10) Unemployment, Inflation, Economic Fluctuations

What are the goals of macroeconomics?

1) Economic Growth • productivity, incentives • per capita, to account for population growth • rates of growth 2) Low Unemployment 3) low Inflation • Some inflation is good • Price stability

The overall stock market often ____________ before a recession and usually ___________ before the economy recovers.

1) decreases 2) increases

What are the three types of unemployment?

1. Frictional 2. Structural 3. Cyclical

What is the only cause of a sustaineded increase in the rate of inflation?

A high rate of monetary growth.

boom

A period of fast economic growth; a strong expansion (recovery) • lasting at least a few months • decrease in unemployment • increase in real GDP (output, production)

Say the price of milk rises by 5% in a year, and the inflation rate (the overall price level) increased by 2%. How much did the relative price of milk change in that year?

ANS: 3% WHY? The overall inflation rate measures the universal change in inflation for all goods and services of a particular economy. A relative price change is concerned only with the changes in price exclusively associated with a particular good. • 5% - 2% = 3%

The official unemployment rate may overstate the extent of unemployment because: a.) It excludes discouraged workers. b.) It counts part-time workers as fully employed. c.) It does not count those with jobs in the underground economy as employed. d.) It includes those who claim to be looking for work as unemployed, even if they are just going through the motions in order to get government benefits. e.) of both (c) and (d).

ASW: e) of both (c) & (d). c.) It does not count those with jobs in the underground economy as employed. d.) It includes those who claim to be looking for work as unemployed, even if they are just going through the motions in order to get government benefits.

Producer Price Index (PPI)

An index that measures the measure of the cost of goods and services bought by firms rather than consumers

What strategy is most often implemented to counter recessions to reduce cyclical unemployment?

Increasing aggregate demand.

Is it better to measure inflation using the GDP Deflator or the Consumer Price Index?

It depends, but both measures usually convey the same general trend of inflation. • The GDP Deflator only takes into account domestic products, but it's a more stable measure. • The CPI takes into account all goods and services bought by consumers, including goods from other countries. This measure is more volatile.

1) Are layoffs more prevalent during a recession or a boom? 2) What about resignations?

Layoffs are more likely to occur during a recession. When times are bad, employers are often forced to let workers go. Resignations are relatively more prevalent during good economic times because more job opportunities are available to those seeking new jobs.

Why is it that, contrary to popular belief, when industries find new technology and innovation it doesn't ultimately lead to greater unemployment?

Producers generate greater incomes and better goods being sold at lower prices. These benefits for consumers lead to growth in other industries. • EX: Computer It was speculated to displace thousands of workers. Instead, the computer generated a whole new growth industry that created jobs.

Is there a correlation between the state of the economy and suicide rates?

Researchers have found that a strong relationship exists between unemployment, the economy, and suicide. • Shame, helplessness, dispair can be caused by things like unemployment, loss of savings and securities, etc. • Another study by the Centers for Disease Control and Prevention (CDC) found that the suicide rate from 1928 to 2007 has risen and fallen in tandem with the business cycle. • "Good economic policies can save lives [by shaping standards of living]."

How does news of unemployment typically effect the stock market?

Rising unemployment lowers stock prices, vise versa.

What does it cost the economy to reduce unemployment rates?

SHORT-RUN • higher rates of inflation • underemployment LONG-RUN • underemployment

Why is it that the United States unemployment rates have been lower than countries like Sweden, Spain, Ireland, Italy, and France?

The United States offers weaker unemployment benefits and the benefits last a shorter time.

Bureau of Labor Statistics (BLS)

The government agency responsible for tracking income, expenses and labor statistics in the United States. • unemployment rates • inflation rates

Why can it be argued that a minimum wage in the United States has only a small increase in unemployment?

The majority of minimum wage earners are 25 years of age or less and constitute a small portion of the labor force.

What are some examples of factors that can change the natural unemployment rate?

The natural rate is not fixed because it can change with demographic changes over time. EXAMPLES • As baby boomers age, the natural rate falls because middle-aged workers generally experience lower unemployment rates than do younger workers. • The Internet and job placement agencies have improved access to employment information and allowed workers to find jobs more quickly. • New work requirements of the welfare laws increased the number of people with jobs.

Normalization

The process of applying rules to a database design to ensure that information is divided into the appropriate tables. • (base - current) / current

How does education affect unemployment rates?

The unemployment rate among college graduates is significantly lower than for those who do not complete high school. • In July 2014, the unemployment rate for individuals without high school diplomas was 9.6%, compared with 3.1% for those with bachelor's degrees and higher. • College graduates have lower unemployment rates than people who have some college education but did not complete their bachelor's degrees (5.3%).

Is age, sex, and race correlated with unemployment?

The youth and minorities are less likely to be employed. • Also, adult females have a higher rate of unemployment than adult males.

What is revealed about the frictional and structural unemployment rates when the overall unemployment rate is less than the natural rate of unemployment?

Unemployment rates below the natural rate reflect the existence of below-average levels of frictional and structural unemployment.

Potential output (GDP)

When all the resources of an economy— labor, land, and capital— are fully employed, the economy is said to be producing its potential output. • the level of aggregate output that can be sustained in the long run without inflation

What is revealed about cyclical unemployment when the overall unemployment rate is greater than the natural rate of unemployment?

When unemployment rises above the natural rate, it indicates the existence of cyclical unemployment.

minimum-wage rate

a binding price floor where a worker's wage floor is set above the equilibrium wage that a business would optimally provide • causes an increase in labor supply, because more people are willing to work • causes a decrease in the quantity of labor demanded by employers, because businesses become unprofitable

market basket

a collection of goods and services used to represent the overall consumption of the economy WHY? It's not feasible to make an index of every category of goods and services in the economy.

deflation

a general and progressive decrease in prices for a particular good or service • purchasing power rises • increases demand and spending

inflation

a general and progressive increase in prices for a particular good or service • purchasing power (wealth) falls • reduces demand, consumers buy fewer goods

Unemployment Insurance (UI)

a government program that partially protects workers' incomes when they become unemployed, excluding those who were fired or voluntarily quit • ~ half of the initial salary for 26 weeks • reduces a person's suffering caused by recessions • leads to prolonged periods of the average recipient being unemployed • increases the overall unemployment rate

depression

a long-term and severe recession; an economic state characterized by unemployment and low prices and low levels of trade and investment

Real Gross Domestic Product (RGDP)

a measure of a nation's total output or production; the economy's aggregate output measured in dollars of constant purchasing power • real: adjusted for inflation over time • per capita: per person

price level

a measure of the average prices of goods and services in the economy • Inflation typically causes price levels to rise. • relative price: the change in the price of one good or service, as compared to other goods and services

GDP deflator

a measure of the price level calculated as the ratio of nominal GDP to real GDP • measures the average level of prices of all final goods and services produced in the economy (the price level) • x100

Consumer Price Index (CPI)

a measure of the varying prices consumers pay for a certain bundle of goods and services over a specified time frame

purchasing power

a measure of the worth of a dollar • "How much of a good or service can a dollar buy?"

price index [formula]

a measurement that shows how the average price of a standard group of goods changes over time

price index [graph]

a measurement that shows how the average price of a standard group of goods changes over time

index of leading indicators

a monthly statistical series that usually predicts when a recession or expansion is about to occur • The Department of Commerce combines data from the most common leading indicators into this index.

recession

a period of reduced economic activity • lasting at least a few months • increase in unemployment • decrease in real GDP (output, production)

disinflation

a reduction in the rate of inflation • not to be confused with deflation • monitored and controlled by the Federal Reserve System

capital gains tax

a tax levied on the returns that people earn from capital investments, like the profits from the sale of stocks or a home • this can distort market signals and may lead to a reduction in saving, lending, and investment EXAMPLE John sold a stock in 1980 for $50,000 that he bought in 1970 for $40,000. Adjusted for inflation, he actually lost money because the 25% increase in stock price was overwhelmed by the inflation rate that exceeded 100%. Then, John had to pay a capital gains tax for the $10,000 ($50,000 - $40,000). • Thus, many economists believe capital gains should be taxed on real gains. • In this case, you could write off capital losses because you actually lost money on your investment in real terms. These costs are not just a redistribution cost but can impact economic growth if the taxes are discouraging saving and investment.

hyperinflation

a very rapid rise in the price level; an extremely high rate of inflation • lasting a sustained period of time

unions

an association of workers, formed to bargain for better working conditions and higher wages • pushes the labor market towards a state of disequilibrium • collective bargaining • ~ 15% higher wages compared to non-union workers • less than 10% of perivate sector jobs are unionized When unions are able to acheive higher wages (assuming that their wages lie above the equilibrium state), then unemployment as a whole will rise as the quantity of union labor demanded decreases.

efficiency-wage theory

an economic theory asserting that some employers will pay their workers wages that lie above the equilibrium wage as an incentive for better performance and loyalty PROS • based on the notion that higher wages lead to higher productivity • deters shirking (social loafing) • leads to lower employee turnover • boosts morale • Henry Ford successfully implemented this model. CONS • shifts the macroeconomy away from labor market equilibrium • If too many firms in the industry implement this incentive scheme, it ceases to generate loyal and productive employees and leads to a surplus of workers (a greater unemployment rate).

New Outlet Bias

an inability of the Consumer Price Index (CPI) to accurately measure inflation when consumers shift from buying goods from one retailer to another • EX: Consumers have greatly shifted from buying goods from in-person stores to online shopping. When the BLS collects data on the same or similar products only from full-price retail stores, the CPI overstates the prices some buyers actually paid.

Substitution Bias

an inability of the Consumer Price Index (CPI) to accurately measure inflation when it fails to account for consumers substitute the goods they purchase with relatively cheaper goods and services • Since the CPI uses market baskets to represent the total consumer spending of goods and services, these fixed baskets erroneously imply that consumers purchase the same amount of each product in the basket over time. • When prices change from year to year, they do not change proportionately. • EX: Say the market basket the CPI uses takes into account "Good A", but not "Good B". When the prices of "A" increase, consumers switch to "B".

Quality Bias

an inability of the Consumer Price Index (CPI) to accurately measure inflation when the CPI ignores changes in the quality of the goods it measures • sometimes, prices of goods can increase due to an increase in that good's quality • EX: COMPUTER greater speeds and more features have become available without substantial increases in price

New Product Bias

an inability of the Consumer Price Index (CPI) to accurately measure inflation when the market basket of goods changes isn't updated frequently enough, causing a delay to including new goods • EX: iPhones iPhones were not introduced into the index until they were commonplace items. Therefore, the resulting price decreases and quality increases that occured during the early years following introduction weren't captured by the index.

unemployment benefits

cash transfers for those who lose their jobs and actively seek employment • It's like insurance because usually the employer or the employee pays for it. When the employee pays for it, it's a set portion of their wages. When these benefits are too great, it serves as an incentive for people to claim to be seeking employment when they aren't really. The measured unemployment rate will rise.

Civilian Labor Force (CLF)

citizens of age 16+ that are available for employment • excluding military, prisoners, mentally ill, retired, students • those currently employed or actively seeking work

business cycles (economic fluctuations)

fluctuations in economic activity, such as employment and production • business activity tends to be higher before the winter holidays and lower in summer (due to vacations) PHASES 1) Expansion - Real GDP (output) rises • AKA recovery 2) Peak - local maximum of Real GDP increase 3) Contraction - Real GDP falls • AKA recession 4) Trough - local minimum of real GDP

discouraged workers

individuals who would like to work but don't look for a job • caused by periods of prolonged recessions • These people lose hope or trust in the economy. • not part of the labor force

unanticipated inflation

inflation that occurs at a rate greater than expected • Fixed interest rates can devastate people when this occurs because their money loses purchasing power but their payments don't accommodate this. • This inflation can dramatically shift purchasing power from one person to another • The uncertainty that unanticipated inflation creates can also discourage investment and economic growth. • distorts price signals

anticipated inflation

inflation that occurs at the expected rate • This inflation doesn't shift purchasing power from one person to another as much.

real interest rate

interest rates that adjust for inflation • The nominal interest rate is corrected for the effects of inflation.

nominal interest rate

interest rates that don't adjust for inflation

structural unemployment

long-term unemployment that results because of a discrepancy between worker skills and demand for such skills • reflects and occurs because of the dynamic economy • Many people advocate government-subsidized re-training programs as a means of reducing structural unemployment. • mainly caused by technology (labor-saving capital) OCCURS WHEN... 1) the number of jobs available in some labor markets is insufficient to provide a job for all of those who are qualified and want them. 2) workers lack the necessary skills for the jobs that are available. 3) workers have particular skills for jobs that are no longer in demand. EXAMPLE • A machine operator in a manufacturing plant loses their job. They remain unemployed despite the openings for computer programmers in their community.

Consumers often _________ their spending on big-ticket items such as homes and automobiles before a recession begins.

reduce

Interest rates are an important economic indicator because they have strong effects on consumer and business ___________.

spending.

full employment of labor

state of the economy where the economy provides employment for all who are willing and able to work, without the presence of cyclical unemployment • capital and land are fully employed

econometric models

statistical methods of forecasting economic data using regression models

frictional unemployment

temporary unemployment that occurs when people take time to find a suitable job • Generally the economy is dynamic, meaning people are constantly leaving or losing their jobs and seeking other jobs. • accounts for 2-3% of all unemployment • Employees and employers don't usually accept the first applications they encounter. This type of unemployment is normal and can benefit the economy when people utilize this time to find the most efficient and productive jobs possible according to their skills and interests. CAUSES • Normal search time required to find a suitable job. • Lack of information needed to find a suitable job.

Department of Commerce

the branch of the United States concerned with supervising trades, promoting US business, and tourism • creates the index of leading indicators

menu costs of inflation

the costs associated with consumers adapting to inflation • EX: a restaurant prints new menus to reflect the new, higher prices • the changing of posted prices

Great Depression

the economic crisis beginning with the stock market crash in 1929 and continuing through the 1940s • Unemployment rate rose from 3.2% to 20% • high suicide rates STOCK MARKET CRASH 1) During a period of prosperity (bubble), Americans began buying margin call options, because they expected the price to continue to rise. When it eventually fell, people were forced to sell their shares to pay the call price and the interest associated with the debt. 2) This in turn caused consumers to lose money and distrust the current value of money. They spend less, thus grinding the economy to a halt. 3) Firms continued to spend in an effort to live but the consumers don't buy. This causes the businesses to lose money. • Agriculture was also severely impacted by a drought of the 1930s. 4) People withdrew money from their banks. Banks started dying. • During this time if a bank failed you were probably going to lose your savings. The Federal Government didn't subsidize the banks to keep people calm. 5) Other nations reacted by implementing protectionist policies for their local businesses. • This ruins the principles of specialization and trade.

shoe leather costs of inflation

the increased costs of transactions caused by inflation • Inflation causes people to be more involved in their assets, thus incurring greater costs associated with monitoring and preparing. • "People will check so often that they wear out the leather on their shoes."

labor force participation rate

the percentage of the adult population (16+) that is in the labor force

unemployment rate

the percentage of the civilian labor force that is unemployed • civilian labor force: citizens of age 16+ that are available for employment (excluding military, prisoners, mentally ill, retired, students) • rises as the quantity of labor supplied exceeds quantity demanded

nominal GDP

the production of goods and services valued at current prices

real GDP

the production of goods and services, adjusted for inflation to show the value at constant prices • nominal GDP / price level

Natural Rate of Unemployment (NRU) (full-employment rate of unemployment)

the unemployment rate that occurs when there is no cyclical unemployment and the economy is achieving its potential output; the unemployment rate when the economy is experiencing neither a recession nor a boom • approximately 5-6% • the unemployment rate at which actual inflation equals expected inflation • the median (usual) annual unemployment rate • equal to the sum of frictional and structural unemployment at their maximums The natural rate of unemployment can change over time as technological, demographic, institutional, and other conditions vary.

cyclical unemployment

unemployment that occurs as a result of economic recessions and downturns in the business cycle • rises during economic recessions • falls when the economy improves

seasonal unemployment

unemployment that occurs as a result of harvest schedules or vacations, or when industries slow or shut down for a season • EX: teachers on breaks, ski instructors, farmers • The BLS publishes a seasonally adjusted unemployment rate to account for this.

leading economic indicators

variables that predict a recession or recovery before they occur • EX: consumer confidence, stock market prices, investments • S&P500

lagging economic indicators

variables that reflect peaks and troughs in economic activity and occur after changes in overall economic activity • EX: interest rates, the average duration of unemployment

coincident economic indicators

variables that reflect peaks and troughs in economic activity as they occur • EX: employment, personal income, industrial production

seasonal fluctuations

variation of economic activity resulting from seasonal changes in the economy • business activity tends to be higher before the winter holidays and lower in summer (due to vacations) • very pronounced in agriculture industries Often, key economic statistics, such as unemployment rates, are seasonally adjusted, meaning the numbers are modified to account for normal seasonal fluctuations.

efficiency wages

wages that lie above the labor market equilibrium. Based on the notion that greater wages lead to increased worker productivity. • efficiency-wage theory

underemployment

workers that are overqualified for their jobs or work fewer hours than they would prefer EXAMPLE If the economy subsidized education in an inefficient manner, there might be taxi drivers and bartenders with PhDs or degrees in STEM.

Using the following information, how would Babe Ruth's salary be worth in 2014? • Babe Ruth's salary in 1931 was $80,000. • The 2014 price level was 233.9 • The price level in 1931 was 15.2

• $1,231,052.63 WHY? Multiply the initial money by the change in price levels. • ($80,000 [1931]) x (233.9 [2014] / 15.2 [1931] = $1,231,052.63

What are the four kinds of biases that cause the Consumer Price Index (CPI) to overstate the true inflation rate?

• Substitution Bias • Quality Bias • New Outlet Bias • New Product Bias

What are the four main categories of unemployed workers?

• job losers: people who have been laid off or fired by their employers (50-60% of the unemployed, largest group) • reentrants: those who have worked before and are re-entering the labor force • new entrants: those who are entering the labor force for the first time • job leavers: those who voluntarily quit their jobs