1. Unemployment and Inflation
Chapter 8

2. Two Major Economic Problems
Unemployment
Inflation

3. Defining and Measuring Unemployment
Calculated by the U.S. Bureau of Labor Statistics
Employment is the total number of people currently employed, either full-time or part-time.
Employment Defined
16 years and older
Worked at least one hour for pay last week
Worked for a family business for at least 15 hours without pay
Have a job but not working because of illness, vacation, strike, bad weather, or personal family obligation

4. Unemployment Unemployment Defined
16 yrs. and older
Actively seeking a job (last 4 weeks) but do not have one
Not working but waiting to be called back after being laid off
Labor force is the sum of employment and unemployment.

5. Unemployment Who does NOT count toward unemployment?
Under 16 (not in the labor force)
Institutionalized (prison, mental, nursing)
In the military
Retired
Homemakers

6. Labor Force, Employment and Unemployment
Under 16
And/or
Institutionalized
(70.5 Million)
Labor Force, Employment,
and Unemployment, 2005
Not in
Labor Force
(76.8 Million)
Total
Population
(296.6 Million)
Employed
(141.7 Million)
Labor participation rate = Labor force X 100
Population age 16 and older
Labor
Force
(149.3 Million)
Unemployment rate = Number of Unemployed Workers X 100
Labor force
Unemployed
(7.6 Million)

7. Unemployment Rate % U N E M P L O Y d
US Department of Labor

8. Overstating Unemployment
Searching for work, it is normal to take at least a few weeks to find a suitable job.
Even when it is easy to find work, the unemployment rate is still 4%.

9. Understating Unemployment
Discouraged Workers
Not actively seeking work (last 4 weeks)
Believe there is no work for them
Believe they are being discriminated against
Literally discouraged because they can’t find a job
Unemployment rate can drop as a result of an increase in discouraged workers, ceteris paribus.

10. Understating Unemployment
Discouraged workers are non-working people who have given up.
Marginally attached workers would like to be employed and have looked for a job in the recent past but are not currently looking for work.
Underemployment is the number of people who work part-time because they cannot find full-time jobs.

11. Understating Unemployment
+ involuntary part-time
+ Marginally attached
+ Discouraged workers
Unemployment rate

12. Unemployment Rates of Different Groups, August 2012
Source: US Dept.
Of Labor

13. Costs of Unemployment
Certain groups are more likely to suffer from unemployment.
Teenagers
Low-skilled workers
Black Americans and Hispanics
Less educated

14. Recessions and Unemployment% U N E M P L O Y d
US Department of Labor

15. Growth and Unemployment Rates

16. Costs of Unemployment
Real GDP is less than what it would be at full employment (aka – The GDP Gap)
Okun’s Law
For every 1% of Unemployment OVER THE NATURAL RATE, % of GDP is lost.

17. Costs of Unemployment Psychological depression Political change
Social upheaval

18. Who Gets Hurt in Inflation?
People on a fixed income
The elderly
Retirement income no longer adequate
Creditors/Financial Institutions
The value of the money firms lend out is worth more than the value of the money that was paid back.

19. Who Benefits from Inflation?
Debtors
The money borrowed is worth more than the money paid back.

20. Employment or Unemployment?
Elizabeth Lloyd reported to the interviewer that last week she worked 40 hours as a sales manager for the Western Beverage Company.
Employed, Unemployed, or not in the Labor Force?
Elizabeth is employed.

21. Employment or Unemployment?
Steve Hogan lost his job when the local plant of the Chariot Aircraft Manufacturing Company was closed down. Since then, he has been visiting personnel offices of other businesses in town trying to find a job.
Employed, Unemployed, or not in the Labor Force?
Steve is unemployed.

22. Employment or Unemployment?
Linda Coleman is a homemaker. Last week, she was occupied with her normal household chores. She neither held a job nor looked for a job. Her 80 year- old father who lives with her has not worked or looked for work because of a disability.
Employed, Unemployed, or not in the Labor Force?
Linda and her father are not in the labor force.

23. Types of Unemployment
There is ALWAYS a level of unemployment in a capitalist economy.
Frictional Unemployment
Workers “between jobs”
It is inevitable and often desirable (especially if it leads to a more productive job)
Seasonal Unemployment
Temporarily laid off -- (Seasonal)

24. Types of Unemployment
Structural unemployment is when more people seeking jobs in a particular labor market than there are jobs available at the current wage rate.
When workers find that their skills are no longer needed.
Buggy-whip makers at the advent of automobiles
Workers who sew clothing

25. Structural UnemploymentWF
Minimum Wage QD QS

26. Causes of Structural Unemployment
A minimum wage is a government-mandated floor on the price of labor.
Actions of labor unions can have effects similar to minimum wages, leading to structural unemployment.
Efficiency wages are wages that employers set above the equilibrium wage rate as an incentive for their workers to perform better.
Government policies such as unemployment compensation may also contribute to structural unemployment.
Shifts in the economy that lead to a mismatch of skills between what employees have to offer and what employers are looking for.

27. Natural Rate of Unemployment
Natural rate of unemployment equals Frictional plus Seasonal plus Structural unemployment.
Most economists place that at about 4-5%.
The natural rate of unemployment is 4-5%.
FULL EMPLOYMENT is 4-5% unemployment.

28. Natural Unemployment Around the OECD
GLOBAL PERSPECTIVE
Average unemployment rate,

29. Changes in the Natural Rate of Unemployment
Changes in Labor Force Characteristics
Number of young workers
Experienced vs inexperienced
New workers
Changes in Labor Market Institutions
Union membership
Temporary employment agencies
Technological change
Changes in Government Policy
Minimum wage
Job training programs
Employment subsidies

30. Types of Unemployment Cyclical Unemployment
Unemployment that results from a downturn of the business cycle.
Consumer demand declines, businesses produce less, lay-off workers.

31. Practice Check Your Understanding 8-1, page 220

32. Inflation and Deflation
The level of prices does NOT matter…..
….But the rate of change of prices does.

33. Costs of Inflation
Shoe-leather costs are the increased costs of transactions caused by inflation.
The menu cost is the real cost of changing a listed price.
Unit-of-account costs arise from the way inflation makes money a less reliable unit of measurement.

34. Disinflation is Hard
Disinflation is the process of bringing the inflation rate down.
US experienced disinflation in mid-70s and early 80’s.