Fluctuations in Economic Output, Unemployment, and Inflation

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Fluctuations in Economic Output, Unemployment,
and Inflation
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The Business Cycle

• The phases of the business cycle are
• Recovery or Expansion,
• Peak or Boom (shaded green)
• Recession or Contraction
• trough or Depression (blue shaded areas).

Real GDP
Time
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The Business Cycle

• Cycles are irregular

• Annual growth rate of real GDP

• Source Economic Report of the President,
  various issues.

• Ups and downs characterize business activity.
• There has been an upward trend in real GDP in the
  United States and other industrial nations.

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• Economic Fluctuations

and the Labor Market
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• 1. Employed a person (16 years old or over)
  who is
• working for pay at least one hour per week,
• self employed, or,
• working 15 hours or more each week without pay in
  a family-operated enterprise.

• 2. Unemployed a person not currently
  employed who is either
• actively seeking a job, or,
• waiting to begin or return to a job.

3. Civilian Labor force civilians (16 years
and older) who are either employed or
unemployed.
4. Not in the labor force persons (16 years
and older) who are neither employed nor
unemployed (like retirees, students,
homemakers, or disabled persons).
4 Labor Market Classifications
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Economic Fluctuations and the Labor Market

• The non-institutional civilian adult population
  is grouped into two broad categories

• Persons not in the labor force, and,
• persons in the labor force.

• To be classified as unemployed, one must either
  be on layoff or actively seeking work.

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Unemployment and Measurement Problems

• The definition of unemployed involves some
  subjectivity.
• Some argue the employment/population ratio is
  a better indicator of job availability than the
  unemployment rate.

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U.S. Population, Employment, and Unemployment
2001
66.9
63.8
4.8
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U.S. Population, Employment, and Unemployment
2004
66.0
62.3
5.5
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• U.S. Population, Employment,
• and Unemployment 2006

• 66.4

• 63.2

• 4.6

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66.9
63.8

• 2001

4.8
66.0
62.3

• 2003

5.5

• 66.4

• 63.2

• 2006

• 4.6

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Labor Force Participation Rate of Men and Women
1948-2003

• During the same period the rate of men has been
  falling.

• Labor Force Participation Rate of Men and Women

• 1990

• 2006

• 1975

• 1948

• 1960

• 1990

• 2006

• 1975

• 1948

• 1960

• Women

• Men

• Source www.bls.gov.

• The labor force participation rate of women has
  been steadily increasing for several decades.

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• The Unemployment Rate
• By Age and Gender 2006

• Unemployment Rate, 2006

• Allmen

• Allwomen

• Allworkers

• Source www.bls.gov.

• In 2006, there was little difference in the rate
  of unemployment between men and women.

• Notice how the unemployment rate for persons
  under age 25 (of each gender) is much higher than
  for those older.

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The Unemployment Rate By Age and Gender 2003
Unemployment Rate, 2003
Allworkers
Allmen
Allwomen
Source www.bls.gov.

• The unemployment rate for men in 2003 was 6.3,
  for women 5.7, and for all workers 6.0.

• Notice how the unemployment rate for persons
  under age 25 (of each gender) is much higher than
  for those older.

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Composition of the Unemployed by Reason

• There are various reasons why persons were
  unemployed in 2003.

• A little more than two-fifths (42.4) of the
  unemployed were dismissed from their previous
  jobs.

• 35.5 of the unemployed were either new
  entrants or reentrants into the labor force.

Source www.bls.gov.
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Composition of the Unemployed by Reason

• There are various reasons why persons were
  unemployed in 2006.

• A little less than two-fifths (39.1) of the
  unemployed were dismissed from their previous
  jobs.

• 43.6 of the unemployed were either new
  entrants or reentrants into the labor force.

• Source www.bls.gov.

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Classify each of the following as (a) employed,
(b) unemployed, or (c) not in the labor force
a. a person who is not working but applied for a
job at Wal-Mart last week b. a person working
part-time who is searching diligently for a
full-time job c. an auto worker vacationing in
Florida during a layoff at a General Motors plant
who expects to be recalled in a couple of weeks
d. a 17-year-old who works six hours per week as
a route person for the local newspaper e.
homemaker working 70 hours a week preparing meals
and performing other household services f. a
college student who spends between 50 and 60
hours per week attending classes and
studying g. a retired Social Security recipient
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2. The figures below (in millions) are for the
U.S. during the year 2006. Population (age
16 and over) 299.8 Civilian pop. (age 16 and
over) 228.6 Employed 144.4 Unemployed
7.0

1. Calculate the unemployment rate.

• 7.0

• Calculate the labor force participation rate.

• 7.0

• 144.4

• 144.4

• 7.0

c. Calculate the employment/ population ratio

• 228.6

• 144.4

• 228.6

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• Types of Unemployment

1. Frictional

between jobs
2. Structural
job replaced
3. Cyclical
less business
4. Seasonal
temporary job
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• Full Employment

Deals with which type?

1. Frictional?

2. Structural?
3. Cyclical?
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• Which type?

1. A student who decides at mid-semester to
devote the rest of the term to studying quits her
part-time job
2. A graphic artist who is out of work because
a computer now does her job.
3. A waiter who quits his job and is applying
for the same type of work in a restaurant where
morale is better.
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• Which type?

4. The son of a local farmer who works 20-hour
weeks without pay on the farm while waiting for a
job at a nearby factory.
5. A travel agent who is laid off because the
economy is in a slump and vacation travel is at a
minimum.
6. A plumber who works 5 hours per week for his
church (on a paid basis) until he can get a
full-time job
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• The Natural Rate of Unemployment

At full employment there will still be some

1. Frictional

2. Structural
but no Cyclical
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• The Natural Rate of Unemployment

actual unemployment may only get as low as
4 5
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The Business Cycle

• Cycles are irregular

• Share of labor force unemployed

• 10

• 8

• 6

• 4

• 2

• 1960

• 1965

• 1970

• 1975

• 1980

• 1985

• 1990

• 1995

• 2000

• 2005

• Ups and downs characterize business activity.
• There has been an upward trend in real GDP in the
  United States and other industrial nations.

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Unemployment Across Economies

• Recently, the unemployment rate in the U.S. and
  Japan has been lower than in major European
  economies.
• Higher unemployment benefits, less flexible
  bargaining, and more regulated labor markets of
  Europe explain this.

Average Unemployment Rate (1990-1999)
19.9
Spain
11.2
France
10.6
Italy
8.2
U.K.
7.5
Germany
5.8
U.S.
3.1
Japan
Source Economic Outlook, OECD (Dec. 2000).
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Unemployment Across Economies
Average Unemployment Rate (1994-2003)
Average Unemployment Rate (1990-1999)
19.9
14.6
Spain
Spain
11.2
10.6
France
France
10.6
10.5
Italy
Italy
8.2
8.6
U.K.
U.K.
7.5
6.5
Germany
Germany
5.8
U.S.
5.1
U.S.
3.1
4.2
Japan
Japan
Source Economic Outlook, OECD (Dec. 2000).
Source Economic Outlook, OECD (June 2004).
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Unemployment Across Economies

• Average Unemployment Rate
• (1997-2006)

• 11.6

• Spain

• 9.7

• Italy

• 9.2

• France

• 8.5

• Germany

• 5.4

• U.K.

• 4.9

• U.S.

• 4.6

• Japan

• Source Economic Outlook, OECD (June 2007).

• U.S. and Japan lower than major European
  economies.
• Higher unemployment benefits, less flexible
  collective bargaining, and more regulated labor
  markets in Europe.

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Actual and Potential GDP

• Potential output Maximum sustainable output
  level consistent with the economys resources,
  (on the production possibilities curve.)
• Actual and potential output will be equal when
  the economy is at full employment.

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• Here we illustrate both actual and potential GDP.

• Real GDP(billions of 2000 )

• 12,000

• 10,000

• 8,000

• 6,000

• 4,000

• 2,000

• 1960

• 1965

• 1970

• 1975

• 1980

• 1985

• 1990

• 1995

• 2000

• 2005

• Note the gap (shaded area) between actual and
  potential GDP during periods of recession.

Historically Speaking
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• Inflation is an increase in the general level of
  prices.

• The Rate of Inflation is calculated as

• What is Inflation?

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The Inflation Rate, 1956-2006

• Inflation rate

• 15

• 10

• 5

• 0

• 1956

• 1960

• 1965

• 1970

• 1975

• 1980

• 1985

• 1990

• 2000

• 1995

• 2005

• Between 1956 and 1965, the general price level
  increased at an average annual rate of only 1.3.
  

• In contrast, the inflation rate averaged 9.2
  from 1973 to 1981, reaching double-digits during
  several years.

• Since 1982, the average rate of inflation has
  been lower (3.1 from 1983-2006) and more stable.
  

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There are 2 Kinds of Inflation
1. Anticipated inflation A widely expected
change in the price level. 2. Unanticipated
inflation An increase in the price level that
comes as a surprise, at least for most
individuals.
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• Consequences of Inflation

1. Hyperinflation

• 2002 Argentina

• 1920s Germany

• 1990s Russia

2. Money loses value
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• Real Interest rate decreases

• Interest rate - inflation

1. Savings

Lose value
2. Loans
Are easier to repay
3. Wealth
May increase
4. Politics
May cause changes
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• Nearly all economists believe that rapid
  expansion in the money supply is the primary
  cause of inflation.

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• Types of Inflation

1. Demand-Pull

2. Cost-Push
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1. Demand-Pull

Price
S1
P2
P1
D1
Quantity
Q1
Q2
buyers demands greater than producers supply
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2. Cost Push
Price
S1(initial equilibrium)
P2
P1
D
Quantity/time
Q1
Q2
sellers costs are passed on to buyers
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Questions for Thought
1. Suppose that the CPI was 150 at the end of
last year and 157.5 at the end of this year. What
was the inflation rate during the year?
2. If decision makers anticipate an inflation
rate of 3 at the start of a year and prices
during the year rise by 7, this is an example
of a. anticipated inflation. b. an inflation
rate higher than anticipated. c. an inflation
rate lower than anticipated.
3. True or false when the inflation rate is high
and variable, decision makers will generally be
able to anticipate year-to-year changes in
inflation quite accurately.
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