1. Module 2: Macroeconomics
Employment and the Labor Force

2. Key Terms used in Macroeconomics
Inflation
Deflation
Price Stability
Labor Force = employed + unemployed
Inflation, a rise in the overall price level.
Inflation is bad because it reduces our ability to purchase goods and services. A dollar of our hard-earned income doesn’t go as far if the prices of most goods and services are rising. If inflation is rapid, our wages could become useless for  consumption .
Deflation, a fall in the overall price level.
Deflation is bad too. When overall prices are falling, consumers will hold onto their dollars and continue to wait for lower and lower prices. This waiting creates a problem as producers find they can’t sell goods and services. Producers respond by lower prices and consumers respond by waiting even longer to make a purchase.
Be sure to stress that changes to the prices of a few goods changes the opportunity cost of purchasing those goods, but does not constitute inflation or deflation.
Inflation and deflation are terms are reserved for more general changes in the prices of goods and services throughout the economy. 2

3. Labor Force = Employed + Unemployed
THE LABOR FORCE
Labor Force = Employed + Unemployed
LF = E + U
Unemployment Rate = U/LF
As of December, 2018 the unemployment rate had fallen to 4.0%. In 2009 and 2010, during the height of the recession, it was over 10%.

4. Who makes up the Labor Force is determined by a weekly survey
Employed: Anyone who did work for money during the previous week prior to the survey
Employed: Anyone who was absent temporarily from work due to vacation, illness, bad weather, or other personal reason
Employed: Those who work without pay in a family business which exceeds 15 hours a week
Military (armed forces) are NOT part of the labor
force
UNEMPLOYED: Those not working but who are actively seeking employment and over 16yrs and NOT in school.

5. Sample Problem: UR% = 100 X U/LF
THE COUNTRY OF SUTHER LAND HAS THE FOLLOWING:
Military Personnel = 1.5m
Population under 16 working part-time = 0.3m
Population over 16 working part-time and not in school full time. = 4m
Population over 16 working full time = 14m
Those not working but seeking work = 2m
What is the size of the civilian work force?
What is the unemployment rate? 5

6. Solution for Lipman Land
Population over 16 working part-time = 4m
Population over 16 working full time = 14m
Those not working but seeking work = 2m {U}
LF = for a total of 20 million
Never count military persons or those under 16 as part of the Labor Force.
UR% = 100 x (U/LF)
UR% = 100 X (2/20) = 10%

7. Models are used in Economics to help explain what is happening
Models (aka graphs)
Other things equal assumption
Ceteris Paribus (Latin for “other things equal”)
Economists use the scientific method to establish theories, laws, and principles.
1. The scientific method consists of:
a. Facts/Data. The observation of facts (real data).
b. Hypotheses. The formulations of explanations of cause and effect relationships based upon the facts.
Example: A convenience store owner notices that when the temperature rises, she sells more fountain soft drinks and fewer coffees. The reverse tends to occur when the temperature falls. A hypothesis is born out of this data. “Soft drink sales are positively related, and coffee sales are negatively related, to the outside temperature.”
c. Testing. The testing of the hypotheses.
Months of data is collected on the outside temperature and the quantity of soft drinks and coffee drinks sold at the store.
d. The acceptance, reject, or modification of the hypotheses.
If the data seems to confirm our hypothesis, we might be able to confirm that most of the time, this trend holds.
Note: The instructor could draw a crude scatter-plot with soft-drink sales on the y-axis and temperature on the x-axis. Show the scatter plot with a fairly obvious upward trend.
The determination of a theory, law, principle, or model.
2. Theoretical economics: The systematic arranging of facts, interpretation of the facts, making generalizations.
Theories evolve after hypotheses have been repeatedly tested and favorable results have been accumulated.
After weeks of gathering data on temperature and sales, and with the use of a few statistical tools, we publish a landmark article called “The effect of global warming on beverage choice: a theory of soft drink consumption.”
3. Laws/Principles are very well tested and widely accepted theories. Principles are used to explain and/or predict the behavior of individuals and institutions.
Model: a simplified representation of reality that is used to better understand real-life situations.
On some days our theory holds, on others it doesn’t, but on average we can count on it.
“Other things equal” or ceteris paribus assumption: In order to judge the effect one variable has upon another it is necessary to hold other contributing factors constant. Natural scientists can test with much greater precision than can economists. They have the advantage of a controlled laboratory experiment. Economists must test their theories using the real world as their laboratory.
What factors are we holding constant in our theoretical model? Consumer incomes? Price? Price of other drink options? Price of related goods (the gasoline)? 7

8. The U.S. Unemployment Rate and the Timing of Business Cycles, 1989–2009. Shaded areas
Indicate periods of a recession 8

9. 9

10. The Various Business Cycles
Depression
Recession
Expansion or growth (which leads to inflation)
Graph demonstrates changes happening over time as cycles change
recession
Upward trend
time
   
1. A peak is when business activity reaches a temporary maximum with full employment and near capacity output. The unemployment rate is at its lowest level.
2. A recession is a decline in total output, income, employment, and trade lasting six months or more. The unemployment rate is beginning to rise.
3. The trough is the bottom of the recession period. The unemployment rate is at its highest level.
4. Recovery is when output and employment are expanding toward full‑employment level. The unemployment rate is beginning to fall.
5. The entire business cycle is measured by the elapsed time between peaks in the cycle. 10