1. Unemployment and Inflation Chapter 9

2. Types of Unemployment
The unemployment rate rises during recessions and falls during expansion.
Shaded areas indicate recessions.
The Annual Unemployment Rate in the United States, 1950–2010

3. Measuring the Unemployment Rate and the Labor Force Participation Rate
The Household Survey
Labor force The sum of employed and unemployed workers in the economy.
Unemployment rate The percentage of the labor force that is unemployed.
Discouraged workers People who are available for work but have not looked for a job during the previous four weeks because they believe no jobs are available for them.

4. Measuring the Unemployment Rate and the Labor Force Participation Rate
The Household Survey
The Employment Status of the Civilian Working-Age Population, September 2011

5. Measuring the Unemployment Rate and the Labor Force Participation Rate
The Household Survey
• The unemployment rate measures the percentage of the labor force that is unemployed.
• The labor force participation rate measures the percentage of the working-age population in the labor force.

7. Additional example

8. Solved Problem
What Happens if You Include the Military?
In the BLS household survey, people on active military service are not included in the totals for employment, the labor force, or the working-age population. Suppose people in the military were included in these categories.

9. Trends in Labor Force Participation
Trends in the Labor Force Participation Rates of Adult Men and Women Since 1948
The labor force participation rate of adult men has declined gradually since 1948, but the labor force participation rate of adult women has increased significantly, making the overall labor force participation rate higher today than it was in 1948.

10. What Explains the Increase in “Kramers”?
Making the Connection
What Explains the Increase in “Kramers”?
Why do more men seem to be adopting Kramer’s lifestyle?

11. How Long Are People Usually Unemployed? PERCENTAGE OF TOTAL UNEMPLOYED
Duration of Unemployment
LENGTH OF TIME UNEMPLOYED
PERCENTAGE OF TOTAL UNEMPLOYED
Less than 5 weeks
35.6%
5 to 14 weeks
31.3
15 to 26 weeks
15.7
27 weeks or more
17.5
(a) Duration of unemployment during an economic expansion.
22.0%
24.2
19.9
33.8
(b) Duration of unemployment during an economic recession.

13. How Unusual Was the Unemployment Situation Following the 2007–2009 Recession?
The average period of unemployment was twice as high following the 2007–2009 recession as following any other recession since the end of World War II.

14. Measuring the Unemployment Rate and the Labor Force Participation Rate
The Establishment Survey: Another Measure of Employment
Household and Establishment Survey Data for March and April 2007
HOUSEHOLD SURVEY
ESTABLISHMENT SURVEY
MARCH
APRIL
CHANGE
EMPLOYED
146,254,000
145,786,000
−468,000
137,596,000
137,684,000
+88,000
UNEMPLOYED
6,724,000
6,801,000
+77,000
LABOR FORCE
152,979,000
152,587,000
−392,000
UNEMPLOYMENT RATE
4.4%
4.5%
+0.1%

15. The Establishment Survey: Another Measure of Employment
Household and Establishment Survey Data for June and July 2009
HOUSEHOLD SURVEY
ESTABLISHMENT SURVEY
JUNE
JULY
CHANGE
Employed
140,196,000
140,041,000
−155,000
131,735,000
131,488,000
−247,000
Unemployed
14,729,000
14,462,000
−267,000
Labor force
154,926,000
154,504,000
−422,000
Unemployment rate
9.5%
9.4%
−0.1%

16. Types of Unemployment Frictional Unemployment and Job Search
Frictional unemployment: Short-term unemployment that arises from the process of matching workers with jobs.
Structural Unemployment
Structural unemployment: Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of jobs.
Cyclical Unemployment
Cyclical unemployment: Unemployment caused by a business cycle recession.

17. Types of Unemployment Full Employment
Natural rate of unemployment: The normal rate of unemployment, consisting of frictional unemployment plus structural unemployment.

18. Government Policies and the Unemployment Rate
International Comparisons
Average Unemployment Rates in the United States, Canada, Japan, and Europe, 1999–2008
The unemployment rate in the United States is usually lower than the unemployment rates in most other high-income countries, other than Japan. This is partly because the United States has tougher requirements for the unemployed to receive government payments. These requirements raise the costs of searching for a better job and lower the unemployment rate.

19. Unemployment rates, February 2011–June 2013
BLS

20. Unemployment rates, February 2011–June 2013

21. Explaining Unemployment
Government Policies and the Unemployment Rate
Minimum Wage Laws
In 1938, the federal government enacted a national minimum wage law.
If the minimum wage is set above the market wage determined by the demand and supply of labor, the quantity of labor supplied will be greater than the quantity of labor demanded.
Economists agree that the current minimum wage is above the market wage for some workers, but they disagree on the amount of unemployment that has resulted.

23. Why Does Costco Pay Its Workers So Much More Than Wal-Mart Does?
Efficiency Wages
Efficiency wage A higher-than-market wage that a firm pays to increase worker productivity.
Why Does Costco Pay Its Workers So Much More Than Wal-Mart Does?
Costco’s relatively high wages and health benefits reduce employee turnover and raise morale and productivity.

24. Inflation a tax that no one can avoid

25. Measuring Inflation
Price level: A measure of the average prices of goods and services in the economy. Measured by the Consumer Price Index CPI.
Inflation rate : The percentage increase in the price level from one year to the next. Measured by the change in CPI

26. Measuring Inflation- The Consumer Price Index
The CPI Market Basket, December 2010
Compare to next slide
The Bureau of Labor Statistics surveys 30,000 households on their spending habits. The results are used to construct a market basket of goods and services purchased by the typical urban family of four.
The chart shows these goods and services, grouped into eight broad categories. The percentages represent the expenditure shares of the categories within the market basket.
The categories of housing, transportation, and food make up about three-quarters of the market basket.

28. EXPENDITURES (ON BASE-YEAR QUANTITIES)
Measuring Inflation
The Consumer Price Index
Consumer price index (CPI): An average of the prices of the goods and services purchased by the typical urban family of four.
BASE YEAR (1999)
2008
2009
PRODUCT
QUANTITY
PRICE
EXPENDITURES
EXPENDITURES (ON BASE-YEAR QUANTITIES)
Eye examinations 1
$50.00
$100.00
$85.00
Pizzas 20
10.00
200.00
15.00
300.00
14.00
280.00
Books
25.00
500.00
27.50
550.00
Total
$750.00
$900.00
$915.00
Price level (CPI)
CPI2008=
CPI2009=
Inflation (change in CPI)
(CPI2009CPI2008)/CPI2009x100%=

29. Measuring Inflation The Consumer Price Index CPI =
FORMULA
APPLIED TO 2008
APPLIED TO 2009
CPI =
Don’t Let This Happen to YOU! Don’t Miscalculate the Inflation Rate

30. A Simple Year-Year Market Basket Comparison
Basket of Goods
Prices
2003
2004
10 Pairs of Jeans
$20/pair
$25/pair
12 Flannel Shirts
$15/shirt
$20/shirt
100 lb of apples
$0.80/lb
$1.05/lb
80 lbs of oranges
$1.00/lb
Total Expenditures
Calculate the CPI in 2003.
Calculate the CPI in 2004.

31. Measuring Inflation Is the CPI Accurate?
It is important that the CPI be as accurate as possible, but there are four biases that make changes in the CPI overstate the true inflation rate:
• Substitution bias.
• Increase in quality bias.
• New product bias.
• Outlet bias.

32. Other ways to measure inflation
The Producer Price Index
Producer price index (PPI): An average of the prices received by producers of goods and services at all stages of the production process.
GDP deflator
Based on all prices in the economy

33. Using Price Indexes to Adjust for the Effects of Inflation

34. NOMINAL AVERAGE HOURLY EARNINGS REAL AVERAGE HOURLY EARNINGS
Solved Problem
Calculating Real Average Hourly Earnings
YEAR
NOMINAL AVERAGE HOURLY EARNINGS
CPI
( = 100)
2004
$15.69
188.9
2005
16.13
195.3
2006
16.76
201.6
YEAR
NOMINAL AVERAGE HOURLY EARNINGS
CPI
( = 100)
REAL AVERAGE HOURLY EARNINGS
( DOLLARS)
2004
$15.69 /
188.9
x100%=
$8.31
2005
16.13
195.3
8.26
2006
16.76
201.6
8.31

35. Example 4 and 5
Real variable= nominal variable/price index*100

36. Real versus Nominal Interest Rates
Nominal interest rate : The stated interest rate on a loan.
Real interest rate: The nominal interest rate minus the inflation rate.
Real interest rate = Nominal interest rate − Inflation rate
Deflation: A decline in the price level.

37. Real versus Nominal Interest Rates
Nominal and Real Interest Rates, 1970–2008
The real interest rate is equal to the nominal interest rate minus the inflation rate.
The real interest rate provides a better measure of the true cost of borrowing and the true return on lending than does the nominal interest rate.
The nominal interest rate in the figure is the interest rate on three-month U.S. Treasury bills. The inflation rate is measured by the percentage change in the CPI from the same quarter during the previous year.
What should you do when economy is experiencing deflation?

38. Does Inflation Impose Costs on the Economy?
Inflation Affects the Distribution of Income
The extent to which inflation redistributes income depends in part on whether the inflation is anticipated.
The Problem with Anticipated Inflation
Menu costs The costs to firms of changing prices.
Menu cost: inflation jump in EU when switching to Euros
Inflation distribution of income
- Some people find their income increase more than inflation so their purchasing power increases.
- Some people find their income increase less than inflation so their purchasing power decreases.
The Problem with Unanticipated Inflation
Leads to stronger effects on distribution
Like many of life’s other problems, inflation is easier to manage if you see it coming.

40. Source: “Inflation ‘s last hurrah”, The Economist print edition, Aug 21st