Chapter 6 MONITORING CYCLES, JOBS, AND THE PRICE LEVEL

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Chapter 6 MONITORING CYCLES, JOBS, AND THE PRICE
LEVEL

• The business cycle
• Measures of labor market activity
• Unemployment
• Sources
• Duration
• Groups affected most
• Measuring the price level inflation rate.

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• Business cycle
• periodic but irregular up-and-down movement in
  production and jobs.
• NBER defines phases and turning points
• Recession
• significant decline in activity spread across the
  economy,
• lasts more than a few months
• visible in industrial production, employment,
  real income, and wholesale-retail trade.
• begins just after the economy reaches a peak of
  activity
• ends as the economy reaches its trough.
• Expansion occurs between trough and peak
• Bus. Cycle dates http//www.nber.org/cycles.htm
  l/

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Jobs and Wages

• Current Population Survey
• The U.S. Census Bureau conducts monthly surveys
  to determine the status of the labor force in the
  United States.
• Approximately 60,000 households interviewed
  monthly.
• Four months in, eight months out, four months in.

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Jobs and Wages

• To be considered unemployed, a person must be
• without work and have made specific efforts to
  find a job within the past four weeks, or
• waiting to be called back to a job from which he
  or she was laid off, or
• waiting to start a new job within 30 days.

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Jobs and Wages

• the population labor force categories and the
  magnitudes for 2006.

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December 2008 Labor Force Statistics
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Jobs and Wages
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What was the unemployment rate in Dec 2008?
(round your answer to nearest 10th and dont use
sign -- e.g. 5.4)
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What was the labor force participation rate in
Dec 2008? (round your answer to nearest 10th and
dont use sign -- e.g. 5.4)
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What was the employment-population ratio
participation rate in Dec 2008? (round your
answer to nearest 10th and dont use sign --
e.g. 5.4)
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Trends in Employment Measures
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The unemployment rate is pro-cyclical.

• Yes
• No

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The employment-population ratio is pro-cyclical.

• True
• False

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The labor force participation rate is
pro-cyclical.

• True
• False

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Cyclical behavior of employment statistics.

• Are each of the following, pro- or
  counter-cyclical?
• Unemployment rate
• LFPR
• Effect of discouraged workers
• Employment-population ratio

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Trends in employment statistics

• The LFPR
• increased from 59 in the 1960s to 67 in the
  1990s.
• for men has declined, but for women has
  increased.
• fell for older workers since the 1950s, but has
  recently begun to rise.
• The employment-population ratio
• increased from 55 in the early 1960s to 67 in
  2000.
• declined for men and increased for women.

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Jobs and Wages

• Aggregate Hours
• the total number of hours worked by all workers
  during a year.
• increased since 1960 but less rapidly than the
  total number of workers because the average
  workweek has shortened.

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Jobs and Wages
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Aggregate hours is proc-cylclical.

• True
• False

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Jobs and Wages

• Real Wage Rate
• the quantity of goods and services that can be
  purchased with an hours work.
• the money wage rate divided by the price level
  (more later)
• Three measures
• Hourly earnings in manufacturing
• Total wages and salaries per hour
• Total wages, salaries, supplements per hour

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Jobs and Wages

• Real Wage Rate
• compensation in 2000 dollars per hour of work.

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Unemployment and Full Employment

• Is duration of unemployment pro- or
  counter-cyclical?
• As duration increases, is pain more or less
  concentrated?

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Unemployment and Full Employment

• Types of Unemployment
• Frictional
• Structural
• Cyclical

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Mary quit her job to move to another city. As
she searches for a new job in her new location,
she is

• Frictionally unemployed
• Structurally unemployed
• Cyclically unemployed

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Some believe that the U.S. automobile industry
will forever be smaller. If John lost his job
as an auto worker as a result of the down-sizing,
John is

• Frictionally unemployed
• Structurally unemployed
• Cyclically unemployed

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Some believe that the U.S. automobile industry
will eventually return to its original size. If
John lost his job as an auto worker as a result
of the current recession, but expects that he
will get his job back, John is

• Frictionally unemployed
• Structurally unemployed
• Cyclically unemployed

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Unemployment and Full Employment

• Full Employment
• no cyclical unemployment
• when all unemployment is frictional or
  structural.
• Natural rate of unemployment.
• unemployment rate at full employment
• estimated to have been around 6 percent on
  average in U.S.
• Higher in 1970s, lower in 1990s
• Baby boom
• Women
• UI Generosity

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Unemployment and Full Employment

• Potential GDP
• Quantity of real GDP produced at full employment.
  
• corresponds to the capacity of the economy to
  produce output on a sustained basis
• Actual GDP fluctuates around potential GDP with
  the business cycle.
• Actual unemployment fluctuates around natural
  rate with the business cycle.

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When the unemployment rate is above the natural
rate, real GDP will be below potential GDP.

• True
• False

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The Consumer Price Index

• The price level is the average level of prices
  and is measured by using a price index.
• CPI measures the average level of the prices of
  goods and services consumed by the average urban
  family.
• The GDP deflator is another price index,
  reflecting the average price of all goods and
  services produced.

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The Consumer Price Index

• Constructing the CPI involves three stages
• Selecting the CPI basket
• Conducting a monthly price survey
• Using the prices and the basket to calculate the
  CPI

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The Consumer Price Index

• The CPI basket.

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The Consumer Price Index

• The CPI basket is based on a Consumer Expenditure
  Survey.
• The current CPI based on a 1993-95 survey,
  although the reference base period is still
  1982-84.
• Every month, BLS employees check the prices of
  80,000 goods and services in 30 metropolitan
  areas.
• The CPI is calculated using the prices and the
  contents of the basket.

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The Consumer Price Index
If 1984 is base year, 1984 CPI
___________ 2005 CPI __________ If 2005 is base
year, 1984 CPI ___________ 2005 CPI
__________
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Using 1984 base year, what is the CPI in 1984?
(round answer to nearest 10th e.g. 103.2)
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Using 1984 base year, what is the CPI in 2005?
(round answer to nearest 10th e.g. 103.2)
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Using 2005 base year, what is the CPI in 1984?
(round answer to nearest 10th e.g. 103.2)
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Using 2005 base year, what is the CPI in 2005?
(round answer to nearest 10th e.g. 103.2)
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The Consumer Price Index

• The inflation rate
• change in price level between years.
• (CPI now CPI last year) / CPI last year
• (CPI now / CPI last year) - 1
• Avg. annual inflation rate over past t years
  (CPI now / CPI t years ago)1/t -1
• Avg. annual growth rate over past t years (X
  now / X t years ago)1/t -1

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Adjusting for changes in price level

• In base year, how do nominal and real wages
  compare?
• Suppose that between 2005 and 2006 nominal wages
  rise from 10 to 11 and the CPI rises from 140
  to 150
• What was the inflation rate?
• Growth in nominal wages?
• Growth in real wages?

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Inflation Questions

• Using BLS data on average prices, answer the
  following
• Inflation rate between 2004 and 2005.
• Average annual rate of inflation between 1990 and
  2005.
• If a person earned 10 per hour in 1990, how much
  would they have to earn in 2005 to have the same
  real wage?

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Suppose that between 2005 and 2006 nominal wages
rise from 10 to 11 and the CPI rises from 140
to 150. What was the inflation rate? (nearest
10th, no sign e.g. 4.3).
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Suppose that between 2005 and 2006 nominal wages
rise from 10 to 11 and the CPI rises from 140
to 150. What was annual rate of growth in the
nominal wage? (nearest 10th, no sign e.g.
4.3).
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Suppose that between 2005 and 2006 nominal wages
rise from 10 to 11 and the CPI rises from 140
to 150. What was the growth rate in the real
wage? (nearest 10th, no sign e.g. 4.3).
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The Bias in the CPI

• A Congressional Advisory Commission estimated
  that the CPI overstates inflation by 1.1
  percentage points a year.

• Sources of bias
• New commodities
• Quality improvements
• Commodity substitution bias
• Outlet substitution bias.

• Why is the bias costly?
• Government spending/taxes.
• Social Security proposal
• Private Contracts
• Biases estimates of real earnings