Unemployment

1
Unemployment Prices
2
Examining Unemployment

• During periods of poor economic performance, such
  as economic recessions when real GDP declines,
  unemployment rises sharply and becomes a cause of
  public concern.
• During times of good economic performance and
  rapid economic growth, unemployment is reduced
  but does not disappear.

3
Examining Unemployment

• The unemployed are those individuals who do not
  currently have a job but who are actively looking
  for work.
• The employed are individuals who currently have
  jobs.
• The employed plus the unemployed comprise the
  labor force.

4
Examining Unemployment

• The unemployment rate is the percentage of labor
  force unemployed and looking for work.
• The labor force participation rate is the
  fraction of the population that is over 16 years
  of age that is in the labor force.

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Breakdown of the U.S. Population and the Labor
Force
6
U.S. Unemployment Data,February 2004

• The total population 16 years and older is
  divided into two groups
• Those in the labor force, which constitutes
  employed and unemployed.
• Those outside the labor force.
• The labor force participation rate for 2004 was
  65.9, and the unemployment rate was 6.15.

7
Unemployment RatesAround the World, 2004

• There are substantial variations in unemployment
  around the world.

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Alternative Measures of Unemploymentand Why
Theyre Important

• The official statistics for unemployment do not
  include the full range of individuals who would
  like to participate fully in the labor market.
• Individuals who want to work, have searched for
  work in the prior year, but are not currently
  looking for work because they believe they wont
  be able to find a job are called discouraged
  workers.
• Individuals who would like to work, have searched
  for work in the recent past, but have stopped
  looking for work for a variety of reasons are
  known as marginally attached workers.
• Workers who would like to be employed full-time
  but hold part-time jobs are known as individuals
  working part time for economic reasons.

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Alternative Measuresof Unemployment

• Including discouraged workers, marginally
  attached workers and individuals working
  part-time for economic reasons substantially
  increase measured unemployment.
• Depending on the statistic you want to emphasize,
  the unemployment rate could vary from the
  official 5.8 to as much as 9.4.

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Who Are the Unemployed?

• Selected U.S. Unemployment Statistics
  Unemployment Rates for February 2004

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Who Are the Unemployed?

• Different groups of people suffer more
  unemployment than other groups.
• Unemployment rates vary somewhat as GDP rises and
  falls.
• Unemployment due to recurring calendar effects is
  called seasonal unemployment.

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The Three Types of UnemploymentCyclical,
Frictional, and Structural

• Cyclical unemployment is the unemployment that
  accompanies fluctuations in real GDP.
• Frictional unemployment is the unemployment that
  occurs naturally during the normal workings of an
  economy. It occurs because it simply takes time
  for people to find the right jobs and for
  employers to find the right people to hire.
• Structural unemployment occurs when the economy
  evolves. It occurs when different sectors give
  way to other sectors or certain jobs are
  eliminated while new types of jobs are created.

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The Natural Rate of Unemployment

• The level of unemployment at which there is no
  cyclical unemployment is called the natural rate
  of unemployment.
• The natural rate of unemployment is the
  economists notion of what the rate of
  unemployment should be when there is full
  employment.
• In the United States, economists estimate that
  the natural rate of unemployment is between 5.0
  and 6.5.

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The Costs of Unemployment

• Unemployment insurance are payments received from
  the government upon becoming unemployed.
  Unemployment insurance is typically only
  temporary and does not replace a workers full
  earnings.
• Unemployment insurance may actually lead to
  additional time spent unemployed.
• The effects of unemployment can also linger into
  the future. The costs are not only financial but
  also psychological.

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Measuring Prices

• Price Level A weighted average of the prices of
  all goods and services.
• Price Index A measure of the price level.
• Consumer Price Index (CPI) the weighted average
  of prices of a specific set of goods and services
  purchased by a typical household.

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Are You Beating (CPI) Inflation or is Inflation
Beating You?

• Nominal Income the current-dollar amount of a
  persons income.
• Real Income nominal income adjusted for price
  changes.
• Real Income (in base year prices) (Nominal
  Income)/CPIx100

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The Consumer Price Indexand the Cost of Living
Real-Nominal PRINCIPLE What matters to people is
the real value of money or incomeits purchasing
powernot the face value of money or income.

• Economists have developed a number of different
  measures to track the cost of living over time.
• The best known of these measures is the Consumer
  Price Index (CPI). The CPI measures changes in
  prices facing consumers.

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The Consumer Price Indexand the Cost of Living

• The CPI measures changes in a fixed basket of
  goodsa collection of items chosen to represent
  the purchasing pattern of a typical consumer.
• The CPI index for a given year, say year K, is
  defined as

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The Consumer Price Indexand the Cost of Living

• Example
• Cost of a market basket in 1992 (the base year)
  200
• Cost of the same market basket in 2004 250
• CPI92 (200/200) x 100 100
• CPI04 (250/200) x 100 125
• Suppose you had 300 in 1992. How much would you
  need to be able to maintain the same standard of
  living in 2004?
• 300 x (125/100) 375

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Converting Dollars from One Year to Another

• Take your price, income, or salary that you want
  to compare. Choose the current year and the year
  to compare to.
• Complete this formula
• Salary current year (CPI current year / CPI
  earlier year)
• x Income earlier year

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Components of the CPI
22
The CPI versus theChain Index for GDP

• Both the CPI and the chain index are measures of
  the average prices for the economy, yet they
  differ in several ways
• The CPI includes goods produced in prior years,
  as well as imported goods, while the chain price
  index does not.
• Unlike the chain price index for GDP, the CPI
  asks how much a fixed basket of goods costs in
  the current year compared to the base year.

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Problems in MeasuringChanges in Prices

• In reality, all indexes tend to overstate actual
  price changes, primarily because we have a
  difficult time measuring quality improvements.
• Economists believe that we overestimate the
  inflation rate by between 0.5 and 1.5 each
  year.
• Government programs, such as social security,
  automatically increase payments based on changes
  in the CPI, and this increase tends to be larger
  than it should be.

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Problems in MeasuringChanges in Prices

• Cost-of-living adjustments are automatic
  increases in wages or other payments that are
  tied to a price index.
• If the CPI overstates increases in the cost of
  living, the government and employers might be
  overpaying Social Security recipients and workers
  for changes in the cost of living.

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Inflation

• The percentage rate of change of a price index is
  the inflation rate.
• Suppose that a price index in a country was 200
  in 1998 and 210 in 1999, the inflation rate
  between 1998 and 1999 was
• Inflation rate (210 200)/200 .05 5
• In other words, the country experienced a 5
  inflation rate.

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Historical U.S. Inflation Rates

• Price Index for U.S. GDP, 1875-2003

• After remaining relatively flat for 60 years, the
  price level began to steadily increase after
  World War II.

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Historical U.S. Inflation Rates
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U.S. Inflation Rate, 1950-2000,Based on Chain
Price Index

• Inflation reached its highest peak in the postwar
  era during the mid 1970s, when the economy was
  hit with several increases in oil prices. In
  recent years, the inflation rate has been
  relatively low.

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The Perils of Deflation

• Deflation refers to a sustained decrease in the
  average level of prices and wages in the economy.
• Deflation is undesirable. The biggest problem
  caused by a decreasing prices and wages is that
  people cannot repay their debts, which do not
  fall with deflation.

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The Costs of Inflation

• The costs associated with fully expected or
  anticipated inflation include
• First, there are actual physical costs of having
  to change prices, which economists call menu
  costs.
• Second, there are shoe-leather costs, or costs
  associated with the wear and tear necessary to
  hold less cash during times of inflation.

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The Costs of Inflation

• The cost of unexpected or unanticipated inflation
  is arbitrary redistributions of income.
  Inflation creates winners and losers.
• These redistributions impose real costs on the
  economy. If a society experiences unanticipated
  inflation, individuals and institutions will
  change their behavior.
• When inflation rates exceed 50 per month, we
  have what is called hyperinflation. Inflation of
  this magnitude can seriously disrupt normal
  commerce.

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Coming Up (Ch. 6) Macroeconomic Measurements,
Part II GDP and Real GDP