Title: Chapter 8 Unemployment and Inflation
1Chapter 8Unemployment and Inflation
2The Production Possibilities Frontier and
Unemployment
50
- An economy is trying to produce ON the curve.
- At anything less than full employment of
resources the economy produces inside the curve,
in the inefficient region. - Full employment of ALL resources includes labor.
- If the economy isnt using all its available
labor, we arent at our most efficient output
level.
43
A
34
B
Consumer Goods
(millions of units per year)
20
10
0
0
10
20
30
40
50
Capital Goods
(millions of units per year)
3Exhibit 1 The Adult Population Sums the
Employed, the Unemployed, and Those Not in the
Labor Force (in millions)
4Measurements of the Labor Force Unemployment
- The labor force consists of both those people
with jobs and those looking for jobs. - The Unemployment Rate is calculated by dividing
those looking for a job divided by the total
labor force B/(AB) - The Labor Force Participation Rate is the share
of adult population that in the labor force.
C
B
A
Labor Force A B
UR B / (A B)
LFPR A B / (A B C)
5Who do not get counted as Unemployed
- Populations in institutions (mental and prisons).
- Military personal (deployed or not)
- Discouraged workers
- Part-time workers (they are considered employed).
- Retired
- Adult homemakers
- Students not working
- People who dont want to work
C
B
A
6How Unemployment is Measured The Household
Survey
- Monthly survey by US Census Bureau
- Begun in 1940
- 60,000 individuals across the US
(90 response rate) - Reported the 1st Friday of each month
7Types of Unemployment
- The type of unemployment depends on WHY or How an
individual becomes unemployed. - There are four types currently identified by
economists. - Frictional
- Structural
- Cyclical
- Seasonal (Somewhat newly defined)
8Frictional Unemployment
- Short-term unemployment that is by choice of the
worker. - People who are in between jobs.
- People who quit their job.
- People entering and re-entering the job market
looking for higher pay or a better situation (new
graduates). - Actively looking for work but just not yet in a
job yetbut, will be soon - (accounts for about 4-6 of the unemp rate.)
9Structural Unemployment
- Longer-term unemployment that is due to changes
in the structure of the economy. - Jobs lost to another country.
- Blue collar jobs (steel, cars, textiles)
- Service (customer service reps)
- Sometimes requires re-education or training to
move back into a job. - Innovations occurs that makes jobs obsolete
- Elevator operators
- Seamstress
- Wagon wheel makers
10Cyclical Unemployment
- A reduction in the demand for inputs (including
labor) during economic downturns or low points in
the business cycle. - Unemployment increases economy slips into the
contractionary phase of the business cycle. - Unemployment decreases as production picks back
up during the expansion phase of the business
cycle. - Cyclical unemployment can add several points to
the frictional unemployment rate
11Seasonal Unemployment
- Loss of a job due to seasonal fluctuations in an
industry. - Some jobs are only available for a portion of the
year, and workers become unemployed during the
slow season - Construction
- Tourism
- Theme parks
- Fishing and agricultural seasonal workers
- Summer and Christmas retail jobs
12Looking at some of the components of unemployment
Structural unemp is difficult/impossible to spot
on a graph
A zero rate of employment is not require for us
to be at full employment.
13Four reasons the official unemployment rate my
under count the actual unemployment in the economy
- Discouraged workers arent countedIf you arent
looking (in the last 4 weeks), you arent
counted. - Disabilitypeople on disability may be able to
work at least to some extent, but do not. - Prison2 million people are in prison, 2/3rds
were not working when they entered prison. If
they werent in prison, most would be counted as
unemployed. - Part-time employment may be underemployment in
that it doesnt fully employ some that desire
full-time employment.
14Exhibit 2 The U.S. Unemployment Rate Since 1900
Lowest level of unemployment 2 during WWII
Supply Side Technology boom
Upward trend after WWII
15Not all of the unemployment is equally
distributed among the population or across the
country
- Some groups have been disproportionately affected
by unemployment. - Some areas of the US have been particularly
plagued by persistently high unemployment rates.
16Exhibit 3 Unemployment Rates for Various
Groups- 20 years of age or older
17Other differences in unemployment that have shown
up in research
- Geographic
- Urban/Suburban/Rural
- Southern/Northern
- Demographic
- Minority/Majority
- Male/Female
- Educational attainment
- Age
18Education and unemployment are highly related
- Young, low-skilled, less educated workers are
more likely to be unemployed because they are the
first to be fired if demand declines. - They typically do not have special skills or
training. - Jobs that require few skills are the first to be
outsourced to other countries or eliminated. - Conversely, occupations in the technical and
professional fields (engineers, doctors, etc.,)
have the lowest unemployment rates. - People with a college degree have a greater range
of skills than those with just HSD or less.
19Exhibit 4 Unemployment Rates Differ Across U.S.
Metropolitan Areas
Old Data!!!
20Exhibit 5 In the Last Two Decades, Unemployment
Rates Fell in the United States, Rose in Japan,
and Remained High in Western Europe
21Unemployment Benefits
- Benefits for up to 6 mo
- Not fired for cause or quit.
- About 40 of take home
- Pros and cons of Unemp. Benefits
- Incentives to find work reduced
- Time available for job search can be higher and
this can result in a better job match.
22InflationRemember?!
- Inflation is the sustained increase in the
overall price level in an economy. - Other terms
- Deflation A sustained decrease in the overall
price level in an economy - Hyperinflation A very high rate of inflation,
often associated with countries in crisis like
Germany after WWII or Brazil in the 1980s.
23Types of Inflation
- There are two different types of inflation and
they are identified by where in the AS/AD the
price changes originate. They are called - Demand Pull
- Cost Push
24Exhibit 6 Inflation Caused by Shifts of
Aggregate Demand and Aggregate Supply Curves
25AS/AD at different parts of the Aggregate Supply
Curve
- At AD, the economy is slack. We can increase
aggregate demand without too much inflation. - However, as we move along the AS curve, increases
in output are acompanied by a rise in the price
level. - remember the PPF, we are getting close to the PPF
curve as we push output up and up in the current
period. - Once we get past the bend in AS, any attempt to
increase output causes prices to increase and
output stays almost the samepure inflation.
P
P
P
Q
Q
Q
Full Emp
26AS/AD at different parts of the Aggregate Supply
Curve
- When we were in the Great Depression, where along
the AS curve were we? - The low end.
- When we were experiencing Stagflation, what
happened to the AS curve? - Left shift in AS.
- This is not in your book!!!
P
P
P
Q
Q
Q
27Exhibit 7 Consumer Price Index Since 1913
28Exhibit 7 Consumer Price Index Since 1913
No periods of deflation since the 50s
29Exhibit 8 Average Annual Inflation from 1994 to
2004 Differed across U.S. Metropolitan Areas
4 in the last two months
30Anticipated versus Unanticipated Inflation
- Because the future is uncertain, people have to
form expectations as to what the inflation rate
will be. - When the rate of inflation is stable or growing
at a stable rate, its relatively easy to
predict. - When the rate of inflation is unstable,
predicting what prices will look like in the near
future becomes more difficult.
31Who does unanticipated inflation hurt?
- People on fixed incomes (all inflation hurts
these people) - Sellers who agreed to sell a good delivered in
the future for a fixed price in todays dollars. - Workers who have a COLA below the inflation
ratethis includes those that have no COLA. - Employers with COLAs above inflation rate.
- Consumersmore time price shopping.
32Who does unanticipated inflation benefit?
- Buyers who agreed to buy a good delivered in the
future for a fixed price in todays dollars. - Workers who have a COLA above the inflation rate
33Exhibit 10 The Market for Loanable Funds
You cant talk about inflation without talking
about interest rates. Loans are just contracts
for the payment for the use of money. Interest
is the dollar amount paid by borrowers to lenders
for giving up current consumption. The greater
the interest rate, all else constant, the greater
the reward for lending money.
34Interest Rates and Inflation
- Interest rates (i) and quantity of loanable funds
demanded is inversely related. - Interest rates and the supply of loanable funds
is positively related. - This is just supply and demandyouve seen it
before.
35Real versus Nominal Interest Rates
- The nominal interest rate measures the interest
paid on a loan in terms of current dollars. Its
the interest rate stated on the loan. - The real interest rate is the return on the loan
once inflation is factored in. - Real Interest Rate Nominal Interest Rate The
rate of inflation - So, if you received a loan
36Inflations effect on borrowers and lenders
- Mortgage lenders Get back less than loaned
- Borrowers Pay back less than borrowed
- The extent differs by loan type
- Loans types
- ARM
- Interest-only
- Fixed-Rate
- Short-term
- Long term
37Why is inflation generally unpopular???
- Wage increases by workers are viewed as well
deserved because of increases in productivity
and experience over time. - BUT, inflation silently reduces the buying power
of the wage increases.