1. Unemployment, and Inflation

2. Economic Fluctuations
and the Labor Market

3. 4 Labor Market Classifications
1. Employed – a person (16 years old or over) who is
working for pay at least one hour per week,
self employed, or,
working 15 hours or more each week without pay in a family-operated enterprise.
2. Unemployed – a person not currently employed who is either
actively seeking a job, or,
waiting to begin or return to a job.
3. Civilian Labor force – civilians (16 years and older) who are either employed or unemployed.
4. Not in the labor force – persons (16 years and older) who are neither employed nor unemployed (like retirees, students, homemakers, or disabled persons).
4 Labor Market Classifications

4. The Employment Status of the Civilian Working-Age Population, September 2011

5. Labor Force Participation Rate
Economic Fluctuations
and the Labor Market
The non-institutional civilian adult population is grouped into two broad categories:
Persons not in the labor force, and,
persons in the labor force.
Labor Force Participation Rate =
# in the Labor Force
Civilian population (16+)
Employed + Unemployed
Recall the Labor Force =

6. Economic Fluctuations and the Labor Market
To be classified as unemployed, one must either be on layoff or actively seeking work.
Rate of Unemployment =
# Unemployed
# in the Labor Force

7. Employment / Population Ratio
Unemployment and
Measurement Problems
The definition of unemployed involves some subjectivity.
Some argue the employment/population ratio is a better indicator of job availability than the unemployment rate.
Employment / Population Ratio =
# employed
Civilian population (16+)

8. The Official Unemployment Rate and a Broad Measure of the Unemployment Rate, 1994–2011
The red line shows the usual measure of the unemployment rate.
The blue line shows what it would be if the BLS had counted as unemployed all people who were available for work but not actively looking for jobs and all people who were in part-time jobs but wanted full-time jobs.
The difference between the measures was particularly large during the 2007–2009 recession and the weak recovery that followed.
Shaded areas indicate months of recession.

9. 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 it has increased significantly for adult women, making the overall rate higher today than it was then.

10. Labor Force Participation Rate of Men and Women: 1948-2003
During the same period the rate of men has been falling.
Labor Force Participation Rate of Men and Women
87 %
83%
78 %
76 %
74 %
58 %
59 %
46 %
38 %
33 %
1948
1960
1975
1990
2006
1948
1960
1975
1990
2006
––––––– Men –––––––
–––––– Women ––––––
Source:
The labor force participation rate of women has been steadily increasing for several decades.

11. Little difference in the rate of unemployment between men and women.
4/20/2017
The Unemployment Rate
By Age and Gender: 2006
Unemployment Rate, 2006
16.9 %
13.8 %
8.7 %
7.6 %
4.6 %
4.6 %
4.6 %
3.5 %
3.7 %
25+
16-19
20-24
–– Men aged ––
All men
All workers
All women
–– Women aged ––
25+
16-19
20-24
Source:
Little difference in the rate of unemployment between men and women.
Rate for persons under age 25 is much higher than for both

12. Unemployment Rates for Different Groups in the US September 2011
The unemployment rate of African Americans is the highest of the four ethnic groups shown, while the unemployment rate of Asians is the lowest.
High school dropouts have an unemployment rate that is triple the unemployment rate for college graduates.

13. Classify each of the following as (a) employed,
(b) unemployed, or (c) not in the labor force:
a. a person who is not working but applied for a job at Wal-Mart last week
b. a person working part-time who is searching diligently for a full-time job
c. an auto worker vacationing in Florida during a layoff at a General Motors plant who expects to be recalled in a couple of weeks
d. a 17-year-old who works six hours per week as a route person for the local newspaper
e. homemaker working 70 hours a week preparing meals and performing other household services
f. a college student who spends between 50 and 60 hours per week attending classes and studying
g. a retired Social Security recipient

14. How Long Are People Typically Unemployed?
During the Great Depression of the 1930s, some people were unemployed for years at a time.
In April 2007—a period of economic expansion—82 percent of the people who were unemployed had been unemployed for less than six months.
In September 2011, only 55 percent of the unemployed had been jobless for less than six months.
The average period of unemployment was only 17 weeks in April 2007 but was 41 weeks in September 2011.
A sharp break from the normal U.S. experience.

15. 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 WWII.

16. How Unusual Was the Unemployment Situation Following the 2007–2009 Recession?
The fall of the employment–population ratio may give an even better indication of how weak the U.S. labor market was during and after the 2007–2009 recession.

17. Number of Establishments
Job Creation and Job Destruction over Time
When the BLS announces each month the increases or decreases in the number of persons employed and unemployed, these are net figures.
The change in the number of persons employed is equal to the total number of jobs created minus the number of jobs eliminated.
Establishments Creating and Eliminating Jobs, September-December 2010
Number of Establishments
Number of Jobs
Establishments Creating Jobs
Existing establishments
1,447,000
5,609,000
New establishments
382,000
1,345,000
Establishments Eliminating Jobs
1,418,000
5,162,000
Closing establishments
352,000
1,229,000

18. Frictional 2. Structural 3. Cyclical 4. Seasonal Types of Unemployment
between jobs
Short-term unemployment that arises from the process of matching workers with jobs.
2. Structural
job replaced
Unemployment that arises from a persistent mismatch between the skills and attributes of workers and the requirements of jobs.
3. Cyclical
less business
Unemployment caused by a business cycle recession.
4. Seasonal
temporary job
refers to unemployment due to factors such as weather, variations in tourism, and other calendar-related events.

19. Unemployment that arises from a persistent mismatch between the skills and attributes of workers and the requirements of jobs.
Unemployment caused by a business cycle recession.
Full Employment
When the only remaining unemployment is structural and frictional unemployment, the economy is said to be at full employment.
Natural rate of unemployment The normal rate of unemployment, consisting of frictional unemployment plus structural unemployment.
The natural rate of unemployment is also sometimes called the full-employment rate of unemployment.

20. Deals with which type? Frictional? 2. Structural? 3. Cyclical?
Full Employment
Deals with which type?
Frictional?
2. Structural?
3. Cyclical?
When the only remaining unemployment is structural and frictional unemployment, the economy is said to be at full employment.

21. The Natural Rate of Unemployment
At full employment there will still be some:
Frictional
2. Structural
but no Cyclical

22. The Natural Rate of Unemployment
actual unemployment may only get as low as
4 – 5 %

23. The Annual Unemployment Rate in the US, 1950–2010
The unemployment rate rises during recessions and falls during expansion.
Shaded areas indicate recessions.

24. Which type? a. Frictional b. Structural d. Not Unemployed c. Cyclical
1. A student who decides at mid-semester to devote the rest of the term to studying quits her part-time job
2. A graphic artist who is out of work because a computer now does her job.
3. A waiter who quits his job and is applying for the same type of work in a restaurant where morale is better.
d. Not Unemployed
c. Cyclical

25. Which type? a. Frictional b. Structural d. Not Unemployed c. Cyclical
4. The son of a local farmer who works 20-hour weeks without pay on the farm while waiting for a job at a nearby factory.
5. A travel agent who is laid off because the economy is in a slump and vacation travel is at a minimum.
6. A plumber who works 5 hours per week for his church (on a paid basis) until he can get a full-time job
d. Not Unemployed
c. Cyclical

26. The Business Cycle Cycles are irregular
Share of labor force unemployed
Actual rate of unemployment 10 8 6
Natural rate of unemployment 4
2008 2
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Ups and downs characterize business activity.
There has been an upward trend in real GDP in the United States and other industrial nations.

27. Average Unemployment Rate
Unemployment Across Economies
Recently, the unemployment rate in the U.S. and Japan has been lower than in major European economies.
Higher unemployment benefits, less flexible bargaining, and more regulated labor markets of Europe explain this.
Average Unemployment Rate
( )
Spain
19.9 %
France
11.2 %
Italy
10.6 %
U.K.
8.2 %
Germany
7.5 %
U.S.
5.8 %
Japan
3.1 %
Source: Economic Outlook, OECD (Dec. 2000).

28. Unemployment Across Economies
Average Unemployment Rate
( )
Average Unemployment Rate
( )
Spain
Spain
14.6 %
19.9 %
France
France
11.2 %
10.6 %
Italy
Italy
10.6 %
10.5 %
U.K.
U.K.
8.2 %
8.6 %
Germany
Germany
7.5 %
6.5 %
U.S.
U.S.
5.8 %
5.1 %
Japan
Japan
3.1 %
4.2 %
Source: Economic Outlook, OECD (Dec. 2000).
Source: Economic Outlook, OECD (June 2004).

29. Average Unemployment Rate
Unemployment Across Economies
Average Unemployment Rate
( )
Spain
11.6 %
Italy
9.7 %
France
9.2 %
Germany
8.5 %
U.K.
5.4 %
U.S.
4.9 %
Japan
4.6 %
Source: Economic Outlook, OECD (June 2007).
U.S. and Japan lower than major European economies.
Higher unemployment benefits, less flexible collective bargaining, and more regulated labor markets in Europe.

30. Actual and Potential GDP
Potential output : Maximum sustainable output level consistent with the economy’s resources, (on the production possibilities curve.)
Actual and potential output will be equal when the economy is at full employment.

31. Historically Speaking
Here we illustrate both actual and potential GDP.
Real GDP (billions of 2000 $)
12,000
2001 recession
Potential GDP
10,000
recession
8,000
Actual GDP
6,000
1960 recession
1982 recession
1980 recession
4,000
recession
1970 recession
2,000
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Note the gap (shaded area) between actual and potential GDP during periods of recession.
Historically Speaking

32. Inflation is an increase in the general level of prices.
The Rate of Inflation is calculated as:
Inflation rate =
Last year’s price index
This year’s price index
Last year’s price index -
* 100
What is Inflation?

33. The Inflation Rate,
Inflation rate
average inflation rate = 9.2 % 15
average inflation rate = 3.1 %
average inflation rate = 1.6 % 10 5
1956
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Between 1956 and 1965, the general price level increased at an average annual rate of only 1.3%.
In contrast, the inflation rate averaged 9.2% from 1973 to 1981, reaching double-digits during several years.
Since 1982, the average rate of inflation has been lower (3.1% from ) and more stable.

34. There are 2 Kinds of Inflation
1. Anticipated inflation: A widely expected change in the price level.
2. Unanticipated inflation: An increase in the price level that comes as a surprise, at least for most individuals.

35. Consequences of Inflation
Hyperinflation
2002 Argentina
1920s Germany
1990s Russia
2. Money loses value

36. Real Interest rate decreases =Interest rate - inflation
Savings
Lose value
2. Loans
Are easier to repay
3. Wealth
May increase
4. Politics
May cause changes

37. Nearly all economists believe that rapid expansion in the money supply is the primary cause of inflation.

38. Types of Inflation
Demand-Pull
2. Cost-Push

39. buyers demands greater than producers supply
Demand-Pull
Price
D2(increase in demand) S1
New price and output P2
Orig. price and output P1 D1
Quantity Q1 Q2
buyers demands greater than producers supply

40. sellers’ costs are passed on to buyers
2. Cost Push
Price
S2(new equilibrium)
S1(initial equilibrium) P2 P1 D
Quantity/time Q2 Q1
sellers’ costs are passed on to buyers

41. Questions for Thought:
1. Suppose that the CPI was 150 at the end of last year and at the end of this year. What was the inflation rate during the year?
2. If decision makers anticipate an inflation rate of 3% at the start of a year and prices during the year rise by 7%, this is an example of
a. anticipated inflation.
b. an inflation rate higher than anticipated.
c. an inflation rate lower than anticipated.
3. True or false: when the inflation rate is high and variable, decision makers will generally be able to anticipate year-to-year changes in inflation quite accurately.

42. 4. How would an unanticipated 5 percent jump in inflation impact the wealth of:
a. Joe, who has a 30-year home mortgage at a fixed interest rate
b. The McCoy's, who hold most of their wealth in long-term fixed yield bonds
c. Hanna, a retiree drawing a pension of a fixed dollar amount
d. Jose, a heavily indebted small-business owner.
e. Mike, the owner of an apartment complex with
substantial debt at a fixed interest rate
f. Tina, a worker whose wages are determined by a
3-year union contract ratified three months ago

43. 2. Economists use the term “business cycle” to refer to
1. During this century, the growth rate of real GDP in the United States has averaged approximately
a. 1 %
b. 3 %
c. 6 %
d. 10 %
2. Economists use the term “business cycle” to refer to
a. the growth of small businesses into major corporations.
b. changes in products that occur from improved technology.
c. fluctuations in the level of real output and employment.
d. periods of increases and decreases in the rate of inflation.
3. The labor force participation rate of women in the United States has been
a. increasing for several decades.
b. decreasing for the past several decades after increasing dramatically in the early 1900s.
c. approximately constant during the last three decades.
d. decreasing since the early 1900s.

44. 4. Suppose there was a country with an adult (age 16 and over) population of 1,000, of which 100 were unemployed and 700 were employed. Which of the following is true?
a. The employment population ratio is 87.5 percent.
b. The labor force participation rate is 70 percent.
c. The unemployment rate is 12.5 percent.
d. There are 700 individuals in this country’s labor force.
5. The type of unemployment caused by changes in the business cycle is
a. cyclical
b. natural
c. frictional
d. structural.
6. Frictional unemployment is the result of
a. not enough jobs for everyone to be employed.
b. unemployed workers’ skills not matching those needed for the available jobs.
c. a decline in the demand for labor, such as during a recession.
d. imperfect information and temporary periods of unemployment while workers are changing jobs.

45. 7. Which of the following individuals would be considered unemployed by the official government definition?
a. George, who returned to graduate school after failing to find a job the last four months
b. Gwen, a medical student, who is still in college and is not working
c. Morgan, who is employed part-time but desires a full-time job
d. Ralph, an auto worker vacationing in Florida during a layoff at a General Motors plant.
8. Suppose that the consumer price index at year-end 2004 was 140 and by year-end 2005 had risen to 150. What was the inflation rate during 2005?
a. 7.1 %
b. 10 %
c %
d. 50 %
9. Which of the following is true?
a. Anticipated inflation is an increase in the price level that comes as a surprise, at least to most individuals
b. Unanticipated inflation is a change in the price level that is widely expected.
c. Decision makers are generally able to anticipate slow steady rates of inflation with a fairly high degree of accuracy.
d. Inflation will increase the prices of goods and services that households purchase but not the wage rates of workers