICS T E N T H E D I T I O N

2. 2 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics

3. 3 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics CHAPTER OUTLINE 22 Unemployment, Inflation, and Long-Run Growth Unemployment Measuring Unemployment Components of the Unemployment Rate The Costs of Unemployment Inflation The Consumer Price Index The Costs of Inflation Long-Run Growth Output and Productivity Growth Looking Ahead

4. 4 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics 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. 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. Unemployment

5. 5 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics 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. inmates

6. Stay at home parents

7. Hospitalized

8. Retired

9. Students

10. Those taking care of elderly at home

11. Discouraged worker

12. 12 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics labor force The number of people employed plus the number of unemployed. labor force = employed + unemployed population = labor force + not in labor force

13. 13 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics Unemployment Measuring Unemployment unemployment rate The ratio of the number of people unemployed to the total number of people in the labor force. labor force participation rate The ratio of the labor force to the total population 16 years old or older.

14. 14 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics TABLE 22.1 Employed, Unemployed, and the Labor Force, 1950–2009 (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) 1950105.062.258.93.359.25.3 1960117.269.665.83.959.45.5 1970137.182.878.74.160.44.9 1980167.7106.999.37.663.87.1 1990189.2125.8118.87.066.55.6 2000212.6142.6136.95.767.14.0 2009235.8154.1139.914.365.49.3 Note: Figures are civilian only (military excluded). Unemployment Measuring Unemployment

15. 15 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics TABLE 22.2 Unemployment Rates by Demographic Group, 1982 and 2010 YearsNovember 1982June 2010 Total10.8 9.5 White9.6 8.6 Men20+9.08.9 Women20+8.17.1 Both sexes16–1921.323.2 African American20.2 15.4 Men Women 20+ 19.3 16.5 17.4 11.8 Both sexes16–1949.539.9 Unemployment Components of the Unemployment Rate Unemployment Rates for Different Demographic Groups

16. 16 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics TABLE 22.3 Regional Differences in Unemployment, 1975, 1982, 1991, 2003 and 2010 19751982199120032010 U.S. avg.8.59.76.76.0 9.7 Cal.9.9 7.56.7 12.4 Fla.10.78.27.35.1 11.7 Ill.7.111.37.16.7 10.8 Mass.11.27.99.05.8 9.2 Mich.12.515.59.27.3 13.6 N.J.10.29.06.65.9 9.7 N.Y.9.58.67.26.3 8.3 N.C.8.69.05.86.5 10.3 Ohio9.112.56.46.1 10.7 Tex.5.66.96.66.8 8.3 Unemployment Components of the Unemployment Rate Unemployment Rates in States and Regions

17. 17 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics 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. Unemployment Components of the Unemployment Rate Suppose labor force=100 million Unemployed=10 million Unemployment rate=10% If 1 million of the unemployed become discouraged, then the new unemployed= 9 million and the new labor force = 99 million New unemployment rate =9/99=9.1%

18. 18 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics As women began joining the labor force in greater numbers in the 1970s and 1980s, their wages relative to men’s wages actually fell. Most economists attribute this decline to the fact that less experienced women were entering the labor force, pointing out the importance of correcting for factors such as experience and education when we analyze labor markets. 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. E C O N O M I C S I N P R A C T I C E A Quiet Revolution: Women Join the Labor Force

19. 19 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics TABLE 22.4 Average Duration of Unemployment, 1970–2009 Weeks 1970 8.6198418.2199715.8 197111.3198515.6199814.5 197212.0198615.0199913.4 197310.0198714.5200012.6 1974 9.8198813.5200113.1 197514.2198911.9200216.6 197615.8199012.0200319.2 197714.3199113.7200419.6 197811.9199217.7200518.4 197910.8199318.0200616.8 198011.9199418.8200716.8 198113.7199516.6200817.9 198215.6199616.7200924.4 198320.0 Unemployment Components of the Unemployment Rate The Duration of Unemployment

20. 20 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics When we consider the various costs of unemployment, it is useful to categorize unemployment into three types: Frictional unemployment Structural unemployment Cyclical unemployment Unemployment The Costs of Unemployment Some Unemployment Is Inevitable

21. 21 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics frictional unemployment The portion of unemployment that is due to the normal turnover in 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. Unemployment The Costs of Unemployment Frictional, Structural, and Cyclical Unemployment natural rate of unemployment The unemployment rate that occurs as a normal part of the functioning of the economy. Sometimes taken as the sum of frictional unemployment rate and structural unemployment rate. cyclical unemployment Unemployment that is above frictional plus structural unemployment.

22. 22 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics The costs of unemployment are neither evenly distributed across the population nor easily quantified. The social consequences of the Depression of the 1930s are perhaps the hardest to comprehend. Few emerged from this period unscathed. At the bottom were the poor and the fully unemployed, about 25 percent of the labor force. Even those who kept their jobs found themselves working part-time. Many people lost all or part of their savings as the stock market crashed and thousands of banks failed. Unemployment The Costs of Unemployment Social Consequences

23. 23 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics 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. Inflation The Consumer Price Index

24. 24 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics 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. ▲ FIGURE 22.1 The CPI Market Basket Inflation The Consumer Price Index

25. 25 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics TABLE 22.5 The CPI, 1950–2009 Percentage Change in CPICPI Percentage Change in CPICPI Percentage Change in CPICPI 19501.324.119705.738.819905.4130.7 19517.926.019714.440.519914.2136.2 19521.926.519723.241.819923.0140.3 19530.826.719736.244.419933.0144.5 19540.726.9197411.049.319942.6148.2 1955  0.4 26.819759.153.819952.8152.4 19561.527.219765.856.919963.0156.9 19573.328.119776.560.619972.3160.5 19582.828.919787.672.619981.6163.0 19590.729.1197911.365.219992.2166.6 19601.729.6198013.582.420003.4172.2 19611.029.9198110.390.920012.8177.1 19621.030.219826.296.520021.6179.9 19631.330.619833.299.620032.3184.0 19641.331.019844.3103.920042.7188.9 19651.631.519853.6107.620053.4195.3 19662.932.419861.9109.620063.2201.6 19673.133.419873.6113.620072.8207.3 19684.234.819884.1118.320083.9215.3 19695.536.719894.8124.02009-0.4214.5 Inflation The Consumer Price Index

26. 26 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics 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. Inflation The Consumer Price Index

27. 27 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics During inflations, most prices—including input prices like wages—tend to rise together, and input prices determine both the incomes of workers and the incomes of owners of capital and land. So inflation by itself does not necessarily reduce ones purchasing power. Inflation The Costs of Inflation

28. 28 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics In the last few years many state governments in the United States have begun to see the costs associated with retiring state workers escalate as the number of retirees has grown. For many of these public- sector retirees, pensions have been tied to the cost of living. E C O N O M I C S I N P R A C T I C E The Politics of Cost-of-Living Adjustments No Cost-of-Living Increase for State Retirees in July The Baltimore Sun

29. 29 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics real interest rate The difference between the interest rate on a loan and the inflation rate. Inflation The Costs of Inflation Inflation May Change the Distribution of Income

30. 30 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics There may be costs associated even with anticipated inflation. One is the administrative cost associated with simply keeping up. 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. Inflation The Costs of Inflation Administrative Costs and Inefficiencies Public Enemy Number One?

31. 31 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics 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. Long-Run Growth

32. 32 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics Productivity grew much faster in the 1950s and 1960s than since. ▲ FIGURE 22.2 Output per Worker Hour (Productivity), 1952 I–2010 I Long-Run Growth Output and Productivity Growth

33. 33 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics Capital per worker grew until about 1980 and then leveled off somewhat. ▲ FIGURE 22.3 Capital per Worker, 1952 I–2010 I Long-Run Growth Output and Productivity Growth

34. 34 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics Looking Ahead This ends our introduction to the basic concepts and problems of macroeconomics. The first chapter of this part introduced the field; the second chapter discussed the measurement of national product and national income; and this chapter discussed unemployment, inflation, and long-run growth. We are now ready to begin the analysis of how the macroeconomy works.

35. 35 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART IV Concepts and Problems in Macroeconomics 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 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. R E V I E W T E R M S A N D C O N C E P T S