Chapter 7: Unemployment rate and inflation

debtors

(benefitted) Bank example, person borrowing money ahd benefitted. Real income is redistributed away from the owners of the bank towards borrowers (person who borrowed). Inflation helps government with debt. Do not have to repay money with as much purchasing power.

Part-time employment

(critism) The BLS lists all part-time workers as fully employed. There are two groups. People who work part time because of personal choice and part-time workers either wanting to work full time and could not find a suitable full time work or worked fewer hours befause of a temporary slack in consumer demand. These last two groups were partially employed and unemployed. By counting them as fully employed, way critics, the official BLS data UNDERSTATE the unemployment rate.

discourage workers

(critism) You must beactively seeking work in order to be counted as unemployed. An unemployed individual who is not actively seeking employment is classified as "not in the labor force." The problem is that many workers, after unsuccessful seeking employment for a time, become discouraged and drop out of the labor force. These are discouraged workers. By not counting discouraged workers as unemployed, say critics, the official BLS data understate the unemployment problem.

savers

(hurt) As prices rise, the real value, or purchasing power, of an accumulation of savings deteriorates. Paper assets such as savings accounts, insurance policies, and annuities that were once comfortable retirement decline in real value during inflation. Of course, most forms of savings earn interest. But the value of savings will still decline if the rate of inflation exceeds the rate of interest.

creditors

(hurt) If a bank lent a person $1000 to be repaid in 2 years, if the price level doubles in those 2 years, the $1000 that the person has to repay will have only half the purchasing power of the $1000 he borrowed. True, if we ignore interest charges, the same number of dollars will be repaid as was borrowed. But because of inflation, each of those dollars will only buy half as much as it did when the loan was negotiated. The owner of the bank suffers a loss of real income.

fixed income recievers

(hurt) People whose incomes are fixed see their real incomes fall when inflation occurs. (EX: elderly couple who live on pension which is fixed amount of nominal income each month. May have seemed like adequete pension when they retired but inflation has cut purchasing power down by one-third) Landlords who recieve lease payments of fixed amounts will be hurt by inflation as they recieve dollars of declining value over time. (all people who have fixed income where their income does not increase with inflation are hurt)

How can demand pull inflation be fixed?

(only fix if demand pull inflation causes the economy to go past Qf) OPTION 1: Monetary policy -FED decreases supply of money, which increases interest rates, which decreases Ig, which decreases AD OPTION 2: fiscal policy -government increases teaxes, decreases C, decreases AD OR -government decreases government spending which decreases AD

GDP gap (w/ equation)

(sacrifice of output coming from unemployment) the difference between actual and potential GDP GDP gap = actual GDP - potential GDP

flexible-income recievers

(unaffected or benefitted) (EX: social security income. Unaffected because social security are indexed to CPI) Some flexible-income recievers and all borrowers are helped by unanticipated inflation. The strong product demand and labor shortages implied by rapid demand-pull inflation may cause some nominal incomes to spurt ahead of the price level, therefore enhancing real incomes. (when growth rate of profit incomes outpace the rate of inflation)

What are all the unemployment rates?

-U3: what is definition, the 4.2% -U4: U3 + discouraged workers -U5: U4 + marginally attached workers -U6: U5 + part time wokrers who want to work full time (best indicator) (most accurate)

What do economists measure and define economic growth as?

-an increase in real GDO occuring over some time period -an increase in real GDP per capita occuring over some time period Calculated as a percentage rate of growth per quarter or per year.

How can the unemployment rate be overstated

-false information from survey -underground economy

What needs to happen to AD when there is a positive or negative GDP gap?

-positive GDP gap: AD needs to decrease (beyond/past Qf) -negative GDP gap: AD needs to increase (below Qf)

What are the three types of unemployment?

1. Frictional 2. Structural 3. Cyclical

What are the labor market concerns?

1. Job creation: (-33,000) -if this persists, unemployment will increase -but if you see this don't raise interest rates right away 2. labor shortage -companies can't fill positions because people are not qualified -skills don't match jobs-- structural 3. sidelined workers -not in labor force -waiting ofr improvemnt, then enter -problem: more people need jobs, unemployment may increase

How do you classify each person in one of the parts of the population?

1. People with jobs are employed -15 or more hours each week -includes unpaid family workers 2. People who are jobless, looking for jobs, and available are unemployed 3. People who are neither employed or unemployed are not in labor force

In what two ways can society increase its real output and income?

1. by increasing its inputs of resources 2. by increasing the productivity of those inputs

What are the bright spots in the labor report?

1. low unemployment rate: 4.2% 2. labor force participation rate increasing -more people are seeking work (people who were scared from finanical crisis are now looking) 3. confidence increase (shown in stock market) -people getting more confident, enter the labor force

What are the two critisms of the data collected in the unemployment survey?

1. part-time employment 2. discouraged workers

What are the four phases of the business cycle?

1. peak 2. recession 3. trough 4. expansion

How does the BLS divide the population?

3 groups 1. made up of people under 16 years of age and people who are institutionalized. Such people are not considered potential members of the labor force. 2. "Not in labor force." composed of adults who are potential workers but are not employed and are not seeking work. For example, they are homemakers, full-time students, or retirees. 3. labor force. Consists of people who are able and willing to work. Both those who are employed and those who are unemployed but actively seeking work are counted as being in the labor force.

What is true about a growing economy?

A growing economy can consume more today while increasing its capacity to produce more in the future. More capital goods.

recession

A period of decline in total output, income, and employment. THis dpwnturn, which lasts 6 months ore more, is marked by widespread contraction of business activity in many sectors of the economy. Along with declines in real GDP, significant increases in unemployment occur.

expansion

A recession is usually followed by a recovery and expansion, a period in which real GDP, income, and employment rise. At some point, the economy again approaches full employment. If spending then expands more rapidly than does production capacity, prices of nearly all goods and services will rise. In other words, inflation will occur.

potential output

At the NRU, the economy is said to be producing its potential output. This is the real GDP that occurs when the economy is "fully employed"

What is the definition of full employment?

Because frictional and structural unemployment is largely unavoidable, full employment is less than 100 percent employment of the labor force. Economists say that the economy is "fully employed" when it is experiencing only frictional and structural unemployment, and no cyclical unemployment. full employment = frictional + structural

peak

Business activity has reached a temporary maximum. Here the economy is near or at full employment and the level of real output is at or very close to the economy's capacity. The price level is likely to rise during this phase.

business cycles

Business cycles are alternating rises and declines in the level of economic activity, sometimes over several years. Individual cycles vary is duration and intensity.

demand pull inflation (notes)

Caused by AD increase. People wanting to buy goods and services, causing price level to increase. -AD increase-- C, Ig, G, Xn, increase -P increase, OE increase -tradeoff exists: relationship between inflation and unemployment, inflation increases but unemployment decreases

cost-push inflation (notes)

Caused by AS decrease and price level increases. -AS decreases caused by increase in PUPS (can be supply shock, oil, wages, productivity) -P increases, OE decreases -no tradeoff: two bad things are happening -Not fixable: recession and inflation -to fix recession must increase AD, but to fix inflation must decrease AD -self limiting (transitory): since industry driven, will work itself out.

Demand-Pull Inflation

Changes in the price level are caused by an excess of total spending beyond the economy's capacity to produce. Where inflation is rapid and sustained, the cause invariably is an overissuance of money by the central bank. When resources are already fully employed, the business sector cannot respond to excess demand by expanding output, producing this type of inflation. "Too much spending chasing too few goods."

CPI

Consumer Price Index: compiled by the Bureau of Labor Statistics. The CPI reports the price of a "market basket" of some 300 consumer goods and services that presumably are purchased by the typical urban consumer. CPI = (price of the most recent market basket in the particular year/ price estimate of the same market basket in 1982-1984) x100

Structual unemployment

Economists use "structural" in the sense of "compositional." Changes over time in consumer demand and in technology alter the "structure" of the total demand for labor, both occupationally and geographically. Occupationally: deamand for certain skills may decline or even vanish and other skills may intensify. Unemployment results because the composition of the labor force does not respons immediately or completely to the new structure of job opportunities. Workers can be structually unemployed until they adapt or develop skills that employers want. Geographically: as job opportunities shift from one place to another, some workers become structurally unemployed. -lack of skill -technological changes -structure of jobs changes

What is the economic cost of unemployment?

Forgone output. Lost output make a GDP gap. If unemployment rate > natural rate, we will have a negative GDP gap. So if cyclical unemployment exists, output will be lost and a negative GDP gap will occur.

trough

In the trough of recession or depression, output and employment "bottom out" at their lowest levels. The trough phase may be either short-lived or quite long.

How does cost-push inflation self limit?

Increased per unit production costts will reduce supply and this means lower real output and employment. Those decreases will constrain further per-unit cost increases. In other words, cost-push inlfation generates a recession. And in a recession, households and businesses concentrate on keeping their resources employed, not on pushing up with prices of those resources.

How can you distinguish between demand-pull and cost-push inflation?

It is difficult to distinguish unless the original source of inflation is known. (EX: if signifigant increase in total spending occurs, demand-pull inflation occurs. But as it works its way through various product and resource markets, individual firms find their wage costs, material costs, and fuel prices rising. From their perspective, looks like cost-push because PUPS rising. Clearly demand-pull in origin but hard to distinguish)

What is the difference between structural and frictional unemployment?

Key difference is that frictionally unemployed workers have salable skills and wither live in areas where jobs exist or are able to move to areas where they do. Structurally unemployed workers find it hard to obtain new jobs without retraining, gaining additional educationm or relocating. Frictional unemployment is short-term, structural unemployment is more likely to be long-term and consquently more serious.

What do most economists believe is the cause of cyclical changes in the levels of real output and employment?

Level of total spending. Businesses produce goods or services only if they can sell them at a profit. If total spending sinks, many businesses find that producing their current volume of goods and services is no longer profitable. As a conquence, output, employment, and incomes all fall. When the level of speding rises, and increase in production becomes profitable, and output, employment, and incomes will rise accordingly.

Okun's Law

Macroeconomist Arthur Okun was the first to quantify the relationship between the unemployment rate and the GDP gap. Okun's Law indicates that for every 1 percentage point by which the actual unemployment rate exceeds the natural rate, a negative GDP gap of about 2 percent occurs. With this information we can calculate the absolute loss of output associated with any above-natural unemployment rate.

Unequal burdens (what are they?)

Part of the burden of unemployment is that its cost is unequally distributed. -occupation: Workers in lower skilled occupations have higher unemployment rates among other things. Lower skilled workers are not treated as well in the economy as higher skilled workers. -age: teenagers have much higher unemployment than adults. -race and ethinicity: the unemployment rate for African-Americans and Hispanics is higher than that for whites. -gender: the unemployment rates for men and women are very similar -Education: less educated workers have higher unemployment rates that workers with more education. -duration: The number of persons unemployed for long periods (15 weeks or more) as a percentage of the labor force is much lower than th overall unemployment rate.

What are the noneconomic costs of unemployment?

Severe unemployment is more than an economic malady. It is a social catastrophe. It causes loss of skills, self-respect, plummeting morale, family disintegration, and sociopolitical unrest. Widespread joblessness increases poverty, hightens racial and ethnic tensions, and reduces the hope for material advancement.

Cost-Push Inflation

Supply/cost side of the economy. Happens in periods when output and employment were both declining while the general price level was rising. The theory behind this type of inflation explains that rising prices in terms of factors that raise per-unit production costs at each level of spending. Rising PUPS squeeze profits and reduce the amount of output firms are willing to supply at the existing price level. So the economy's supply of goods and services decline and the price level rises.

rule of 70

Tells us effect of economic growth. It tells us that we can find the number of years it will take for some measure to double, given its annual percentage increase, by dividing the percentage increase into the number 70. Approximate number of years required to double real GDP = 70 / annual percentage rate of growth

When is the GDP gap negative or positive?

The GDP gap can be either negative (actual GDP < potential GDP) or positive (actual GDP > potential GDP). In the case of unemployment above the natural rate, it is negative because actual GDP falls short of potential GDP.

How do we measure unemployment?

The U.S. Bureau of Labor Statistics conducts a nationwide random survey of 60,000 households each month to determine who is employed and who is not employed. In a series of questions, it asks which member of the household are working, unemployed and looking for work, not looking for woek, and so on. From the answers, it determines an unemployment rate for the entire nation.

real interest rate vs. nominal interest rate (w/ equation)

The real interest rate is the percentage increase in purchasing power that the borrower pays the lender. The nominal interest rate is the percentage increase in money that the borrower pays the lender including that resulting from the built-in expectation of inflation, if any. nominal interest rate = real interest rate + inflation premium (the expected rate of inflation)

anticipated inflation

The redistribution effects of inflation are less severe or are eliminated altogether if people anticipate inflation and can adjust their nominal incomes to reflect the expected price-level rises. Can reduce effects of borrowed. Lender and borrow can come up with interest rate that is fair provided that price level is stable.

anticipated inflation vs unanticipated inflation

The redistribution effects of inflation depend on whether or not it is expected. With fully expected or anticipated inflation, an income reciever may be able to avoid or lessen the adverse effects of inflation on real income. The generalizations that follow assume unanticipate inflation-- inflation whose full extent was not expected.

How does the unemployment rate relate to the production possibilities curve?

Unemployment above the natural rate means that society is operating at some point inside its productions possibilities curve.

cyclical unemployment

Unemployment that is caused by a decline in total spending. This typically begins in the recession phase of the business cycle. As the demand for goods and services decreases, employment falls and unemployment rises. Cyclical unemployment results from insufficient demand for goods and services. -lack of demand -caused by recession -demand falling

When does NRU occur?

When the number of job seekers equals the number of job vacancies. (NRU takes into the account the time for frictionally unemployed wrokers to find jobs and structually unemployed workers to achieve the skills and geographical relocation needed for reemployment. This is why even when NRU is at balance, it can still be positive)

Frictional unemployment

Workers can be "between jobs." As these unemployed people find jobs or are called back from temporary layoffs, other job seekers and laid-off workers will replace them in the "unemployment pool." So even though the workers who are unemployed for such reasons change from month to month, this type of unemployment persists. Economists use the term frictional unemployment (consists of search and wait unemployment) for workers who are either searching for jobs or waiting to take jobs in the near future. The word "frictional" implies that the labor makret does not operate perfectly and instantaneously in mathcing workers and jobs. -"search and wait" -switching jobs -graduates -seasonality

Is it possible to have a positive GDP gap?

Yes, actual GDP for a time can exceed potential GDP, but positive GDP gaps create inflationary pressures and cannot be sustained indefinitely.

Can the economy ever fall below the NRU?

Yes, at times the demand for labor may be so great that firms take a stronger iniative to hire and train structurally unemployed. Also, some homemakers, teenagers, college students, and retirees who were casually looking for just the right part-time or full-time jobs may quickly find them. Thus, the unemployment rate temporarily falls below the natural rate.

Does the unemployment rate differ among nations?

Yes. One reason is that nations ahve different natural rates of unemployment. Another is that nations may be in different phases of their business cycles.

real income (w/ equation)

a measure of the amont of goods and services nominal income can buy; it is the purchasing power of nominal income, or income adjusted for inflation. real income = nominal income / price index (in hundreths)

inflation

a rise in the general level of prices. When inflation occurs, each dollar of income will buy fewer goods and services than before. Reduces "purchasing power."

COLAs

cost-of-living adustments. Some union workers get COLAs in their pay when the CPI rises, although such increases rarely equal the full percentage rise in inflation.

Who does unanticipated inflation hurt?

fixed-income recipients, savers, and creditors. It redistributes real income away from them and towards others.

What is the basic economic cost of unemployment?

forgone output. When the economy fails to create enough jobs for all who are able and willing to work, potential production of goods and services is irretrievably lost.

real GDP per capita

found by dividing real GDP by the size of the population. The resulting number is then compared in percentage terms with that of the previous period.

What is the unemployment rate that is consistent with full employment called?

full-employment rate of unemployment OR natural rate of unemployment (NRU)

productivity

growth can occur with increases in productivity. Real output per unit of input. Productivity rises when the health, training, education, and motivation of workers are improved.

hyperinflation

if inflation persists could lead to hyperinflation. Type of inflation driven by consumers. If people think price level will rise, they buy now instead of later, thus causing acutal inflation. Can cause domino effect.

NAIRU

non accelerating inflationary rate of unemployment. How low unemployment can go without inflation rising above 2%. When cyclical = 0.

marginally attached workers

people who would like to work, but have not looked recently (may not be because economy is doing bad)

rule for how much real income will change

percentage change in real income =(about) percentage change in nominal income - percentage change in price level

inflation premium

raising the interest rate by 6 percent, the amount of anticipated inflation.

What is the major source of cost-push inflation?

supply shocks, which are abrupt increases in the costs of raw materials or energy inputs have on occasion driven up PUPS and this product prises. (EX: rise of prices of importing oil in 1973 and 1979)

nominal income

the number of dollars recieved as wages, rent, interest, or profits

unemployment rate (w/ equation)

the perentage of the labor force unemployed Unemployment rate = (unemployed/labor force)x100

What could happen of cost push inflation persists?

wage price inflationary spiral Increasing wages leads to increase in prices which leads to increase in wages (creates constant cycle). Wage-price spiral is an economic term that describes how prices increase when wages increase. It's a phenomenon that occasionally occurs when the general prices for goods and services increase, causing workers to demand a wage hike. The wage increase effectively increases general business expenses that are passed on to the consumer in the form of higher prices. It's essentially a loop or cycle that perpetuates itself by consistent prices increases.