2. Fluctuations in Economic Output, Unemployment, and Inflation

3. The Business Cycle The phases of the business cycle are: Recovery or Expansion, Peak or Boom (shaded green) Recession or Contraction trough or Depression (blue shaded areas). Time Real GDP Business peak Depression or trough Recession Recovery Business peak Depression or trough Trend line

5. Ups and downs characterize business activity. There has been an upward trend in real GDP in the United States and other industrial nations. The Business Cycle Cycles are irregular Source: Economic Report of the President, various issues. Annual growth rate of real GDP 6 8 4 2 0 - 2 196019651970197519801985 1990 1995 20002005 Long-run growth rate (approx. 3%)

6. Economic Fluctuations and the Labor Market

7. 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).

8. Labor Force Participation Rate = # in the Labor Force Civilian population (16+) 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. Employed + Unemployed Recall the Labor Force = To be classified as unemployed, one must either be on layoff or actively seeking work. Rate of Unemployment = # Unemployed # in the Labor Force

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

10. U.S. Population, Employment, and Unemployment: 2001 Civilian population 16 and over Civilian labor force Employed Employees Self-employed workers Unemployed New entrants Reentrants Lost last job Quit last job Laid off Not in the labor force Household workers Students Retirees Disabled Labor Force Participation Rate = Civilian labor force Civilian population (16+) = 66.9% Employment / Population Ratio = Number employed Civilian population (16+) = 63.8% Rate of Unemployment = Number unemployed Civilian labor force = 4.8% 141.8 million 135.1 million 70.1 million 211.9 million 6.7 million

11. U.S. Population, Employment, and Unemployment: 2004 Civilian population 16 and over Civilian labor force Employed Employees Self-employed workers Unemployed New entrants Reentrants Lost last job Quit last job Laid off Not in the labor force Household workers Students Retirees Disabled Labor Force Participation Rate = Civilian labor force Civilian population (16+) = 66.0% Employment / Population Ratio = Number employed Civilian population (16+) = 62.3% Rate of Unemployment = Number unemployed Civilian labor force = 5.5% 147.4 million 139.3 million 76.0 million 223.4 million 8.1 million 147.4 223.4 = 139.3 223.4 = 8.1 147.4 =

12. U.S. Population, Employment, and Unemployment: 2006 Civilian population 16 and over Civilian labor force Employed Employees Self-employed workers Unemployed New entrants Reentrants Lost last job Quit last job Laid off Not in the labor force Household workers Students Retirees Disabled Labor Force Participation Rate = Civilian labor force Civilian population (16+) = 66.4% Employment / Population Ratio = Number employed Civilian population (16+) = 63.2% Rate of Unemployment = Number unemployed Civilian labor force = 4.6% 151.8 million 144.4 million 77.4 million 228.6 million 7.0 million 151.8 228.6 = 144.4 228.6 = 7.0 151.8 =

13. Labor Force Participation Rate = Civilian labor force Civilian population (16+) = 66.9% Employment / Population Ratio = Number employed Civilian population (16+) = 63.8% Rate of Unemployment = Number unemployed Civilian labor force = 4.8% Labor Force Participation Rate = Civilian labor force Civilian population (16+) = 66.0% Employment / Population Ratio = Number employed Civilian population (16+) = 62.3% Rate of Unemployment = Number unemployed Civilian labor force = 5.5% 147.4 223.4 = 139.3 223.4 = 8.1 147.4 = Labor Force Participation Rate = Civilian labor force Civilian population (16+) = 66.4% Employment / Population Ratio = Number employed Civilian population (16+) = 63.2% Rate of Unemployment = Number unemployed Civilian labor force = 4.6% 151.8 228.6 = 144.4 228.6 = 7.0 151.8 = 141.8 211.9 = 135.1 211.9 = 6.7 141.8 = 2001 2003 2006

14. The labor force participation rate of women has been steadily increasing for several decades. During the same period the rate of men has been falling. Labor Force Participation Rate of Men and Women: 1948-2003 Labor Force Participation Rate of Men and Women Source: www.bls.gov. 2006197519481960 87 % 83% 74 % 33 % 38 % 46 % 58 % ––––––– Men ––––––– –––––– Women –––––– 19902006197519481960 1990 78 % 76 % 59 %

15. In 2006, there was little difference in the rate of unemployment between men and women. Notice how the unemployment rate for persons under age 25 (of each gender) is much higher than for those older. Unemployment Rate, 2006 Source: www.bls.gov. All workers 16.9 % 8.7 % 4.6 % 13.8 % 7.6 % 25+16-1920-24 –– Men aged –– The Unemployment Rate By Age and Gender: 2006 All men All women –– Women aged –– 25+16-19 20-24 3.5 % 4.6 % 3.7 %

16. The unemployment rate for men in 2003 was 6.3%, for women 5.7%, and for all workers 6.0%. Notice how the unemployment rate for persons under age 25 (of each gender) is much higher than for those older. Unemployment Rate, 2003 Source: www.bls.gov. All workers 19.3 % 10.6 % 6.0 % 5.7 % 15.6 % 9.3 % 25+16-1920-24 –– Men aged –– The Unemployment Rate By Age and Gender: 2003 All men All women –– Women aged –– 25+16-19 20-24 5.0 % 6.3 % 4.6 %

17. Source: www.bls.gov. Composition of the Unemployed by Reason There are various reasons why persons were unemployed in 2003. A little more than two-fifths (42.4%) of the unemployed were dismissed from their previous jobs. 35.5% of the unemployed were either new entrants or reentrants into the labor force. Dismissed from previous jobs 42.4% Job leavers 9.3 % New entrants 7.3% Reentrants 28.2% On layoff 12.8%

18. Source: www.bls.gov. Composition of the Unemployed by Reason There are various reasons why persons were unemployed in 2006. A little less than two-fifths (39.1%) of the unemployed were dismissed from their previous jobs. 43.6% of the unemployed were either new entrants or reentrants into the labor force. Dismissed from previous jobs 39.1% Job leavers 12.5 % New entrants 9.5% Reentrants 34.1% On layoff 13.3%

19. 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 Classify each of the following as (a) employed, (b) unemployed, or (c) not in the labor force:

20. 2. The figures below (in millions) are for the U.S. during the year 2006. Population (age 16 and over) 299.8 Civilian pop. (age 16 and over) 228.6 Employed 144.4 Unemployed 7.0 c. Calculate the employment/ population ratio b.Calculate the labor force participation rate. a.Calculate the unemployment rate. 7.0 144.4 228.6

21. 1. Frictional 1. Frictional 2. Structural 2. Structural 3. Cyclical 3. Cyclical 4. Seasonal 4. Seasonal temporary job less business job replaced between jobs

22. 1. Frictional? 1. Frictional? 2. Structural? 2. Structural? 3. Cyclical? 3. Cyclical? Deals with which type? Deals with which type?

23. 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.

24. 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

25. 1. Frictional 1. Frictional 2. Structural 2. Structural but no Cyclical but no Cyclical At full employment there will still be some: At full employment there will still be some:

26. actual unemployment may only get as low as actual unemployment may only get as low as 4 – 5 % 4 – 5 %

27. Ups and downs characterize business activity. There has been an upward trend in real GDP in the United States and other industrial nations. The Business Cycle Cycles are irregular Share of labor force unemployed 10 8 6 4 2 196019651970197519801985199019952000 2005 2008 Natural rate of unemployment Actual rate of unemployment

28. 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. 5.8 % 8.2 % 11.2 % 3.1 % 7.5 % 10.6 % 19.9 % Spain Italy Germany Japan Average Unemployment Rate (1990-1999) France U.K. U.S. Source: Economic Outlook, OECD (Dec. 2000).

29. 5.8 % 8.2 % 11.2 % 3.1 % 7.5 % 10.6 % 19.9 % Spain Italy Germany Japan Average Unemployment Rate (1990-1999) France U.K. U.S. Source: Economic Outlook, OECD (Dec. 2000). 5.1 % 8.6 % 10.6 % 4.2 % 6.5 % 10.5 % 14.6 % Spain Italy Germany Japan Average Unemployment Rate (1994-2003) France U.K. U.S. Source: Economic Outlook, OECD (June 2004). Unemployment Across Economies

30. U.S. and Japan lower than major European economies. Higher unemployment benefits, less flexible collective bargaining, and more regulated labor markets in Europe. 4.9 % 8.5 % 9.7 % 4.6 % 5.4 % 9.2 % 11.6 % Spain France U.K. Japan Average Unemployment Rate (1997-2006) Italy Germany U.S. Source: Economic Outlook, OECD (June 2007).

31. 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.

32. Here we illustrate both actual and potential GDP. Note the gap (shaded area) between actual and potential GDP during periods of recession. Historically Speaking Real GDP (billions of 2000 $) 1970 recession 1974-75 recession 1980 recession 1982 recession 1990-91 recession 2001 recession 1960 recession 8,000 6,000 4,000 2,000 196019651970197519801985199019952000 2005 10,000 Potential GDP 12,000 Actual GDP

33. 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 Inflation is an increase in the general level of prices.

34. 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 1983-2006) and more stable. The Inflation Rate, 1956-2006 1983-2006 average inflation rate = 3.1 % Inflation rate 1956196019651970197519801985199020001995 10 5 0 15 2005 1956-1965 average inflation rate = 1.6 % 1973-1981 average inflation rate = 9.2 %

35. 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.

36. 1. Hyperinflation 1. Hyperinflation 2. Money loses value 2. Money loses value

37. 1. Savings 1. Savings 2. Loans 2. Loans 3. Wealth 3. Wealth 4. Politics 4. Politics May cause changes May increase Are easier to repay Lose value

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

39. 1. Demand-Pull 1. Demand-Pull 2. Cost-Push 2. Cost-Push

40. 1. Demand-Pull 1. Demand-Pull buyers demands greater than producers supply Price Quantity P2P2 P1P1 Q1Q1 D1D1 S1S1 Q2Q2 New price and output D 2 (increase in demand) Orig. price and output

41. 2. Cost Push 2. Cost Push sellers’ costs are passed on to buyers Price Quantity/time P2P2 P 1 Q 1 D S 1 (initial equilibrium) Q2Q2 S 2 (new equilibrium)

42. Questions for Thought: 1. Suppose that the CPI was 150 at the end of last year and 157.5 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.

43. 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