Unemployment and Inflation

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Macro
ECON
McEachern 2008-2009
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CHAPTER
Unemployment and Inflation
Designed by Amy McGuire, B-books, Ltd.
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Unemployment

• Unemployment
• Personal cost
• Cost on the economy
• Measuring unemployment
• Civilian non-institutional adult population
• Labor force
• Employed Unemployed
• Unemployment rate
• Percentage of unemployed in the labor force

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Unemployment

• Adult population
• Employed
• Working full time or part time
• Not working
• Unemployed (looking for work)
• Not in labor force
• Retired students dont want to work
• Discouraged workers

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Exhibit 1
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The Adult Population Sums the Employed, the
Unemployed, and Those Not in the Labor Force
June 2007 (in millions)
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Unemployment

• Labor force participation rate
• Number in labor force / Adult population
• Unemployment over time
• Rise during contractions
• Fall during expansions
• Overall downward trend (1980s to 2000)
• Growing economy
• Fewer teenagers in workforce

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Exhibit 2
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The U.S. Unemployment Rate Since 1900
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Unemployment

• Unemployment in various groups
• Age
• Higher unemployment among teenagers
• Race
• Gender
• Geography
• Occupation

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Exhibit 3(a)
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Unemployment Rates for Various Groups
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Exhibit 3(b)
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Unemployment Rates for Various Groups
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High School Dropouts, Labor Market Dropouts
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• High unemployment rates
• Poorly educated young black males
• 2000, 65 of high school dropouts
• Not working
• Unemployed
• Not looking for jobs
• In prison
• 2004, 72 of high school dropouts
• Not working

Case Study
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High School Dropouts, Labor Market Dropouts
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• Possible causes
• Failing schools
• Absent parents
• Racial discrimination
• Fewer blue collar jobs
• Growing competition
• Stricter child-support enforcement
• Rising incarceration rate
• Subculture downplay the value of work

Case Study
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Unemployment

• Varies by occupation
• Blue-collar workers
• Higher unemployment
• Varies across regions
• Certain occupations
• Dominate certain regions

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Exhibit 4
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Unemployment Rates Differ Across U.S.
Metropolitan Areas
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Sources of Unemployment

• Frictional unemployment
• Bring together employers and job seekers
• Doesnt last long
• Better match workers and jobs
• Seasonal unemployment
• Seasonal changes

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Sources of Unemployment

• Structural unemployment
• Mismatch of skills or geographic location
• Problem
• Cyclical unemployment
• Increases during recessions
• Decreases during expansions

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Full Employment

• Full employment
• No cyclical unemployment
• Some unemployment
• Frictional
• Structural
• Seasonal
• Estimates 4-6

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Unemployment Compensation

• Unemployment benefits
• Half of the unemployed
• Criteria
• Lost job
• Looking for work
• Time limit 6 months
• 40 of wages
• May reduce the incentive to find work

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International Comparisons

• Unemployment trends
• U.S. down
• Japan up
• Low unemployment Job security
• Bankruptcy
• Western Europe remained high
• Higher unemployment benefits
• Last longer
• Government regulations

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Exhibit 5
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During the Last Quarter Century, the U.S.
Unemployment Rate Fell, Europes Remained High,
and Japans Rose
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Problems with Unemployment Figures

• Understate unemployment
• Discouraged workers
• Not counted
• Underemployed
• Only part-time (want full-time)
• Overqualified
• Overstate unemployment
• Looking for work
• Qualify for unemployment benefits
• Only full-time (want part-time)
• Underground economy

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Inflation

• Inflation
• Sustained increase in price level
• Annual inflation rate
• Percentage increase in price level
• Hyperinflation
• Extremely high inflation
• Deflation
• Sustained decrease in price level
• Disinflation
• Decrease in inflation

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Hyperinflation in Brazil
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• Price level in 1994
• 3.6 million times higher than in 1988
• People dont want to hold cruzeiro
• Workers
• Paid daily purchases
• Exchanges for a stable currency
• Real cruzeiro larger denominations
• Facilitate purchase
• Reduce productivity
• Dropped since 1994

Case Study
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Two Sources of Inflation

• Increase in AD
• Demand-pull inflation
• Increased government spending
• Social programs
• Decrease in AS
• Cost-push inflation
• Increase cost of production
• Push up the price level
• Stagflation

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Exhibit 6
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Inflation Caused by Shifts of Aggregate Demand
and Aggregate Supply Curves

• Demand-pull inflation inflation caused by an
  increase of aggregate demand

(b) Cost-push inflation inflation caused by a
decrease of aggregate supply
An outward shift of the aggregate demand to AD
pulls the price level up from P to P.
A decrease of aggregate supply to AS pushes
the price level up from P to P.
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A Historical Look Inflation Price Level

• Price level, U.S., since 1913
• Steady increase
• Inflation or deflation, U.S. since 1913
• Before 1950s
• High inflation war related
• Followed by deflation
• Since 1950s
• Inflation 3.8 per year

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Exhibit 7(a)
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Consumer Price Index Since 1913
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Exhibit 7(b)
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Inflation Since 1913
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Anticipated vs. Unanticipated Inflation

• Anticipated inflation
• Expected inflation
• If inflation gt expected
• Sellers lose
• Buyers gain
• If inflation lt expected
• Sellers gain
• Buyers lose

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Inflation

• Unpopular
• Imposes transaction costs
• Obscures relative price changes
• Differ across metropolitan areas
• Housing prices

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Exhibit 8
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Average Annual Inflation from 2002 to 2006
Differed across U.S. Metropolitan Areas
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International Comparisons of Inflation

• First half of 1980s
• Declining inflation
• Mid-1980s to early 1990s
• Rising inflation
• Mid-1990s
• Lower trend
• Similar trend
• Overall lower inflation

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Exhibit 9
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Inflation Rates in Major Economies Have Trended
Lower over the Past Quarter Century
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Inflation and Interest Rates

• Interest
• Dollar amount
• Paid by borrowers to lenders
• Interest rate
• As percentage
• Supply of loanable funds
• Upward sloping
• Demand of loanable funds
• Downward sloping

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Inflation and Interest Rates

• Nominal interest rate
• Current dollars
• Real interest rate
• Nominal interest rate Inflation rate
• Expected real interest rate

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Exhibit 10
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The Market for Loanable Funds
The upward sloping supply curve, S, shows that
more loanable funds are supplied at higher
interest rates. The downward-sloping demand
curve, D, shows that the quantity of loanable
funds demanded is greater at lower interest
rates. The two curves intersect to determine the
market interest rate, i.
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Why is Inflation Unpopular?

• Pay higher prices
• Inflation Penalty
• Receive higher receipts
• Higher income
• Well-deserved reward
• Fixed nominal income
• Unadjusted for inflation
• Social Security
• Adjusted for inflation (COLA)

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