1. UNEMPLOYMENT AND INFLATION “There is a short run trade-off between reducing inflation and reducing unemployment.” -Me, on the second day of class

2. UNEMPLOYMENT

3. FLAWS IN THE CALCULATION OF UNEMPLOYMENT The unemployment rate (as of Oct. 2 2015, according the Bureau of Labor Statistics) is: 5.1% This figure may understate the joblessness problem, because: 1.Part-time workers are counted as fully employed (so are not in the 5.1%) 2.“Discouraged workers” want a job but have given up looking (so are not actively seeking, so not considered part of the labor force) This figure may overstate the joblessness problem, because: 1.The “phantom unemployed” are part of the 5.1%. This includes those who claim to be actively seeking but do not actually want a job.

4. TYPES OF UNEMPLOYMENT 1.Frictional Unemployment: those between jobs or between school and job.  The job opening is out there, but job seeker and employer haven’t found each other yet.  (Also known as “search unemployment” or “wait unemployment”)  What recent developments might help reduce this type of unemployment? 2.Structural Unemployment: those whose skills do not match the available jobs.  Again, job openings exist, but in this case there is a skills mismatch.  How can this type of unemployment be reduced?  (Sometimes “geographic unemployment” and “seasonal unemployment” are included here.) 3.Cyclical Unemployment: caused by a downturn in the business cycle (a recession).  No job openings are available.

5. THE NRU Frictional and Structural are considered inevitable (and even part of a healthy economy). Because Frictional and Structural are unavoidable, “full employment” does NOT mean a 0% unemployment rate. Instead, an economy is considered at “full employment” if only Frictional and Structural are present (so Cyclical = 0%). Frictional + Structural = The “Natural Rate of Unemployment” (the NRU) AKA the “Full Employment Level of Unemployment” In most developed economies, = 3-5%

6. THE COSTS OF UNEMPLOYMENT Human costs: Of course, some humans must cope with not having a job. Economic costs: foregone output When not at NRU (so some cyclical unemployment): actual GDP < potential GDP (a “GDP gap”) Producing at a point inside of the economy’s PPC Okun’s Law: For every 1% cyclical unemployment, a 2% GDP gap.

7. A SAMPLE PROBLEM Suppose: NRU = 4% Frictional unemployment= 3% Actual unemployment = 9% How much is: Frictional + Structural? Structural? Cyclical? GDP gap?

8. INFLATION: SOME DEFINITIONS

9. HURT AND HELPED BY INFLATION Hurt: Savers Those on Fixed Incomes (with no COLA, or that must wait to re-negotiate wage contracts) Lenders/Creditors So, lenders will apply the “Fisher Equation” Helped: Borrowers/Debtors

10. NOMINAL WAGES/INCOME VS. REAL WAGES/INCOME