1 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics Prepared by: Fernando Quijano & Shelly

1 of 28© 2012 Pearson Education, Inc. Publishing as Prentice Hall

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Prepared by: Fernando Quijano & Shelly Tefft

CASE FAIR OSTER

P R I N C I P L E S O F

MACROECONOMICST E N T H E D I T I O N


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CHAPTER OUTLINE

7Unemployment, Inflation, and

Long-Run Growth

Unemployment Measuring UnemploymentComponents of the Unemployment RateThe Costs of Unemployment

InflationThe Consumer Price IndexThe Costs of Inflation

Long-Run GrowthOutput and Productivity Growth

Looking Ahead


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employed Any person 16 years old or older (1) who works for pay, either for someone else or in his or her own business for 1 or more hours per week, (2) who works without pay for 15 or more hours per week in a family enterprise, or (3) who has a job but has been temporarily absent with or without pay.

unemployed A person 16 years old or older who is not working, is available for work, and has made specific efforts to find work during the previous 4 weeks.

Unemployment

Measuring Unemployment


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not in the labor force A person who is not looking for work because he or she does not want a job or has given up looking.

labor force The number of people employed plus the number of unemployed.

labor force = employed + unemployed

population = labor force + not in labor force

Unemployment



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Unemployment


unemployment rate The ratio of the number of people unemployed to the total number of people in the labor force.

labor force participation rate The ratio of the labor force to the total population 16 years old or older.

unemployedunemployment rate =

employed + unemployed

labor forcelabor force participation rate =

population


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A person not looking for work, because he or she either does not want a job or has given up looking, is classified as:

a. Unemployed.

b. Not in the labor force.

c. In the labor force but not currently employed.

d. In the labor force participation rate, but not in the labor force.


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A person not looking for work, because he or she either does not want a job or has given up looking, is classified as:

a. Unemployed.

b.b. Not in the labor force.Not in the labor force.

c. In the labor force but not currently employed.

d. In the labor force participation rate, but not in the labor force.


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TABLE 7.1 Employed, Unemployed, and the Labor Force, 1950–2009

(1) (2) (3) (4) (5) (6)

Population16 Years

Old or Over(Millions)

LaborForce

(Millions)Employed(Millions)

Unemployed(Millions)

Labor ForceParticipation

Rate(Percentage

Points)

UnemploymentRate

(PercentagePoints)

1950 105.0 62.2 58.9 3.3 59.2 5.3

1960 117.2 69.6 65.8 3.9 59.4 5.5

1970 137.1 82.8 78.7 4.1 60.4 4.9

1980 167.7 106.9 99.3 7.6 63.8 7.1

1990 189.2 125.8 118.8 7.0 66.5 5.6

2000 212.6 142.6 136.9 5.7 67.1 4.0

2009 235.8 154.1 139.9 14.3 65.4 9.3

Note: Figures are civilian only (military excluded).

Unemployment



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TABLE 7.2 Unemployment Rates by Demographic Group, 1982 and 2010

Years November 1982 June 2010

Total 10.8 9.5

White 9.6 8.6

Men 20+ 9.0 8.9Women 20+ 8.1 7.1Both sexes 16–19 21.3 23.2

African American 20.2 15.4

MenWomen

20+

20+

19.316.5

17.411.8

Both sexes 16–19 49.5 39.9

Unemployment

Components of the Unemployment Rate

Unemployment Rates for Different Demographic Groups


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TABLE 7.3 Regional Differences in Unemployment, 1975, 1982, 1991, 2003 and 2010

1975 1982 1991 2003 2010

U.S. avg. 8.5 9.7 6.7 6.0 9.7Cal. 9.9 9.9 7.5 6.7 12.4Fla. 10.7 8.2 7.3 5.1 11.7Ill. 7.1 11.3 7.1 6.7 10.8Mass. 11.2 7.9 9.0 5.8 9.2Mich. 12.5 15.5 9.2 7.3 13.6N.J. 10.2 9.0 6.6 5.9 9.7N.Y. 9.5 8.6 7.2 6.3 8.3N.C. 8.6 9.0 5.8 6.5 10.3Ohio 9.1 12.5 6.4 6.1 10.7Tex. 5.6 6.9 6.6 6.8 8.3

Unemployment


Unemployment Rates in States and Regions


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Unemployment rates in states and regions across the United States reveal that:

a. States and regions in the United States generally display the same levels of unemployment.

b. The labor force in the United States is almost completely mobile, with workers taking advantage of job opportunities clear across the country.

c. A low national rate of unemployment does not mean that the entire nation is growing and producing at the same rate.

d. All of the above.


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Unemployment rates in states and regions across the United States reveal that:

a. States and regions in the United States generally display the same levels of unemployment.

b. The labor force in the United States is almost completely mobile, with workers taking advantage of job opportunities clear across the country.

c.c. A low national rate of unemployment does not mean A low national rate of unemployment does not mean that the entire nation is growing and producing at the same that the entire nation is growing and producing at the same rate.rate.



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discouraged-worker effect The decline in the measured unemployment rate that results when people who want to work but cannot find jobs grow discouraged and stop looking, thus dropping out of the ranks of the unemployed and the labor force.

Unemployment


Discouraged-Worker Effects


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When an unemployed worker becomes discouraged about finding work and stops looking, the unemployment rate will:

a. Rise.

b. Fall.

c. Remain unchanged.

d. Increase only if the worker falls out of the labor force.


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When an unemployed worker becomes discouraged about finding work and stops looking, the unemployment rate will:

a. Rise.

b.b. Fall.Fall.

c. Remain unchanged.

d. Increase only if the worker falls out of the labor force.


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As women began joining the labor force in greater numbers in the 1970s and 1980s, their wages relative to men’s wages actually fell.

Most economists attribute this decline to the fact that less experienced women were entering the labor force, pointing out the importance of correcting for factors such as experience and education when we analyze labor markets.

If you are interested in learning more about the economic history of American women, read the book Understanding the Gender Gap: An Economic History of American Women by Harvard University economist Claudia Goldin.

E C O N O M I C S I N P R A C T I C E

A Quiet Revolution: Women Join the Labor Force


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TABLE 7.4 Average Duration of Unemployment, 1970–2009

Weeks Weeks Weeks

1970 8.6 1984 18.2 1997 15.8

1971 11.3 1985 15.6 1998 14.5

1972 12.0 1986 15.0 1999 13.4

1973 10.0 1987 14.5 2000 12.6

1974 9.8 1988 13.5 2001 13.1

1975 14.2 1989 11.9 2002 16.6

1976 15.8 1990 12.0 2003 19.2

1977 14.3 1991 13.7 2004 19.6

1978 11.9 1992 17.7 2005 18.4

1979 10.8 1993 18.0 2006 16.8

1980 11.9 1994 18.8 2007 16.8

1981 13.7 1995 16.6 2008 17.9

1982 15.6 1996 16.7 2009 24.4

1983 20.0

Unemployment


The Duration of Unemployment


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When we consider the various costs of unemployment, it is useful to categorize unemployment into three types:

Frictional unemployment

Structural unemployment

Cyclical unemployment

Unemployment

The Costs of Unemployment

Some Unemployment Is Inevitable


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frictional unemployment The portion of unemployment that is due to the normal turnover in the labor market; used to denote short-run job/skill matching problems.

structural unemployment The portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries.

Unemployment


Frictional, Structural, and Cyclical Unemployment

natural rate of unemployment The unemployment rate that occurs as a normal part of the functioning of the economy. Sometimes taken as the sum of frictional unemployment rate and structural unemployment rate.

cyclical unemployment Unemployment that is above frictional plus structural unemployment.


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The costs of unemployment are neither evenly distributed across the population nor easily quantified.

The social consequences of the Depression of the 1930s are perhaps the hardest to comprehend. Few emerged from this period unscathed.

At the bottom were the poor and the fully unemployed, about 25 percent of the labor force. Even those who kept their jobs found themselves working part-time.

Many people lost all or part of their savings as the stock market crashed and thousands of banks failed.

Unemployment


Social Consequences


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consumer price index (CPI) A price index computed each month by the Bureau of Labor Statistics using a bundle that is meant to represent the “market basket” purchased monthly by the typical urban consumer.

Inflation

The Consumer Price Index


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The CPI market basket shows how a typical consumer divides his or her money among various goods and services.

Most of a consumer’s money goes toward housing, transportation, and food and beverages.

▲ FIGURE 7.1 The CPI Market Basket

Inflation



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The CPI market basket shows that most of a typical consumer’s money goes toward:

a. Recreation, medical care, and education.

b. Food and beverage, apparel, and other goods and services.

c. Housing, transportation, and food and beverages.

d. None of the above. The typical consumer spends about the same amount of money on each of the categories listed in the choices above.


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The CPI market basket shows that most of a typical consumer’s money goes toward:

a. Recreation, medical care, and education.

b. Food and beverage, apparel, and other goods and services.

c.c. Housing, transportation, and food and beverages.Housing, transportation, and food and beverages.

d. None of the above. The typical consumer spends about the same amount of money on each of the categories listed in the choices above.


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TABLE 7.5 The CPI, 1950–2009

PercentageChange in CPI CPI

PercentageChangein CPI CPI

PercentageChangein CPI CPI

1950 1.3 24.1 1970 5.7 38.8 1990 5.4 130.71951 7.9 26.0 1971 4.4 40.5 1991 4.2 136.21952 1.9 26.5 1972 3.2 41.8 1992 3.0 140.31953 0.8 26.7 1973 6.2 44.4 1993 3.0 144.51954 0.7 26.9 1974 11.0 49.3 1994 2.6 148.21955 0.4 26.8 1975 9.1 53.8 1995 2.8 152.41956 1.5 27.2 1976 5.8 56.9 1996 3.0 156.91957 3.3 28.1 1977 6.5 60.6 1997 2.3 160.51958 2.8 28.9 1978 7.6 72.6 1998 1.6 163.01959 0.7 29.1 1979 11.3 65.2 1999 2.2 166.61960 1.7 29.6 1980 13.5 82.4 2000 3.4 172.21961 1.0 29.9 1981 10.3 90.9 2001 2.8 177.11962 1.0 30.2 1982 6.2 96.5 2002 1.6 179.91963 1.3 30.6 1983 3.2 99.6 2003 2.3 184.01964 1.3 31.0 1984 4.3 103.9 2004 2.7 188.91965 1.6 31.5 1985 3.6 107.6 2005 3.4 195.31966 2.9 32.4 1986 1.9 109.6 2006 3.2 201.61967 3.1 33.4 1987 3.6 113.6 2007 2.8 207.31968 4.2 34.8 1988 4.1 118.3 2008 3.9 215.31969 5.5 36.7 1989 4.8 124.0 2009 -0.4 214.5

Inflation



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producer price indexes (PPIs) Measures of prices that producers receive for products at all stages in the production process.

The indexes are calculated separately for various stages in the production process.

The three main categories are finished goods, intermediate materials, and crude materials, although there are subcategories within each of these categories.

Inflation



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During inflations, most prices—including input prices like wages—tend to rise together, and input prices determine both the incomes of workers and the incomes of owners of capital and land.

So inflation by itself does not necessarily reduce ones purchasing power.

Inflation

The Costs of Inflation


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In the last few years many state governments in the United States have begun to see the costs associated with retiring state workers escalate as the number of retirees has grown.

For many of these public-sector retirees, pensions have been tied to the cost of living.

E C O N O M I C S I N P R A C T I C E

The Politics of Cost-of-Living Adjustments

No Cost-of-Living Increase for State Retirees in July

The Baltimore Sun


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real interest rate The difference between the interest rate on a loan and the inflation rate.

Inflation


Inflation May Change the Distribution of Income


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The interest rate stated in a loan contract is:

a. The real rate of interest.

b. The nominal rate of interest minus the rate of inflation.

c. The real rate of interest plus the rate of inflation.

d. The same as the rate of inflation.


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The interest rate stated in a loan contract is:

a. The real rate of interest.

b. The nominal rate of interest minus the rate of inflation.

c.c. The real rate of interest plus the rate of inflation.The real rate of interest plus the rate of inflation.

d. The same as the rate of inflation.


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There may be costs associated even with anticipated inflation. One is the administrative cost associated with simply keeping up.

Economists have debated the seriousness of the costs of inflation for decades.

No matter what the real economic cost of inflation, people do not like it.

Inflation


Administrative Costs and Inefficiencies

Public Enemy Number One?


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output growth The growth rate of the output of the entire economy.

per-capita output growth The growth rate of output per person in the economy.

productivity growth The growth rate of output per worker.

Long-Run Growth


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Which of the following is part of an ideal economy?

a. Rapid growth of output per worker.

b. Low unemployment.

c. Low inflation.



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Which of the following is part of an ideal economy?

a. Rapid growth of output per worker.

b. Low unemployment.

c. Low inflation.

d. d. All of the above.All of the above.


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Productivity grew much faster in the 1950s and 1960s than since.

▲ FIGURE 7.2 Output per Worker Hour (Productivity), 1952 I–2010 I

Long-Run Growth

Output and Productivity Growth


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The two features immediately clear when you examine the trend in productivity in the United States over the past fifty years are:

a. An upward trend and fairly sizable fluctuations around that trend.

b. An upward trend and relatively small fluctuations around that trend.

c. A downward trend and fairly sizable fluctuations around that trend.

d. A downward trend and relatively small fluctuations around that trend.


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The two features immediately clear when you examine the trend in productivity in the United States over the past fifty years are:

a.a. An upward trend and fairly sizable fluctuations An upward trend and fairly sizable fluctuations around that trend.around that trend.

b. An upward trend and relatively small fluctuations around that trend.

c. A downward trend and fairly sizable fluctuations around that trend.

d. A downward trend and relatively small fluctuations around that trend.


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Capital per worker grew until about 1980 and then leveled off somewhat.

▲ FIGURE 7.3 Capital per Worker, 1952 I–2010 I

Long-Run Growth

Output and Productivity Growth


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Looking Ahead

This ends our introduction to the basic concepts and problems of macroeconomics.

The first chapter of this part introduced the field; the second chapter discussed the measurement of national product and national income; and this chapter discussed unemployment, inflation, and long-run growth.

We are now ready to begin the analysis of how the macroeconomy works.


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consumer price index (CPI)

cyclical unemployment

discouraged-worker effect

employed

frictional unemployment

labor force

labor force participation rate

natural rate of unemployment

not in the labor force

output growth

per-capita output growth

producer price indexes (PPIs)

productivity growth

real interest rate

structural unemployment

unemployed

unemployment rate

1. labor force = employed + unemployed

2. population = labor force + not in labor force

3.

4.

unemployed employed

unemployed ratent unemployme

population

forcelabor rateion participat forcelabor

R E V I E W T E R M S A N D C O N C E P T S

Documents

1 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics Prepared by: Fernando Quijano & Shelly