Transcript Facing Economic Challenges

Facing Economic Challenges
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Chapter 13: Facing Economic Challenges
UNEMPLOYMENT
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Unemployment has a variety of causes. Some level of unemployment
is expected, even when an economy is healthy.
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As the nation goes through business cycles, it faces the problems of
unemployment and inflation. Persistent unemployment can lead to
poverty. During periods of inflation, wages buy less.
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The Labor Force and Unemployment
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labor force = people over 16 who are working, looking for work
(doesn’t include active military or institutionalized citizens)
Unemployment rate—percent of labor force that is jobless & looking
for work
Bureau of Labor Statistics determines the unemployment rate
– divides number of unemployed workers by total in civilian labor
force
– does not count discouraged who have stopped looking or
underemployed
Underemployed—work part-time, want full-time or work below skill
level
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Measuring Unemployment
Full Employment
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Full employment—no unemployment caused by decreased economic
activity
Always some degree of unemployment:
– people relocate; look for better job; can’t find appropriate job
Unemployment rate of 4-6% considered full employment in U.S.
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4 Types of Unemployment
Type 1: Frictional Unemployment
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Frictional unemployment not a threat to economic stability. Includes:
– Childrearing parents returning to work
– new college graduates looking for first job
– experienced workers who want to switch jobs
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Types of Unemployment
Type 2: Seasonal Unemployment
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Demand for some jobs changes dramatically from season to season
– construction work falls off in winter
– migrant farm work drops off in winter; migrant families suffer
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Types of Unemployment
Type 3: Structural Unemployment
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As businesses become more efficient, require fewer workers
– new technologies replace workers or require them to retrain
– new industries requiring specialized education do not employ
unskilled labor
– change in consumer demand can shift type of workers needed
– offshore outsourcing sometimes leaves people out of work
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Types of Unemployment
Type 4: Cyclical Unemployment
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Employers lay off workers during contractions/troughs of business
cycle
During recession, hard to find new jobs since demand for labor drops
Unemployment period varies by type; average relatively short
– over 1/3 of unemployed find work in 5 weeks or less
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The Impact of Unemployment
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Excessive, persistent unemployment is inefficient—wastes human
resources
Promotes inequality since least experienced lose jobs first
– also fewer jobs means fewer opportunities to advance
Discourages workers who lose faith in ability to find good job
– underemployed lose motivation to do good work
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Reviewing Key Concepts
Explain the relationship between the terms in each of
these pairs:
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frictional unemployment and structural unemployment
seasonal unemployment and cyclical unemployment
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Poverty and Income Distribution
What Is Poverty?
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Poverty—lack of income, resources to have minimum
standard of living
• No universal standard for poverty; varies from country to
country
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Poverty threshold—official minimum income to pay for
basic needs; it is set by the govt
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What Is Poverty?
The Poverty Rate
• Poverty rate—% of people in households below poverty
threshold
– based on population as a whole
• Poverty does not hit all sectors of society equally. Most at
risk:
– Children, minorities; inner-city, rural, and single–mother
families
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Factors Affecting Poverty
• Education—the higher the level of education, the higher
the income
• Discrimination against minorities, women
– sometimes face wage discrimination, occupational
segregation
• Demographic trends —single-parent families have more
economic problems
• Job type – change from manufacturing to service jobs has
resulted in lower wages for low-skilled workers
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Income Distribution
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Income distribution—how income is divided among
people in a nation
• Income inequality—unequal distribution of income; some
always exists
• Lorenz curve shows degree of income inequality in a
nation; the more it dips away from diagonal line, the
greater the inequality
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Antipoverty Programs
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Welfare—economic, social programs providing assistance to the needy
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some criticized for wasting government funds, harming recipients
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Food stamp program gives card, government deposits funds in
account; card can be used only to buy food at grocery stores
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Medicaid offers health care to low-income; funded by federal &
state governments
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Earned-income tax credit —refunds taxes deducted from
paychecks
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tax breaks, grants, job training, self-help
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Antipoverty Programs
Misc. Programs
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Social Security (OASDI) program pays benefits to retirees, survivors,
disabled (in NYS, recovering alcoholic, drug addict are considered
disabled)
Medicare is govt health insurance for those receiving Social Security
payments
Unemployment insurance helps laid-off workers while looking for job
Social Security, Medicare funded by payroll taxes; reduced poverty
Unemployment insurance paid mostly by taxes on employer
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Antipoverty Programs
Other Programs
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Community Services Block Grants, job training, Empowerment Zones
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In 1996, Republican-led Congress overhauled welfare programs
federal welfare programs changed to welfare-to-work
– workfare requires welfare recipients to do some work
– Temporary Assistance for Needy Families (TANF) has 5 year limit
except in NY state (Safety Net program)
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Causes and Consequences
of Inflation
What Is Inflation and How Is It Measured?
Inflation—defined two ways
– sustained rise in the level of prices generally
– sustained fall in the purchasing power of money
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What Is Inflation and How Is It Measured?
Consumer Price Index
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Consumer price index (CPI) measures changes in prices of products
U.S. government surveys people to learn what they buy regularly
– creates a “market basket” of about 400 typical products
– each month researches current prices of these items
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What Is Inflation and How Is It Measured?
Inflation Rate
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rate of change in prices over a set period of time
Types of Inflation
Moderate/Chronic inflation —between 1-3% per year
Creeping inflation —4-5% inflation over a period of time
Hyperinflation—over 50% per month
Deflation—decrease in general price level; happens rarely
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What Causes Inflation?
Demand-Pull Inflation
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If total demand rises faster than production, it creates scarcity
– producers need time to recognize demand, gear up for higher
production
– demand pushes up prices for available products
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What Causes Inflation?
Cost-Push Inflation
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When production costs increase, producers make less profit
– if demand is strong, may raise prices to maintain profits
Cost-push inflation may be due to higher price of materials, energy
Wages can be large part of production costs; wage-price spiral:
– higher wages lead to higher costs, which lead to higher prices,
which lead to higher wages and so on
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What Causes Inflation?
Quantity Theory
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Too much money in circulation causes money’s value to decrease,
and prices to feel higher
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What Is the Impact of Inflation?
Effect 1: Decreasing Value of the Dollar
Effect 2: Increasing Interest Rates & Decreasing Real
Returns on Savings
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Reviewing Key Concepts
Explain the relationship between the terms in each of
these pairs:
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consumer price index and producer price index
hyperinflation and deflation
demand-pull inflation and cost-push inflation
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The Effects of Inflation in the 1970s
Background
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In the 1970s, the United States experienced the longest period of inflation in
its history. By 1979, inflation had risen to 10 percent per year or higher.
Prices of consumer goods rose dramatically. Those on fixed incomes were
particularly affected.
What’s the Issue
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How did inflation affect people and businesses in the 1970s?
Thinking Economically
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Name one example from each document that shows how inflation has a
negative impact on the economy.
Inflation is a general rise in price levels. Are the examples of price increases
in documents B and C symptoms of inflation or isolated price increases?
Compare the tone of documents A and C. Do economists care as much
about inflation as consumers? Explain.
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