Transcript Document

Chapter 22
Unemployment and Inflation
© 2009 South-Western/ Cengage Learning
Unemployment
• Unemployment
– Personal cost
– Cost on the economy
• Measuring unemployment
– Civilian non-institutional adult population
– Labor force
• Employed + Unemployed
– Unemployment rate
• Percentage of unemployed in the labor force
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Unemployment
• Adult population
– Employed
• Working full time or part time
– Not working
• Unemployed (looking for work)
• Not in labor force
– Retired; Students; Don’t want to work
– Discouraged workers
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Exhibit 1
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
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Unemployment
• Labor force participation rate
– Number in labor force / Adult population
• Unemployment over time
– Rise during contractions
– Fall during expansions
– Overall downward trend (1980s to 2000)
• Growing economy
• Fewer teenagers in workforce
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Exhibit 2
The US unemployment rate since 1900
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Unemployment
• Unemployment in various groups
– Age
• Higher unemployment among teenagers
– Race
– Gender
– Geography
– Occupation
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Exhibit 3 (a)
Unemployment rates for 20 years of age and older
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Exhibit 3 (b)
Unemployment rates for 16 to 19 years of age
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High school dropouts, labor market dropouts
• High unemployment rates
– Poorly educated young black males
• 2000, 65% of high-school dropouts
– Not working
» Unemployed
» Not looking for jobs
» In prison
• 2004, 72% of high-school dropouts
– Not working
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High school dropouts, labor market dropouts
• Possible causes
– Failing schools
– Absent parents
– Racial discrimination
– Fewer blue collar jobs
– Growing competition
– Stricter child-support enforcement
– Rising incarceration rate
– Subculture: downplay the value of work 11
Unemployment
• Varies by occupation
– Blue-collar workers
• Higher unemployment
• Varies across regions
– Certain occupations
• Dominate certain regions
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Exhibit 4
Unemployment rates differ: US metropolitan areas
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Sources of Unemployment
• Frictional unemployment
– Bring together employers and job
seekers
– Doesn’t last long
– Better match workers and jobs
• Seasonal unemployment
– Seasonal changes
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Sources of Unemployment
• Structural unemployment
– Mismatch of skills or geographic location
– Problem
• Cyclical unemployment
– Increases during recessions
– Decreases during expansions
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Full Employment
• Full employment
– No cyclical unemployment
– Some unemployment
• Frictional
• Structural
• Seasonal
– Estimates: 4-6%
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Unemployment Compensation
• Unemployment benefits
– Half of the unemployed
– Criteria
• Lost job
• Looking for work
– Time limit: 6 months
– 40% of wages
– May reduce the incentive to find work
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International Comparisons
• Unemployment trends
– US: down
– Japan: up
• Low unemployment : Job security
• Bankruptcy
– Western Europe: remained high
• Higher unemployment benefits
• Last longer
• Government regulations
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Exhibit 5
Since 1980, the US unemployment rate fell, Europe’s
remained high, and Japan’s rose
Europe
U.S.
Japan
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Problems with Unemployment Figures
• Understate unemployment
• Discouraged workers
– Not counted
• Underemployed
– Only part-time (want full-time)
– Overqualified
• Overstate unemployment
• Looking for work
– Qualify for unemployment benefits
• Only full-time (want part-time)
• Underground economy
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Inflation
• Inflation
• Sustained increase in price level
• Annual inflation rate
• Percentage increase in price level
• Hyperinflation
• Extremely high inflation
• Deflation
• Sustained decrease in price level
• Disinflation
• Decrease in inflation
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Hyperinflation in Brazil
• Price level in 1994
• 3.6 million times higher than in 1988
• People – don’t want to hold cruzeiro
• Workers
• Paid daily; purchases
• Exchanges for a stable currency
• Real Cruzeiro: larger denominations
• Facilitate purchase
• Reduce productivity
• Dropped since 1994
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Two Sources of Inflation
• Increase in AD
– Demand-pull inflation
– Increased government spending
– Social programs
• Decrease in AS
– Cost-push inflation
– Increase cost of production
• Push up the price level
– Stagflation
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Exhibit 6
Inflation caused by shifts of AD and AS curves
(a) Demand-pull inflation: inflation
caused by an increase of
aggregate demand
Price
AS
level
Price
level
AD’
AS
P
AD
AD
0
AS’
P’
P’
P
(b) Cost-push inflation: inflation caused
by a decrease of aggregate supply
Aggregate output
An outward shift of the aggregate
demand to AD’ “pulls” the price
level up from P to P’.
0
Aggregate output
A decrease of aggregate supply to
AS’ “pushes” the price level up
from P to P’.
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A Historical Look: Inflation; Price Level
• Price level, US, since 1913
– Steady increase
• Inflation or deflation, US, since 1913
– Before 1950s
• High inflation – war related
– Followed by deflation
– Since 1950s
• Inflation: 3.8% per year
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Exhibit 7 (a)
Consumer price index since 1913
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Exhibit 7 (b)
Inflation since 1913
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Anticipated vs. Unanticipated Inflation
• Anticipated inflation
– Expected inflation
• If inflation > expected
– Sellers lose
– Buyers gain
• If inflation < expected
– Sellers gain
– Buyers lose
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Inflation
•
•
•
•
Unpopular
Imposes transaction costs
Obscures relative price changes
Differ across metropolitan areas
– Housing prices
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Exhibit 8
Average annual inflation between 2002 and 2006
differed across US metropolitan areas
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International Comparisons of Inflation
• First half of 1980s
– Declining inflation
• Mid-1980s to early 1990s
– Rising inflation
• Mid-1990s
– Lower trend
• Similar trend
– Overall: lower inflation
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Exhibit 9
Inflation rates in major economies have trended lower
over the last quarter century
Europe
U.S.
Japan
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Inflation and Interest Rates
• Interest
– Dollar amount
• Paid by borrowers to lenders
• Interest rate
• As percentage
• Supply of loanable funds
– Upward sloping
• Demand of loanable funds
– Downward sloping
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Inflation and Interest Rates
• Nominal interest rate
– Current dollars
• Real interest rate
• =Nominal interest rate – Inflation rate
• Expected real interest rate
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Exhibit 10
The market for loanable funds
Nominal interest rate
S
i
D
0
Loanable funds per period
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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Why is Inflation Unpopular?
• Pay higher prices
– Inflation = Penalty
• Receive higher receipts
– Higher income
• ‘well-deserved’ reward
• Fixed nominal income
– Unadjusted for inflation
• Social Security
– Adjusted for inflation (COLA)
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