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Economic Challenges Chapter 13 Unemployment Chapter 13, Section 1 Unemployment Economists characterize unemployment in four categories – Frictional – Seasonal – Structural – Cyclical (Demand Deficient) Frictional Unemployment Unemployment that occurs when people take time to find a job – Switching jobs – Just finished school – Left labor force and trying to return Seasonal Unemployment Unemployment that occurs due to seasons – Growing seasons – Construction – Vacation or resort industries Structural Unemployment Workers skills do not match the jobs available – 5 causes of structural unemployment Development of new technology Discovery of new resources Changes in consumer demand Globalization Lack of education Cyclical Unemployment Unemployment that changes with business cycles – People lose jobs with decrease in production Measuring Employment Unemployment is an important indicator in the economy BLS (Bureau of Labor Statistics) polls the population and reports on unemployment – This computes the unemployment rate Represents the % of people unemployed Determining Unemployment Rate Divides the total number unemployed by the labor force Monthly rates are seasonally adjusted Full Employment Although it seems desirable, full employment is not a characteristic of a strong economy Full employment will lead to some inefficiency A strong economy exhibits an unemployment rate of 4-6 percent…the natural rate of unemployment Economies will always experience cyclical unemployment Underemployment and Discouraged Workers In various cases, people may have a job but be overqualified for that position. This is underemployment. Discouraged Workers are those who have stopped looking for a job – They do not appear in the unemployment rate Unemployment that is too low?? Very low unemployment can lead: – to unneeded positions – High competition by companies to find workers Higher wages Higher prices (inflation) Review 1. Unemployment that occurs when workers’ skills do not match the jobs that are available is known as – – – – (a) frictional unemployment. (b) structural unemployment. (c) seasonal unemployment. (d) cyclical unemployment. 2. The unemployment rate – – – – (a) is the percentage of the labor force that is unemployed. (b) is the number of people who are unemployed. (c) includes only discouraged workers. (d) is the percentage of the labor force that is underemployed. Inflation Chapter 13, Section 2 Inflation Inflation is the term used to describe a general increase in prices – It does not always mean that things have become more expensive. If wages increase with inflation, the change in prices is not felt. Purchasing Power is the power to purchase goods and services. If prices increases and wages do not, one loses purchasing power Price Indexes Price indexes are measurements that show the average price of a collection of goods Consumer Price Index (CPI) – best known price index – Calculated monthly and focuses on consumer goods – Uses the market basket The market basket is a collection of representative goods Market Basket Updated every 10 years Include products in categories (pg 339) – – – – – – – – Food and drink Housing Apparel Transportation Medical care Entertainment Education Other services Inflation Rate Inflation rate measures the percent in price changes over time Calculation: – CPI for year A minus CPI for year B / CPI for year B x 100 Types of Inflation Creeping inflation...low inflation rate (13% per year) for a long period of time. – not harmful to the economy Chronic Inflation...steady accelerating inflation over a period of time – Hard on an economy (things are unpredictable) Hyper Inflation...out of control inflation (100-500%) – Extremely hard on the economy Causes of Inflation Many factors can cause a rise in prices. – Quantity Theory...too much money causes inflation – Demand-Pull Theory...there is higher demand and prices rise – Cost-Push Theory...cost of production goes up so prices rise (wage increases caused by low unemployment, raw materials) Wage-Price Spiral Occurs when higher wages cause higher prices and higher prices cause higher wages Effects of Inflation High inflation can cause many problems for an economy. With high inflation, it is hard to predict the future Purchasing Power...the dollar loses value and one cannot buy as much Effects of Inflation Income...if prices increase but wages do not, one’s disposable income decreases (troublesome for those on a fixed income) Interest Rates...if inflation increase faster than interest rates, my savings and investments may lose money Review 1. Inflation is – (a) the process by which rising wages cause higher prices. – (b) the price increase of a typical group of goods. – (c) a general increase in prices. – (d) the ability to purchase goods and services. 2. Chronic inflation occurs when the inflation rate – – – – (a) drops to zero. (b) remains low for a long time. (c) grows out of control. (d) rises steadily over an extended period. Poverty Chapter 13, Section 3 Poverty Poverty Threshold...income level that is too low to support a family Poverty rate...percentage of households below the poverty line Causes of Poverty Lack of Education Location Racial and Gender Discrimination Economic Shifts...layoffs etc...last hired, first fired Family Structure...single parent families etc... Income distribution Median income for US...$43,318, yet millions live in poverty – This is due to uneven income distribution – 20% of US households make 50% of the income (80% of the wealth) – Lorenz Curve represents the distribution of income in US economy Antipoverty Policies Enterprise zones...companies are encouraged to locate in areas and received incentives to do so Employment Assistance... – programs to place workers – Minimum wage Antipoverty Policies Welfare Reform – Personal Responsibility and Work Opportunity Reconciliation Act Aimed at reducing reliance on welfare assistance Set a 5 year limit on benefits Sent responsibility to the states – Block grants...money to the states for distribution rather than directly to the people – Workfare...exchange of work for assistance Review 1. An income level below which income is insufficient to support a family or household is known as the – – – – (a) income gap. (b) poverty rate. (c) poverty threshold. (d) income inequality. 2. The Personal Responsibility and Work Opportunity Act of 1996 – (a) provides lump sums of money to poor families. – (b) provides federal payments to poor families to supplement state payments. – (c) set a 5-year limit on receipt of benefits. – (d) provides direct cash payments to poor families.