1. Chapter 5: Monitoring Jobs and Inflation
Measures of activity in the labor market
Unemployment
labor force participation
employment-population ratio.
Shortcomings of unemployment rate as measure of labor market performance
Statistics describing U.S. labor market
Prices
Measuring the price level: the consumer price index
Why inflation is a problem
Winners and losers
Shortcomings of CPI as measure of price level

2. Unemployment Why is unemployment a problem? Measuring unemployment
Lost production and income
Lost human capital
Measuring unemployment
The Current Population Survey
Monthly survey
Approximately 60,000 households
Used to monitor employment, hours, wages
Primary source of data for unemployment rates

3. Labor market definitions
Civilian Non-institutionalized Working Age Population
Excludes military and institutionalized
Working age is 16+
Unemployed
Without work but has made specific efforts to find a job within the previous four weeks
Waiting to be called back to a job from which he or she has been laid off
Waiting to start a new job within 30 days

4. Labor Force Measures: April 2017
U.S. population: million
Civilian Non-institutionalized Working age (16+) population: m.
Civilian Labor Force
160.2
Employed
153.2 m.
Unemployed
7.0 m.
Out of labor force
94.4 m.
Not in Civilian Non-Institutionalized Population
70.4 m.

5. Labor market statistics

7. Employment ratio is more cyclical than labor force participation rate.

9. Unemployment as a measure of labor utilization.
Imperfect measure because
Excludes some underutilized
Underemployed
e.g. part-time workers who want full-time work
Discouraged workers
People who want jobs but quit searching due to lack of job opportunities
Some unemployment is “natural”
Even when economy is operating at capacity, there are new entrants who must search for jobs
In 2008, more than 3 million new workers entered the labor force and more than 2.5 million workers retired in U.S. economy.

10. Alternative measures of labor underutilization
U-1 Persons unemployed 15 weeks or longer, as a percent of the civilian labor force
U-2 Job losers and persons who completed temporary jobs, as a percent of the civilian labor force
U-3 Total unemployed, as a percent of the civilian labor force (official unemployment rate)
U-4 Total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers
U-5 Total unemployed, plus discouraged workers, plus all other persons marginally attached to the labor force, as a percent of the civilian labor force plus all persons marginally attached to the labor force
U-6 Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force

12. Types of Unemployment Frictional Structural Cyclical
unemployment that arises from normal labor market turnover (entry, re-entry, etc.)
Affected by UI generosity, demographics
Structural
unemployment created by changes in technology and foreign competition that change the skills needed to perform jobs or the locations of jobs
Cyclical
Fluctuating unemployment over the business cycle
Temporary loss of jobs associated with a recession

13. Mary decides to quit her current job and move to California to start looking for work. Mary is experiencing
Frictional unemployment
Structural unemployment
Cyclical unemployment 10

14. A group of welders lose their jobs because the auto manufacturers purchased robots to do the welding. Since these jobs are gone forever, these welders are experiencing
Frictional unemployment
Structural unemployment
Cyclical unemployment 10

15. Natural Rate of Unemployment is unemployment rate when the economy
is at “full employment”
only frictional and structural unempl, no cyclical
Consistent with stable wages and prices

16. Unemployment and Full Employment
The natural unemployment rate changes over time and is influenced by many factors.
Key factors are
The age distribution of the population
The scale of structural change
Institutional rules
Minimum wage
Unions
Labor laws
Unemployment insurance

17. Which of the following would likely lead to an increase in the natural rate of unemployment?
More rapid technological change
Less generous unemployment insurance
A lower minimum wage
All of the above 10

18. Real GDP and Unemployment
Potential GDP is the quantity of real GDP produced
when the economy is at full employment
When the unemployment rate equals the natural rate
Output Gap = Real GDP – Potential GDP
Positive if unemployment < natural rate
Negative if unemployment > natural rate

20. Inflation
Price level
average of the prices that people pay for all the goods and services that they buy.
Inflation rate
percentage change in the price level between time periods.
Inflation
occurs when the price level is rising persistently.
Deflation
occurs when inflation is negative and prices are falling persistently

21. Why inflation is a problem
Redistributes income and wealth
Borrowers and lenders
Employers and workers
Taxes that are not indexed for inflation
Diverts resources from production
Inflation forecasting becomes more important
Negotiate shorter contracts more frequently
May lead to “barter” if inflation rises to sufficiently high levels (hyperinflation)

22. Measuring the price level and inflation
Consumer Price Index (CPI)
measures the average of the prices paid by urban consumers for a “fixed” basket of consumer goods and services.
defined to equal 100 for the reference or base period.
Using as the base year,
the CPI in December 2009 was 216
prices in December 2009 were 116 percent higher than in

23. Constructing the CPI Selecting the basket
Based on Consumer Expenditure Survey of
Basket contains 80,000 goods

24. Constructing the CPI The monthly price survey Calculating the CPI
Every month, BLS employees check the prices of 80,000 goods in 30 metropolitan areas
Calculating the CPI
Find the cost of the CPI basket at base-period prices.
Find the cost of the CPI basket at current-period prices.
CPI in t = Cost of bundle at current prices in t X Cost of bundle at base year prices

25. Base year = 2008
CPI in 2008 = (50/50)*100
=100
(CPI in base year always equals 100
CPI in 2009 = (70/50)*100
=140
Inflation rate between 2008 & 09
percentage change in CPI
( )/100 = 40%

26. The Inflation Rate

27. Biases in CPI
The CPI might overstate the true inflation for four reasons:
New goods bias
Quality change bias
Commodity substitution bias
Outlet substitution bias

28. Consequences of bias in CPI
Increases government spending too quickly
Social Security, Disability, etc.
Approximately 1/3 of federal spending tied to CPI
Causes tax revenue to rise too slowly
Income tax code is tied to CPI
Creates downward bias in estimate of real earnings growth
Distorts private contracts tied to CPI
Union COLA’s

29. Other price indexes CPI for different types of consumers
Urban consumers
Urban workers
Different regions, states, metro areas
Personal consumption expenditures (chain-type)
CPI for specific commodity groups
Core CPI
Excludes food and energy
GDP deflator (covered earlier)
Covers prices of all goods & services produced, not just what consumers purchase.
Start here Wed.

32. Adjusting for Inflation: Nominal vs. Real Variables
Real Variable in t = Nominal Variable in t X Price Index in t
Price index could be CPI or GDP deflator
e.g. If Nominal Wage in 2010 is $20 and CPI is 200, Real Wage in 2010 is ($20*100/200=$10)
Real variable
Adjusts nominal values to reflect prices in base year.