1. Unemployment and Inflation
EVERYONE’S NIGHTMARE
Chapter 6

2. Unemployment and Inflation
The two key concepts of Macroeconomics
Either can destabilize the economy.
When BOTH happen together – REALLY, REALLY BAD.
STAGFLATION

3. Unemployment People who are looking for work but have no jobs.
ACTIVELY LOOKING is critical to the definition.

4. Definitions for Unemployment
Labor Force = Employed + unemployed
Unemployment Rate = number of unemployed / total labor force
Labor Force Participation Rate = labor force / population 16 and over

5. Definitions of Unemployment
Discouraged Workers
People who left the labor force because they could not find jobs.
Underemployed
Workers holding part-time work, but prefer full-time work OR hold jobs that are far below their capabilities.

6. The reasons for unemployment
Frictional Unemployment
Structural Unemployment
Seasonal Unemployment
Cyclical Unemployment

7. Cyclical Unemployment
When GDP fluctuates demand in the economy is not sufficient to provide jobs for all those who seek work.
Recession
Depression

8. Frictional Unemployment
People in between jobs.
Short period of time while changing jobs.
3% - 4% frictional employment is considered normal.

9. Structural Unemployment
When changes in market supply or demand conditions affect major industries or regions.
The part of unemployment that results from the mismatch of skills and jobs.

10. Causes of Structural Unemployment
Decline in demand for a product
Increased foreign competition
Automation of production
Increased raw material costs
Lack of labor mobility between occupations or regions.

11. Seasonal Unemployment
Not included in your book – but in most other Econ texts
Most seasonal unemployment is tends to occur in certain industries.
Hotel and catering
Tourism
Fruit picking
Christmas

12. Suspicious Unemployment Statistics
Natural Rate of Unemployment
Level of unemployment at which there is no cyclical unemployment.
Full Employment
Level of employment that occurs when the unemployment rate is at the “natural rate.”

13. QOD:
Why do we need unemployment to make the economy healthy?

14. The Natural Rate of Unemployment
Depending on whom you talk to …
4% to 5% is considered the natural rate.
Consists of only structural and frictional unemployment.

15. Historic Unemployment Rates
1933 during the Great Depression – 25%
1998 – Unemployment fell to 3.9%
October 2009 – 10.2% - highest in 26 years!
March 2010 – 9.7%
April ??

16. 3.9% Unemployment
Why wouldn’t this be good for the economy???

17. Wage Inflation
How do employers attract or keep employees if there is not enough workers?
Higher Wages
More Benefits
1999, Amigos was paying $9 per hour and McDonalds offered $500 signing bonuses.

18. Why would that be bad? Cost – Push Inflation
Costs go up (labor), so prices have to be upped to cover labor.
Higher prices make workers demand more money.
Cost – Push Inflation

19. BTW: Current Data on Unemployment for the US
According to the Bureau of Labor Statistics (
Currently wages are stagnant to negative.

20. Unemployment Data
Previously: 303,000 new jobless claims were filed in March 2009.
Currently: in the week ending April 24, 2010
people reported getting jobs in March 2010

21. How does the US compare? 07-December 09

22. BRIC Country Unemployment
Brazil – 9.7% (est.)
Russia – 6.4% (est.)
India – 6.8% (DOWN)
China – 4.0% (UNRELIABLE!)

23. BTW:
Top 3 of unemployment:
Nauru
Liberia
Zimbabwe

24. Countries with the lowest unemployment -
Andorra
Monaco
Qatar

25. Review How do economists measure the unemployed?
Previously unemployed individuals who have stopped looking for work are called ____ workers.
What are the types of unemployment?
The natural rate of unemployment consists solely of _______ and ____ unemployment.

26. The Consumer Price Index and the Cost of Living
The INFLATION Indicators

27. What do you think?
1976: Starting salary for an economics professor was $15,000
2001: Starting salary for an econ prof was $55,000.
Considering the REALITY PRICIPLE, who had a better life?

28. Reality Principle
What matters to people is the real value of money – its PURCHASING POWER – not the nominal or face value of money.

29. CPI: Consumer Price Index
A price index that measures the cost of a fixed basket of goods chosen to represent the consumption pattern of individuals.
Tracks the cost of living over time.

30. What is in the “market basket”?
Food and Beverages
Housing
Apparel
Transportation
Medical Care
Recreation
Education
Other goods and services

31. Food and Beverages Breakfast Cereal Milk Chicken Wine Coffee
Service meals
Snacks

32. Housing Rent for primary residences Owners equivalent rent
Fuel Oil (home heating)
Bedroom furniture

33. Apparel
Men’s shirts and sweaters
Women’s dresses
Jewelry

34. Transportation
New cars
Airline fares
Gasoline
Car insurance

35. Medical Care Prescription drugs Medical supplies Doctor services
Eyeglasses
Eyeglass services
Hospital care

36. Recreation
Television
Pets
Pet products
Sports equipment
Admissions

37. Education and Communication
College Tuition
Postage
Telephone Services
Computer Software
Computer accessories

38. Other Goods and Services
Tobacco and smoking products
Haircuts
Other personal services
Funeral Expenses

39. BTW CPI - U for 2010: UP .1% so far for the year.
CPI – U for 2010 w/o fuel costs and food. – UP .2%
How does that compare with our wages?
Statistics from bls.gov

40. CPI
Used by both government and the private sector to measure changes in prices facing consumers.
SEE PAGE 122 to calculate CPI

41. CPI versus Chained GDP
CPI measures goods produced in prior years (older cars) as well as imported goods.
Chained GDP does not measure either of these. ONLY new goods and those produced in the country.

42. CPI v. Chained GDP
Because consumers will cut back on goods that cost more – the CPI will tend to overstate true changes in cost of living.
If chicken goes up in price, we switch to hamburger.

43. CPI Problems
Does not “cut back” on higher priced goods like consumers do.
Would still count the same share of chicken as it did before the price index.

44. What Economists THINK
CPI may be overestimated by .5% to 1.5% each year.
BIG argument among the econ community.

45. Cost of Living Adjustments
Automatic increases in wages or other payments that are tied to a price index.
For Future Reference on contract negotiations: Called COLA.

46. COLA and CPI
As CPI goes up, our wages or Social Security makes adjustments to keep up with the cost of living.
SEE PAGE 124 THE CPI AND SOCIAL SECURITY

47. INFLATION!!! Inflation Rate:
The percentage rate of change of the price level of the economy.

48. Calculating Inflation Rates
Inflation Rate = percentage rate of change of a price index.
See page 124 for more on how to calculate!

49. Looking Ahead Two “Schools” of Macroeconomics Classical Economics
Keynsian Economics

50. Classical Economics
A school of economic thought that provides insights into the economy when it operates at or near full employment.
Popular thought so far in 2006.
Picture of David Ricardo Darwin meets Economics

51. Keynsian Economics
A school of economic thought that provides insights into the economy when it operates away from full employment.
Economic fluctuations, business cycles, sharp changes in the economy.

52. THIS Concludes what the book has on unemployment and inflation
I THINK you need and deserve more info on inflation!

53. So what is so wrong if everyone who wants a job has a job?

54. INFLATION
                                                                                                                                                
The trade-off with more employment.

55. What is the CPI pattern in 2010?
CPI measures the dollar’s worth.
Check out the website
TRY THE professor’s salary from the beginning with this site!

56. Types of Inflation Demand-Pull Inflation Cost-Push Inflation
Monetary Inflation
Stagflation
Hyperinflation

57. Demand-Pull Inflation
When the demand for goods and services exceeds the production capacity.
Prices rising because of shortages.

58. Cost-Push Inflation
Inflation can arise from changes in the costs of production of goods and services.
Increase in the price of raw materials
Increase in the price of labor
Increase in the cost of capital.

59. Cost-Push v. Demand Pull
They push and pull prices up.
Labor contracts containing COLA clauses.
Cost-Of-Living Adjustments.

60. Monetary Inflation
Inflation caused by excessive growth in the money supply.
Value of money decreases if it isn’t that “rare.”

61. Rule for Monetary Inflation: VELOCITY
Quantity Equation
M x V = T x P
Money supply times the velocity at which it changes hands equals the number of transactions times the average level of prices.

62. M x V = T x P
Direct relationship between the money supply and the price level.

63. What happens when the quantity equation is “off”?
Hyperinflation
Money supply increases much, much faster than an economy’s output of goods and services.
THINK RUSSIA in 1990s.
Zimbabwe in 2000s
Germany post WWI

64. Phillips Curve: The relationship between unemployment and inflation.
INVERSE relationship.
Unemployment goes UP, then inflation goes DOWN.

65. Stagflation: When things REALLY go wrong on the Phillips Curve
Inflation and unemployment were at higher levels.
Combination of stagnation and inflation.
Both were increasing.

66. 1970s: What caused Stagflation?
Spending on the Vietnam War PLUS spending on domestic social programs.
Inflationary expectations
Rise in energy costs caused by OPEC
Monopolistic pricing

67. What is wrong with Inflation?
Inflation reduces REAL INCOME of those whose incomes do not rise as fast as the price level.
Hurts:
People holding assets in MONEY
Lenders

68. Special Note: Phillips Curve International
Europe 1970s had higher inflation and unemployment.
Worse because:
Labor union practices
Tax structures
Government economic policies

69. Consequences of Unemployment
Real Output Effects
Each 1% of unemployment results in a reduction of $100-billion in output.
Lower real investment means less growth and reduced future output.
OKUN’S LAW!

70. Consequences of Unemployment
Income Effects
Loss of income and benefits (Health insurance)
Loss of income to others because of reduced purchasing power
Reduced tax income and increased outlays of government.

71. Consequences of Unemployment
Social Effects
Health Problems
Increased suicides
Break up of families
Increased child abuse
Increased crime

72. Consequences of INFLATION
Income Effects:
Reduced purchasing power of the dollar
Reduced real income for fixed income receivers
Reduced real wealth of savings

73. Income Effects of Inflation (cont.)
Benefits those whose incomes rise faster than the inflation rate.
Benefits owners of real assets (real estate, precious metals (kinda!))
Benefits debtors

74. How Inflation effects Real Output
Inflation initially stimulates output
Near full employment, there arise bottlenecks in supplies
Costs begin rising faster than prices
Interest rates accelerate, discouraging new investment.