Transcript Business Cycles, Unemployment, and Inflation

09
Business Cycles, Unemployment, and
Inflation
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
The Business Cycle
• Alternating increases and decreases
•
LO1
in economic activity over time
Phases of the business cycle
• Peak
• Recession
• Trough
• Expansion
9-2
The Business Cycle
Peak
Level of real output
Peak
Peak
Trough
Trough
Time
LO1
9-3
The Business Cycle
U.S. Recessions since 1950
Period
Duration,
Months
Depth
(Decline in Real
Output)
1953-54
10
-2.6%
1957-58
8
-3.7
1960-61
10
-1.1
1969-70
11
-0.2
1973-75
16
-3.2
1980
6
-2.2
1981-82
16
-2.9
1990-91
8
-1.4
2001
8
-0.4
2007-09
18
-3.7
Source: National Bureau of Economic Research, http://www.nber.org and Minneapolis Federal Reserve
Bank, http://www.minneapolisfed.org/ Output data are in 2000 dollars
LO1
9-4
Cyclical Impact
• Durable goods affected most
• Capital goods
• Consumer durables
• Nondurable consumer goods affected
less
• Services
• Food and clothing
LO1
9-5
The 16 and older noninstitutionalized population that
holds a paying job or is actively
seeking work.
The Current Population Survey counts all
persons as unemployed who, during the
week before the monthly survey
1. Had no employment,
2. Were available for work,
and either
1. Had made specific efforts to find
employment some time during the
previous 4 weeks or
2. Were waiting to be recalled to a job
from which they had been laid off.
Labor force does not include
Discouraged Workers
People who are available and willing to work
but have not made specific efforts to find a job
within the previous four weeks.
Michael Moore
“Roger and me.”
The adult population sums: employed, unemployed,
and those not in labor force, June 2007 (in millions)
Unemployed
(6.9)
LABOR FORCE
(153.1)
Employed
(146.2)
NOT WORKING
(85.5)
Not in labor force
(78.6)
Labor force= employed + unemployed
Not working = not in the labor force + unemployed
Adult population = employed + unemployed + not in the labor force
10
Unemployment
Total
population
(307.3
million)
Under 16
and/or
Institutionalized
(71.4 million)
Unemployment rate =
# of unemployed
X 100
labor force
Not in
labor
force
(81.7 million)
Unemployment rate =
Employed
(139.9 million)
14,265,000
X 100 = 9.3%
154,142,000
Labor
force
(154.2
million)
Unemployed
(14.3 million)
LO2
9-12
No Ordinary Recession
The U.S. economy shed a net 8,736,000 nonfarm jobs
between Jan. 2008 and Jan. 2010, an average of
364,000 jobs lost per month.
The U.S. has gained 5.5
million jobs since February
2010 , an average of
153,000 per month. At this
rate, we will reach 2007
employment levels again
in December 2014.
The labor force as a
percent of the adult
population.
Labor Force Participation Rates, United States
90
80
60
Men
Women
16-19 Years
50
40
Year
2011
2008
2005
2002
1999
1996
1993
1990
1987
1984
1981
1978
1975
1972
30
1969
Percent
70
Unemployment Duration
Percentage Unemployed for
2010
2000
1983
14 weeks or less
47
77
60
27 weeks or more
39
11
25
Source: www.bls.gov
Unemployment
• Criticisms of unemployment
• Involuntary part-time workers
counted as if full-time
• Discouraged workers are not
counted as unemployed
LO2
9-21
Types of Unemployment
• Frictional unemployment
• Individuals searching for jobs or
•
•
LO3
waiting to take jobs soon
Structural unemployment
• Occurs due to changes in the
structure of the demand for labor
Cyclical unemployment
• Caused by the recession phase of
the business cycle
9-23
Frictional Unemployment
Joblessness experienced by people who are
between jobs or are just entering (or re-entering)
the labor market.
I am looking for a job in my
field—speech pathology
Structural Unemployment
Joblessness arising from mismatches between
workers’ skills and employers’ requirements or
between workers’ locations and employers’
locations.
An industrial robot took
my job.
Cyclical Unemployment
Joblessness arising from changes in
production over the business cycle
I couldn’t find work
in 1991 due to slump
in home building
Definition of Full Employment
• Natural Rate of Unemployment (NRU)
• Full employment level of
unemployment
• Can vary over time
• Demographic changes
• Changing job search methods
• Public policy changes
• Actual unemployment can be above
or fall below the NRU
LO3
9-27
Economic Cost of Unemployment
• GDP Gap
• GDP gap = actual GDP – potential
•
LO3
GDP
• Can be negative or positive
Okun’s Law
• Every 1% of cyclical unemployment
creates a 2% GDP gap
9-28
Economic Cost of Unemployment
Economic Cost of Unemployment
LO3
9-29
The GDP Gap, United States, 2007-2010, in billions of chained 2005 Dollars
Assuming the Natural Rate of Unemployment is 5 percent
14,800
14,400
Recession is
shaded
14,000
13,600
13,200
12,800
12,400
07Q1
07Q3
08Q1
08Q3
09Q1
09Q3
10Q1
Year/Quarter
Potential GDP
GDP
Source: Brown’s calculation from BLS and
BEA data
Unequal Burdens
• Occupation
• Age
• Race and ethnicity
• Gender
• Education
• Duration
LO3
9-31
Unequal Burdens
Unemployment Rates by Demographic Group: Full Employment Year (2007) and Recession Year (2009)*
Unemployment Rate
Demographic Group
Overall
Occupation:
Managerial and professional
Construction and extraction
Age:
16-19
African American, 16-19
White, 16-19
Male, 20+
Female, 20+
Race and ethnicity:
African American
Hispanic
White
Gender:
Women
Men
**
Education:
Less than high school diploma
High school diploma only
College degree or more
Duration:
15 or more weeks
LO3
2007
2009
4.6%
9.3%
2.1
4.6
7.6
19.7
15.7
24.3
29.4
39.5
13.9
21.8
4.1
9.6
4.0
7.5
8.3
14.8
5.6
12.1
4.1
8.5
4.5
8.1
4.7
10.3
7.1
14.6
4.4
9.7
2.0
4.6
1.5
4.7
9-32
Noneconomic Costs
• Loss of skills and loss of self-respect
• Plummeting morale
• Family disintegration
• Poverty and reduced hope
• Heightened racial and ethnic tensions
• Suicide, homicide, fatal heart attacks,
•
LO3
mental illness
Can lead to violent social and political
change
9-33
Global Perspective
LO3
9-34
The Consumer Price
Index (CPI)
We use the CPI to measure changes in the cost of
living experienced by households.
The CPI is the “narrow” price index in that the
market basket used to construct it includes items
purchased by households.
Bureau of Labor Statistics economic assistants
check the prices of 80,000 items in 30 metropolitan
areas each month.
The inflation rate is simply the percentage change in
the CPI from one period to the next.
1982-84 is the reference base period
The CPI Market Basket
The BLS now revises the CPI market basket every 2 years
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2012
29.8
31.8
39.8
55.5
86.3
109.3
133.8
153.5
174.5
196.4
227.67
Source: Bureau of Labor Statistics
Inflation
• General rise in the price level
• Inflation reduces the “purchasing
•
power” of money
Consumer Price Index (CPI)
CPI =
CPI =
LO2
Price of the Most Recent Market
Basket in the Particular Year
Price estimate of the Market
Basket in 1982-1984
207.3
-
201.6
x
100
x
100 = 2.8%
201.6
9-38
Computing the Inflation Rate for 2007
The CPI was
equal to 203.30 in
December 2006.
In December 2007
it was 211.680.

P 2007
211 .680  203 .30

100  4.12%
203 .30
Inflation In Selected Countries
U.S.
Argentina
Australia
China
Pakistan
Turkey
2007
Russia
2006
Euro Area
Britain
Japan
0
2
4
6
Percent
Source: The Economist
8
10
12
Inflation
Inflation Rates in Five Industrial Nations
LO2
9-41
Inflation
LO2
9-42
The race to stay ahead of
inflation
•Inflation erodes the purchasing power of
income and sets off a race to stay ahead of
the cost of living.
•Teachers, fireman, truck drivers, nurses,
accountants, plumbers, social security
recipients, and others strive to increase their
incomes so as not to suffer a decrease in their
standard of living.
•Some groups do better than others.
Machinists
Job description: Set up and operate a
variety of machine tools to produce
precision parts and instruments.
Mean
CPI
Year
Annual Wage
(1982-84 = 100)
1995
$31,270
152.4
2005
$34,790
196.4
Source: Bureau of Labor Statistics
Are machinists better off in 2005?
Real Wages 1995 
NominalWages1995
$31,270
100 
100  $20,518
CPI1995
152.4
NominalWages2005
$34,790
Real Wages 2005 
100 
100  $17,714
CPI2005
196.4
COLAs
Why are we smiling?
Because our social
security benefits are
indexed to the CPI
Why doesn’t Congress
index the minimum
wage to the CPI?
Value of the Federal Minimum Wage
Nominal
Real Value
Value
(1982-84)
1938
$0.25
$1.77
1949
0.40
1.68
1955
0.75
2.80
1961
1.15
3.85
1966
1.25
3.86
1974
2.00
4.06
1978
2.65
4.06
1989
3.35
2.70
1996
4.75
3.03
2006
5.15
2.53
2007
5.85
2.76
2010
7.25
3.32
Year
Source: U.S. Department of Labor
Types of Inflation
• Demand-Pull inflation
• Excess spending relative to output
• Central bank issues too much
•
LO3
money
Cost-Push inflation
• Due to a rise in per-unit input costs
• Supply shocks
9-48
Who is Hurt by Inflation?
• Fixed-income receivers
• Real incomes fall
• Savers
• Value of accumulated savings
•
LO3
deteriorates
Creditors
• Lenders get paid back in “cheaper
dollars”
9-49
Unexpected inflation redistributes real
income from lenders to borrowers
•Repayments schedules for most debt contracts
are fixed in nominal or money terms—that is,
debts are not indexed to inflation.
•Inflation erodes the real value of repayments.
Savings & Loan
institutions lost
money on long term
mortgages in the70s
and 80s.
We bought this house in
1957 for $19,000. We
financed the house on a
30 year mortgage note
at 3.5 percent interest.
Can you guess what our
monthly payment was?
Answer: $85.32
Who is Unaffected by Inflation?
• Flexible-income receivers
• COLAs
• Social Security recipients
• Union members
• Debtors
• Pay back the loan with “cheaper
dollars”
LO3
9-52
Redistribution Effects of Inflation
• Nominal income
• Unadjusted for inflation
• Real income
• Nominal income adjusted for
•
inflation
Anticipated vs. unanticipated income
Percentage
change in
real income
LO3

=
Percentage
change in
nominal income
Percentage
change in
price level
9-54
Anticipated Inflation
• Real interest rate
• Rates adjusted for inflation
• Nominal interest rate
• Rates not adjusted for inflation
LO3
9-55
Anticipated Inflation
6%
11%
=
+
5%
Nominal
Interest
Rate
LO3
Inflation
Premium
Real
Interest
Rate
9-56
Other Redistribution Issues
• Deflation
• Mixed effects
• Incomes may rise
• Fixed assets values may fall
• For fixed-rate mortgages, real debt
•
LO3
declines
Arbitrariness
9-57
Hyperinflation
• Extraordinarily rapid inflation
• Devastates an economy
• Businesses don’t know what to charge
• Consumers don’t know what to pay
• Money becomes worthless
• Zimbabwe’s 14.9 billion percent
inflation in 2008
LO3
9-58