Chapter 7Chapter 7

Unemployment and InflationUnemployment and InflationUnemployment and InflationUnemployment and Inflation

UnemploymentUnemployment

What is the lost to the us- personally and for the economy when unemployment happens? Personally:

Steady Paycheck to consumers Social loss: low self-esteem and lost of identity

To the economy: Lost output due to decreased disposal income in the

economy

What does the unemployment rate measure?

What does the unemployment rate measure?

The unemployment rate measures the healthiness of a specific economy.

Measuring UnemploymentMeasuring Unemployment Civilian non-institutional adult population: all civilian

(meaning excluding the military) age 16 or older, except those in prison, mental facilities or in homes for the aged.

Labor Force: people in the adult population who are either working or looking for work People looking for a job, but cannot find one are unemployed

Not in the work force: Stay at home moms College students not looking for work Retired workers

Measuring UnemploymentMeasuring Unemployment

Measuring UnemploymentMeasuring Unemployment Under-employed: individuals who are working part-time

but would prefer full-time status. These individuals are counted in the employed rate, making the

unemployment rate seem better than it actually is.

Where are we now:

http://data.bls.gov/timeseries/LNS14000000

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The Adult Population Sums the Employed, the Unemployed, and Those Not in the Labor

Force: February 2009 (in millions)

Exhibit 1

LABOR FORCE

(154.2)

Employed

(141.7)

NOT WORKING

(93.2)

Not in labor force

(80.7)

Unemployed

(12.5)

Labor Force Participation RateLabor Force Participation Rate This measures the total number of people in a nation

that are ACTIVELY participating in the labor force, i.e. they are working a part-time or full-time job. Increase in women participates from 34% of adult women in

1950 to 60% of adult women today

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The U.S. Unemployment Rate Since 1900

Exhibit 2

Unemployment among Various Groups

Unemployment among Various Groups

Unemployment in various groups: Age: Higher unemployment among teenagers Race Gender Geography Occupation

Unemployment Rates for Various Groups

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Exhibit 3(a)

Unemployment Rates for Various Groups

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Exhibit 3(b)

Unemployment varies across occupations and regions

Unemployment varies across occupations and regions

Varies by occupations

Blue-collar workers- higher unemployment that professional and technical workers

Varies by regions

Specific regions have higher unemployment rates

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Exhibit 4

Sources of UnemploymentSources of Unemployment Frictional Unemployment: occurs when job seekers and

employers are not matched up. The employer cannot find a qualified candidate The job seeker is unable to find a match for his/her background

Seasonal Unemployment: occurs during seasonal changes throughout the year Landscapers Snow Plowers Amusement park operators

Sources of UnemploymentSources of Unemployment Structural Unemployment: occurs when the skills

demanded by employers do not match those of the unemployed or the unemployed do not live where the jobs are Financial Analyst looking in a small town

Cyclical Unemployment: occurs with fluctuations to the business cycle, increase during recessions and decrease during booms When cyclical unemployment is present, then the economy is

inside it’s PPF The government will begin to make economic policy to increase

Aggregate Demand

Duration of UnemploymentDuration of Unemployment Long-term unemployed: Those who have been out of

work for 27 weeks or longer

What is full employment?What is full employment?

What is full employment so important? It measures the health of the economy This happens when cyclical unemployment is zero This does not mean zero unemployment, but low

unemployment between 4 to 6 %

Unemployment CompensationUnemployment Compensation Cash transfers to those who lose their jobs and actively

seek employment Benefits can last up to 6 months, during recessions

sometimes longer Opportunity cost of unemployment benefits:

They may reduce the incentive for some individuals to find work

During the Last Quarter Century, the U.S. Unemployment Rate Fell, Europe’s Remained High,

and Japan’s Rose

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Exhibit 5

Problems with official unemployment figures

Problems with official unemployment figures

Under-employment: the problem of individuals working a part-time job when they actually want a full-time job This is not measured in the unemployment rate Example: M.S. in Economics working at a p-t bank teller

Some people may be pretending to look for jobs Underground economy

Selling baked goods to friend Selling illegal drugs Doing the books for a friend

InflationInflation What is inflation?

This is when the average price level increases for all goods This has been a current concern due to the aggressive monetary

policy done by Ben Bernanke during the last few years

Duck Tales explains InflationDuck Tales explains Inflation

HyperinflationHyperinflation Hyperinflation: A very high rate of inflation. VERY

DANGEROUS!!!

In 1923 Germany faced this, please read the article on Germany and watch this short youtube video

Germany explains hyperinflationGermany explains hyperinflation

Two Sources of InflationTwo Sources of Inflation Demand-pull inflation: a sustained rise in the price level

caused by a rightward shift of the aggregate demand curve. Increase in consumers purchasing ALL consumer items on the

average This has not been a concern in the last few years because

consumers have not been consuming items due to the uncertainty in the economy.

Two Sources of InflationTwo Sources of Inflation Cost-push inflation: a sustained rise in the price level

caused by a leftward shift of the aggregate supply curve. Also know as stagflation

A little look at inflation:

Inflation Caused by Shifts of Aggregate Demand and Aggregate Supply Curves

Aggregate output0

Pricelevel

P’

P

AS

AD’

AD

(a) Demand-pull inflation: inflation caused by an increase of aggregate demand

An outward shift of the aggregate demand to AD’ “pulls” the price level up from P to P’.

Aggregate output0

Pricelevel

P’

P

AS

AD

(b) Cost-push inflation: inflation caused by a decrease of aggregate supply

A decrease of aggregate supply to AS’ “pushes” the price level up from P to P’.

AS’

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Exhibit 6

A little history on inflation and the price level

A little history on inflation and the price level

Since 1913, steady increase in price levels Before 1950s

High inflation that was war related, then in 1930s deflation occurred

Since 1950s Inflation around 3.8% per year

Consumer Price Index Since 1913LO2Exhibit 7(a)

Inflation Since 1913

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Exhibit 7(b)

Anticipated Versus Unanticipated Inflation

Anticipated Versus Unanticipated Inflation

Unanticipated will create more problems that anticipated inflation Example: Expected inflation of 3%, so lenders (such as banks)

will plan for this. However, if inflation increases to 5%, then the lender will lose out, but the borrower will win!

Problems: Real wages decrease- the dollar has less value Real interest rates decrease- lenders lose money

Result: Overall lose to the economy

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Inflation and Interest RatesInflation and Interest Rates What is interest?

The dollar amount paid by borrowers to lenders

Interest Rate: the amount paid per year as percentage of the amount borrowed. The lower this rate, the cheaper it is to borrow or invest in the

economy

Nominal Interest Rate: the interest rate expressed in dollars of value as a percentage of the amount loaned (it is not adjusted for inflation)

Inflation and Interest RatesInflation and Interest Rates Real interest rate: the nominal rate minute the inflation

rate Real interest rate= Nominal interest rate – inflation rate

What happens if expected inflation is high? The nominal interest rate will increase because lenders want to get

them money back with INTEREST!!

The Market for Loanable Funds

Loanable funds per period0

Nom

inal

inte

rest

rat

e

i

D

S The upward sloping supply curve, S, shows that more loanable funds are supplied at higher interest rates.The downward-sloping demand curve, D, shows that the quantity of loanable funds demanded is greater at lower interest rates.The two curves intersect to determine the market interest rate, i.

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Exhibit 10

Why are we scared of inflation?Why are we scared of inflation? The presence of inflation means EVERYTHING cost

more, so the price of goods goes up What does this mean?

It is hard for firms to hire as much It makes it hard for consumers to buy as much!!!

Why do we care? These two things decrease economic growth!!!