1. Survey of Economics: Principles, Applications, and Tools
SEVENTH EDITION
Chapter 12
Unemployment and Inflation

2. Learning Objectives
12.1 Define these concepts: the labor force, the labor force participation rate, and the unemployment rate Distinguish between cyclical, structural, and frictional unemployment Describe the costs of unemployment Discuss how the Consumer Price Index is calculated Explain the difference between inflation and the price level Summarize the costs of anticipated and unanticipated inflation.
Slide 2 is list of textbook LO numbers and statements

3. 12.1 EXAMINING UNEMPLOYMENT (1 of 9)
How Is Unemployment Defined and Measured?
The Unemployed:
Individuals who do not currently have a job but are actively looking for work.
Actively looking is critical.

4. 12.1 EXAMINING UNEMPLOYMENT (2 of 9)
How Is Unemployment Defined and Measured?
Labor force
The total number of workers, both the employed and the unemployed.
labor force = employed + unemployed
Unemployment rate
The percentage of the labor force that is unemployed.

5. 12.1 EXAMINING UNEMPLOYMENT (3 of 9)
How Is Unemployment Defined and Measured?
Labor force participation rate
The percentage of the population over 16 years of age that is in the labor force.

6. 12.1 EXAMINING UNEMPLOYMENT (4 of 9)
How Is Unemployment Defined and Measured?
Approximately 63 percent of the civilian population is in the labor force. The unemployment rate in January was 5.7 percent.
SOURCE: Bureau of Labor Statistics, U.S. Department of Labor, 2015.

7. 12.1 EXAMINING UNEMPLOYMENT (5 of 9)
How Is Unemployment Defined and Measured?
Among the developed countries, unemployment rates vary substantially.
SOURCE: The Economist, February 14, 2015.

8. 12.1 EXAMINING UNEMPLOYMENT (6 of 9)
How Is Unemployment Defined and Measured?
Labor Force Participation by women
In 1948, the labor force participation rate for women 20 years and older was 32 percent.
By 1970, it had grown to 43 percent, and by 1997 it had reached 60 percent. This trend reflected remarkable changes in our economy and society as women dramatically increased their presence in the workforce.
Since 1997, the figure has remained virtually constant at 60 percent.

9. 12.1 EXAMINING UNEMPLOYMENT (7 of 9)
Alternative Measures of Unemployment and Why They Are Important
Discouraged workers
Workers who left the labor force because they could not find jobs.
Including discouraged workers, marginally attached workers, and individuals working part time for economic reasons substantially increases measured unemployment in from 8.98 million to million.
SOURCE: Bureau of Labor Statistics, U.S. Department of Labor, 2015.

10. 12.1 EXAMINING UNEMPLOYMENT (8 of 9)
Who Are the Unemployed?
The incidence of unemployment differs sharply among demographic groups.
SOURCE: Bureau of Labor Statistics, U.S. Department of Labor, 2015.

11. APPLICATION 1 DECLINING LABOR FORCE PARTICIPATION
APPLYING THE CONCEPTS #1: What factors account for the decline in the labor force participation rate in the last decade?
Since reaching a peak of 67.3 percent in 1999, the labor force participation rate has fallen to percent by end of What can account for this decline?
Two factors have been prominently discussed by economists. The past decade experienced two recessions and low economic growth by historical standards. Perhaps a large number of individuals just decided that job prospects were too poor and left the labor force during this decade. An alternative explanation focuses on the baby boomers—the generation born after As this large generation ages, a significant number of the baby boomers will naturally retire and leave the labor force.
A recent study by the Federal Bank of Chicago suggested both factors were operative. Based on some statistical models, they estimated that about one-half of the decline in labor force participation was due to a longer run trend of increased retirements from the baby boomers. The rest could be explained by other factors, including sluggish economic growth. Of course, sluggish growth might prompt even more baby boomers to retire, so these factors might not be fully independent.

12. 12.1 EXAMINING UNEMPLOYMENT (9 of 9)
Who Are the Unemployed?
Seasonal unemployment
The component of unemployment attributed to seasonal factors.

13. 12.2 CATEGORIES OF UNEMPLOYMENT (1 of 2)
Types of Unemployment: Cyclical, Frictional, and Structural
Cyclical unemployment
Unemployment that occurs during fluctuations in real GDP.
Frictional unemployment
Unemployment that occurs with the normal workings of the economy, such as workers taking time to search for suitable jobs and firms taking time to search for qualified employees.
Structural unemployment
Unemployment that occurs when there is a mismatch of skills and jobs.

14. 12.2 CATEGORIES OF UNEMPLOYMENT (2 of 2)
The Natural Rate of Unemployment
Natural rate of unemployment The level of unemployment at which there is no cyclical unemployment. It consists of only frictional and structural unemployment.
Full employment The level of unemployment that occurs when the unemployment rate is at the natural rate.

15. APPLICATION 2 LESS UNEMPLOYMENT INSURANCE, MORE EMPLOYMENT?
APPLYING THE CONCEPTS #2: Did reductions in unemployment insurance lead to more rapid growth in employment in 2014?
Higher unemployment benefits do reduce the incentive to search for new jobs and increase unemployment.
Economists Marcus Hagedorn, Kurt Mitman, and Lourii Manovskii used a sudden policy change to address this issue.
The federal government had provided subsidies to states to extend the number of weeks of unemployment, but after December 2013, almost all states reduced the benefits to 26 weeks.
They compared employment growth in high and low benefit states before and after the change. They found that the states that had reduced benefits the most grew faster.

16. 12.3 THE COSTS OF UNEMPLOYMENT
Unemployment insurance
Payments unemployed people receive from the government
TABLE 12.1 The Duration of Unemployment, January 2015
Weeks of Unemployment
Percent of the Unemployed
Fewer than 5 weeks
29.3
5–14 weeks
26.0
15–26 weeks
14.7
27 weeks or longer
30.0
SOURCE: Bureau of Labor Statistics, U.S. Department of Labor, 2015.

17. APPLICATION 3 SOCIAL NORMS, UNEMPLOYMENT, AND PERCEIVED HAPPINESS
APPLYING THE CONCEPTS #3: Are you less upset about being unemployed if unemployment is common in your peer group?
Individuals do not like to become unemployed. A seven year British study showed that:
Well-being declines when we become unemployed.
If employed, having peers lose their job also decreases happiness.
Interestingly, losing one’s job causes less of a decrease in well-being if peers were also unemployed.
In other words, misery loves company.
Why is this significant?
The more unhappy an unemployed person is, the more aggressive they are about finding another job.
If your peer group is unemployed, you may be less aggressive about trying to find another job.

18. 12.4 THE CONSUMER PRICE INDEX AND THE COST OF LIVING (1 of 3)
REAL-NOMINAL PRINCIPLE
What matters to people is the real value of money or income—its purchasing power—not the face value of money or income.
Consumer Price Index
A price index that measures the cost of a fixed basket of goods chosen to represent the consumption pattern of a typical consumer.
The CPI index for a given year, say year K, is defined as

19. 12.4 THE CONSUMER PRICE INDEX AND THE COST OF LIVING (2 of 3)
The CPI versus the Chain Index for GDP
Rent and food and beverages make up 44 percent of the CPI basket. The remainder consists of other goods and services.
SOURCE: Bureau of Labor Statistics, U.S. Department of Labor, 2006.

20. 12.4 THE CONSUMER PRICE INDEX AND THE COST OF LIVING (3 of 3)
Problems in Measuring Changes in Prices
Cost-of-living adjustments (COLAs)
Automatic increases in wages or other payments that are tied to the CPI.

21. APPLICATION 4 THE INTRODUCTION OF CELL PHONES AND THE BIAS IN THE CPI
APPLYING THE CONCEPTS #4: How large is the bias in the CPI due to not immediately incorporating new goods?
Cell phones were introduced in 1983, but not included in the CPI until 1998.
According to Jerry Hausman of MIT, this resulted in an upward bias of the telecommunication component of the CPI of 0.8 to 1.9 percent.
The reported increase in telecommunication prices during this period might have actually been a decrease of .8 percent.
Room air conditioners also took 15 years to be included.
Since new products are constantly being introduced, the bias in the CPI can be large.

22. 12.5 INFLATION (1 of 5) Inflation rate
The percentage rate of change in the price level.
Inflation rate = percentage rate of change of a price index

23. 12.5 INFLATION (2 of 5) Historical U.S. Inflation Rates
After remaining relatively flat for 60 years, the price level began to steadily increase after World War II.
The price of a postage stamp in and 2014 illustrates the change in the overall price level that occurred.

24. 12.5 INFLATION (3 of 5) Historical U.S. Inflation Rates
TABLE 12.2 Prices of Selected Goods, 1940s and 2014
Item
1940s Price
2014 Price
Gallon of gasoline
$0.18
$3.07
Loaf of bread
0.08
3.59
Gallon of milk
0.34
3.49
Postage stamp
0.03
0.49
House
6,550
350,000
Car
800
22,000
Haircut in New York City
0.50 50
Movie tickets in New York City
0.25
12.00
Men’s tweed sports jacket in New York City 15
189
Snake tattoo on arm
100.00
SOURCES: Scott Derks, The Value of a Dollar 1860–1989 (Farmington Hills, MI: Gale Group, 1993) and author’s research and estimates.

25. 12.5 INFLATION (4 of 5) Historical U.S. Inflation Rates
Inflation reached its highest peaks in the postwar era during the decade of the 1970s when the economy was hit with several increases in oil prices.
In recent years, the inflation rate has been relatively low.
SOURCE: U.S. Department of Commerce, 2015.

26. 12.5 INFLATION (5 of 5) The Perils of Deflation
Deflation Negative inflation or falling prices of goods and services.

27. 12.6 THE COSTS OF INFLATION (1 of 2)
Historical U.S. Inflation Rates
Anticipated inflation
Inflation that is expected.
Unanticipated inflation
Inflation that is not expected.

28. 12.6 THE COSTS OF INFLATION (2 of 2)
Anticipated Inflation
Menu costs
The costs associated with changing prices and printing new price lists when there is inflation.
Shoe-leather costs
Costs of inflation that arise from trying to reduce holdings of cash.
Unanticipated Inflation
Hyperinflation
An inflation rate exceeding 50 percent per month.

29. KEY TERMS
Anticipated inflation Labor force Consumer Price Index (CPI) Labor force participation rate Cost-of-living adjustments (COLAs) Menu costs Cyclical unemployment Natural rate of unemployment Deflation Seasonal unemployment Discouraged workers Shoe-leather costs Frictional unemployment Structural unemployment Full employment Unanticipated inflation Hyperinflation Unemployment insurance Inflation rate Unemployment rate