3 of 27 2014 Pearson Education, Inc. C H A P T E R O U T L I N
E 7 Unemployment, Inflation, and Long-Run Growth Unemployment
Measuring Unemployment Components of the Unemployment Rate The
Costs of Unemployment Inflation The Consumer Price Index The Costs
of Inflation Long-Run Growth Output and Productivity Growth Looking
Ahead
Slide 4
4 of 27 2014 Pearson Education, Inc. 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
Slide 5
5 of 27 2014 Pearson Education, Inc. 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
Slide 6
6 of 27 2014 Pearson Education, Inc. 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.
Slide 7
7 of 27 2014 Pearson Education, Inc. TABLE 7.1 Employed,
Unemployed, and the Labor Force, 19502012 (1)(2)(3)(4)(5)(6)
Population 16 Years Old or Over (Millions) Labor Force (Millions)
Employed (Millions) Unemployed (Millions) Labor Force Participation
Rate (Percentage Points) Unemployment Rate (Percentage Points)
1950105.062.258.93.359.25.3 1960117.269.665.83.959.45.5
1970137.182.878.74.160.44.9 1980167.7106.999.37.663.87.1
1990189.2125.8118.87.066.55.6 2000212.6142.6136.95.767.14.0
2012243.3155.0142.512.563.78.1 Note: Figures are civilian only
(military excluded).
Slide 8
8 of 27 2014 Pearson Education, Inc. TABLE 7.2 Unemployment
Rates by Demographic Group, 1982 and 2012 YearsNovember
1982December 2012 Total10.8 7.8 White9.6 6.9 Men20+9.06.2
Women20+8.16.3 Both sexes161921.321.6 African American20.2 14.0 Men
Women 20+ 19.3 16.5 14.0 12.2 Both sexes161949.540.5 Components of
the Unemployment Rate Unemployment Rates for Different Demographic
Groups
Slide 9
9 of 27 2014 Pearson Education, Inc. TABLE 7.3 Regional
Differences in Unemployment, 1975, 1982, 1991, 2003 and 2010
19751982199120032010 U.S. avg.8.59.76.76.0 9.6 Cal.9.9 7.56.7 12.4
Fla.10.78.27.35.1 11.5 Ill.7.111.37.16.7 10.3 Mass.11.27.99.05.8
8.5 Mich.12.515.59.27.3 12.5 N.J.10.29.06.65.9 9.5 N.Y.9.58.67.26.3
8.6 N.C.8.69.05.86.5 10.6 Ohio9.112.56.46.1 10.1 Tex.5.66.96.66.8
8.2 Unemployment Rates in States and Regions
Slide 10
10 of 27 2014 Pearson Education, Inc. 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. Discouraged-Worker Effects The BLS survey provides
some evidence on the size of the discouraged-worker effect.
Respondents who indicate that they have stopped searching for work
are asked why they stopped. If the respondent cites inability to
find employment as the sole reason for not searching, that person
might be classified as a discouraged worker. Some economists argue
that adding the number of discouraged workers to the number who are
now classified as unemployed gives a better picture of the
unemployment situation.
Slide 11
11 of 27 2014 Pearson Education, Inc. TABLE 7.4 Average
Duration of Unemployment, 19702012 Weeks 1970 8.6198515.6200012.6
197111.3198615.0200113.1 197212.0198714.5200216.6
197310.0198813.5200319.2 1974 9.8198911.9200419.6
197514.2199012.0200518.4 197615.8199113.7200616.8
197714.3199217.7200716.8 197811.9199318.0200817.9
197910.8199418.8200924.4 198011.9199516.6201033.0
198113.7199616.7201139.3 198215.6199715.8201239.4 198320.0199814.5
198418.2199913.4 The Duration of Unemployment
Slide 12
12 of 27 2014 Pearson Education, Inc. When we consider the
various costs of unemployment, it is useful to categorize
unemployment into three types: Frictional unemployment Structural
unemployment Cyclical unemployment The Costs of Unemployment Some
Unemployment Is Inevitable
Slide 13
13 of 27 2014 Pearson Education, Inc. 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. 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 the
frictional unemployment rate and the structural unemployment rate.
cyclical unemployment Unemployment that is above frictional plus
structural unemployment.
Slide 14
14 of 27 2014 Pearson Education, Inc. 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. Social Consequences
Slide 15
15 of 27 2014 Pearson Education, Inc. Throughout the recession
of 20082009 and the slow recovery afterwards, many young college
graduates found themselves unemployed for a number of months.
Economists believe that the negative effect of early unemployment
lasts for many years! Even fifteen years following the recession in
19791982, wage rates of those with post-college unemployment lagged
substantially. Not only did low wages persist, but fewer graduates
in recessionary periods were able to enter high prestige jobs, even
when the economy recovered. E C O N O M I C S I N P R A C T I C E
The Consequences of Unemployment Persist THINKING PRACTICALLY
1.Describe a mechanism that might help explain the persistence of
wage-effects from a recession.
Slide 16
16 of 27 2014 Pearson Education, Inc. 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 producer price indexes (PPIs) Measures of
prices that producers receive for products at all stages in the
production process. Once called wholesale price indexes, PPIs 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.
Slide 17
17 of 27 2014 Pearson Education, Inc. The CPI market basket
shows how a typical consumer divides his or her money among various
goods and services. The CPI market basket for December 2007 shows
that most of a consumers money goes toward housing, transportation,
and food and beverages. FIGURE 7.1 The CPI Market Basket
Slide 18
18 of 27 2014 Pearson Education, Inc. TABLE 7.5 The CPI,
19502012 Percentage Change in CPICPI Percentage Change in CPICPI
Percentage Change in CPICPI 19501.324.119714.440.519923.0140.3
19517.926.019723.241.819933.0144.5
19521.926.519736.244.419942.6148.2
19530.826.7197411.049.319952.8152.4
19540.726.919759.153.819963.0156.9 1955 0.4
26.819765.856.919972.3160.5 19561.527.219776.560.619981.6163.0
19573.328.119787.672.619992.2166.6
19582.828.9197911.365.220003.4172.2
19590.729.1198013.582.420012.8177.1
19601.729.6198110.390.920021.6179.9
19611.029.919826.296.520032.3184.0
19621.030.219833.299.620042.7188.9
19631.330.619844.3103.920053.4195.3
19641.331.019853.6107.620063.2201.6
19651.631.519861.9109.620072.8207.3
19662.932.419873.6113.620083.9215.3
19673.133.419884.1118.32009-0.4214.5
19684.234.819894.8124.020101.7218.1
19695.536.719905.4130.720113.1224.9
19705.738.819914.2136.220122.1229.6
Slide 19
19 of 27 2014 Pearson Education, Inc. Throughout the last
months of 2012 and into early 2013, as Republicans and Democrats
argued over the federal budget, chain linking became a hot topic.
The fixed-weight version of the consumer price index (CPI) is the
one that is used to adjust social security benefits and veteran
benefits to price changes. If the chain-linked CPI were used
instead, benefits would tend to increase more slowly because in
general, the chain-linked CPI increases less than does the
fixed-weight CPI (because of product substitution). The nonpartisan
Congressional Budget office estimated that if the chain-linked CPI
were adopted, it would save the federal government about $145
billion over a ten year period from the lower benefits. E C O N O M
I C S I N P R A C T I C E Chain-Linked Consumer Price Index in the
News THINKING PRACTICALLY 1.Tax brackets are also tied to the
fixed-weight CPI. How would tax revenue be affected if the
chain-linked CPI were used instead?
Slide 20
20 of 27 2014 Pearson Education, Inc. During inflations, most
pricesincluding input prices like wagestend 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. The Costs of Inflation
real interest rate The difference between the interest rate on a
loan and the inflation rate. Inflation May Change the Distribution
of Income One way of thinking about the effects of inflation on the
distribution of income is to distinguish between anticipated and
unanticipated inflation. The effects of anticipated inflation on
the distribution of income are likely to be fairly small, since
people and institutions will adjust to the anticipated inflation.
Unanticipated inflation, on the other hand, may have large effects,
depending, among other things, on how much indexing to inflation
there is.
Slide 21
21 of 27 2014 Pearson Education, Inc. There may be costs
associated even with anticipated inflation, such as the
administrative cost associated with simply keeping up. Interest
rates tend to rise with anticipated inflation. When interest rates
are high, the opportunity costs of holding cash outside of banks is
high. Economists have debated the seriousness of the costs of
inflation for decades. No matter what its real economic cost, it
makes us uneasy and unhappy. In 1974, President Ford verbalized
some of this discomfort when he said, Our inflation, our public
enemy number one, will unless whipped destroy our country, our
homes, our liberties, our property, and finally our national pride,
as surely as any well-armed wartime enemy. In this belief, our
elected leaders have vigorously pursued policies designed to stop
inflation. Administrative Costs and Inefficiencies Public Enemy
Number One?
Slide 22
22 of 27 2014 Pearson Education, Inc. 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
Slide 23
23 of 27 2014 Pearson Education, Inc. Productivity grew much
faster in the 1950s and 1960s than it has since. FIGURE 7.2 Output
per Worker Hour (Productivity), 1952 I2012 IV Output and
Productivity Growth
Slide 24
24 of 27 2014 Pearson Education, Inc. Capital per worker grew
until about 1980 and then leveled off somewhat. FIGURE 7.3 Capital
per Worker, 1952 I2012 IV
Slide 25
25 of 27 2014 Pearson Education, Inc. 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.
Slide 26
26 of 27 2014 Pearson Education, Inc. 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 Equations: labor force = employed + unemployed
population = labor force + not in labor force R E V I E W T E R M S
A N D C O N C E P T S