Chapter 9: Unemployment and Inflation

People are considered unemployed if

"they did not work in the previous week but were available for work and had actively looked for work at some time during the previous four weeks."

People are considered employed if

"they worked during the week before the survey or if they were temporarily away from their job because they were ill, on vacation, on strike, or for other reasons."

Consumer Price Index (CPI)

---A widely cited index number for the price level; the weighted average of prices of a specific market basket of goods and services purchased by a typical household. ---An average of the prices of the goods and services purchased by the typical urban family of four.

Minimum Wage Laws

---If the minimum wage is set above the market wage determined by the demand and supply of labor, the quantity of labor supplied will be greater than the quantity of labor demanded.

The Price Index

--measures the average level of prices in the economy. --There are several price indexes

Full Employment

--we say that the economy has reached full employment when it has eliminated cyclical unemployment. --Therefore, the full employment unemployment rate lies between 4% and 5%.

Real interest rate

-Real interest rate The nominal interest rate minus the inflation rate. - It is the purchasing power of the repayment the borrower makes. Real interest rate = Nominal interest rate − Inflation rate

natural rate of unemployment:

-The full employment unemployment rate is also called the -the typical rate of unemployment that occurs when the economy is growing normally, and it consists of frictional unemployment plus structural unemployment.

Types of Unemployment

1. Frictional Unemployment and Job Search 2. Structural Unemployment 3. Cyclical Unemployment

factors that determine the levels of Frictional and Structural Unemployment

1. Government Policies and the Unemployment Rate ---1a. Unemployment Insurance and Other Payments to the Unemployed ---1b. Minimum Wage Laws 2. Labor Unions 3. Efficiency Wages

types of price indexes

1. The consumer price index (the most widely used measure of inflation). 2. The producer price index. 3. The GDP deflator.

using price indexes

1. To measure Inflation rates: (USE adjacent years) 2. Using the CPI to Equate Dollar Values over time 3. Converting a nominal value to a real value 4. Inflation and the Real Interest Rates

efficiency wages

A higher-than-market wage that a firm pays to motivate workers to be more productive. --- in many business situations, it is very difficult to monitor workers ---- because the efficiency wage is above the market wage, it results in the quantity of labor supplied being greater than the quantity of labor demanded, just as do minimum wage laws and labor unions. -negative effects on emolyement

Price level

A measure of the average prices of goods and services in the economy. The price level is measured by a price index

core inflation

Excluding food and energy prices from the computation of the inflation rate reveals what is termed ..

Three Macroeconomic Goals

Goal = Economic Growth Problem: Recession Indicator: Real GDP Goal = Full Employment Problem: Unemployment Indicator: Unemployment Rate Goal = Price Stability Problem: Inflation (or Deflation) Indicator: Consumer Price Index

Discouraged workers

People who are available for work but have not looked for a job during the previous four weeks because they believe no jobs are available for them.

Frictional unemployment

Short-term unemployment that arises from the process of matching workers with jobs (inevitable).

Inflation rate

The percentage increase in the price level from one year to the next.

Nominal interest rate

The stated (contractual) interest rate on a loan.

Civilian Labor force

The sum of employed and unemployed workers in the economy.

Structural unemployment

Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of today's jobs (inevitable).

Cyclical unemployment

Unemployment caused by a business cycle recession. -can be avoidable

net figures

When the Labor Department announces each month the increases or decreases in the number of persons employed and unemployed, these are

full employment (potential) output.

When the unemployment rate is equal to its natural rate - that is, no cyclical unemployment exists - the output level produced in the economy is called

The core inflation rate

allows us to monitor what is happening to inflation over the long run, and whether or not policies need to be instituted to keep inflation in check

Producer price index (PPI)

an average of the prices received by producers of goods and services at all stages of the production process.

labor unions

are organizations of workers that bargain with employers for higher wages and better working conditions for their members In unionized industries, the wage is usually above what otherwise would be the market wage. This above-market wage may result in employers in unionized industries hiring fewer workers.

market basket

combination of goods and services that the typical consumer purchases during the period in question.

Underemployment

counting people as employed who are working part-time , although they would prefer to be working full time

Inflation

is an overall increase in the price level.

Nominal Income

is the actual number of dollars of income received during the year

unemployment rate

measures the percentage of the labor force that is unemployed. # Unemployed / Labor force X 100%

labor force participation rate

measures the percentage of the working-age population in the labor force. It tells us what fraction of the working-age population wants to be working, whether or not they actually have a job: Labor Force / working age population X 100%

Unemployment Insurance and Other Payments to the Unemployed

the unemployed are eligible for unemployment insurance payments from the government

exceptional expansion

u<u* Y>Y* cyclical unemployment = "-"

healthy economy

u=u* Y=Y* cyclical unemployment = 0

recession

u>u* Y<Y* cyclical unemployment = "+"

Measuring the Unemployment Rate

• The Employment Act of 1946 declared it the responsibility of the federal government • Everyone who is at least 16 years old falls into one --- and only one --- of these three categories: employed, unemployed, or not in the labor force.

Who then is hurt by inflation?

• inflation hurts those on fixed incomes • inflation hurts lenders and savers. • Because inflation reduces the purchasing power of money, the threat of future inflation can make people reluctant to lend for long periods.

Problems with Measuring the Unemployment Rate

• problem of distinguishing between the unemployed and people who are not in the labor force: • Underemployment • the Labor Department does not verify the responses of people included in the survey

Job Creation and Job Elimination Over Time

• the U.S. economy creates and destroys millions of jobs every year --- changes in consumer tastes, technological changes, success and failures of entrepreneurs in responding to opportunities and challenges.

Trends in the U.S Labor Force Participation rate

Different groups in the population have very different unemployment rates: ---Ethnicity. ---Levels of educational attainment.

Substitution bias

refers to the fact that consumers substitute relatively cheaper goods for relatively more expensive goods.

Nominal variables

such as nominal GDP, have not been adjusted for changes in prices: To convert nominal values to real values, we divide by a price index:

Real variables

such as real GDP, has been adjusted for changes in the price level by using the same set of prices (base-year) in all the time. To convert nominal values to real values, we divide by a price index:

Real income

the actual number of dollars received (nominal income) adjusted for any change in price level: