unemployment inflation. recessions, depressions, and unemployment a recession is roughly a period in...

UnemploymentUnemployment

& & InflationInflation

Recessions, Depressions,Recessions, Depressions,and Unemploymentand Unemployment

A A recessionrecession is roughly a period in which is roughly a period in which real GDP declines for at least two real GDP declines for at least two consecutive quarters. It is marked by consecutive quarters. It is marked by falling output and rising unemployment.falling output and rising unemployment.

• The business cycle describes the periodic ups and downs in the economy, or deviations of output and employment away from the long-run trend.

Recessions, Depressions,Recessions, Depressions,and Unemploymentand Unemployment

Capacity utilization rates,Capacity utilization rates, which show which show the percentage of factory capacity being the percentage of factory capacity being used in production, are one indicator of a used in production, are one indicator of a recession.recession.

• A depression is a prolonged and deep recession. The precise definitions of prolonged and deep are debatable.

Defining andDefining andMeasuring UnemploymentMeasuring Unemployment

The most frequently discussed symptom of a The most frequently discussed symptom of a recession is unemployment.recession is unemployment.An An employedemployed person is any person 16 years person is any person 16 years old or older:old or older:1.1. who works for pay, either for someone else or in his who works for pay, either for someone else or in his

or her own business for 1 or more hours per week,or her own business for 1 or more hours per week,2.2. who works without pay for 15 or more hours per who works without pay for 15 or more hours per

week in a family enterprise, orweek in a family enterprise, or3.3. who has a job but has been temporarily absent, with who has a job but has been temporarily absent, with

or without pay.or without pay.


An An unemployedunemployed person is a person person is a person 16 years old or older who:16 years old or older who:

1.1. is not working, is not working, 2.2. is available for work, andis available for work, and3.3. has made specific efforts to find has made specific efforts to find

work during the previous 4 weeks.work during the previous 4 weeks.

A person who is not looking for A person who is not looking for work, either because he or she work, either because he or she does not want a job or has given up does not want a job or has given up looking, is looking, is not in the labor forcenot in the labor force..


u n em p lo y m en t ra te = u n em plo y ed

em p lo y ed + u n em plo y ed

labo r fo rc e = em p lo y ed + u n em p lo y e d

p op u la tio n = lab o r fo rce + n o t in lab o r fo rce

lab o r fo rc e pa rtic ip a tio n ra te = labo r fo rc ep o pu la tio n


Computing the unemployment rate for the Computing the unemployment rate for the month of July 2003:month of July 2003:– Labor force: 141.39 millionLabor force: 141.39 million– Employed: 133.47 millionEmployed: 133.47 million– Unemployed: 7.92 millionUnemployed: 7.92 million

July 20037.92unemployment rate = 5.6%

133.47 + 7.92

Employed, Unemployed, and the Labor Force, 1953–2002Employed, Unemployed, and the Labor Force, 1953–2002(1)(1) (2)(2) (3)(3) (4)(4) (5)(5) (6)(6)

POPULATIOPOPULATIONN

16 YEARS16 YEARSOLD OR OLD OR OVEROVER

(MILLIONS)(MILLIONS)

LABORLABORFORCEFORCE

(MILLIONS(MILLIONS))

EMPLOYEEMPLOYEDD

(MILLIONS(MILLIONS))

UNEMPLOYEUNEMPLOYEDD

(MILLIONS)(MILLIONS)

LABOR-LABOR-FORCEFORCE

PARTICIPATIPARTICIPATIONON

RATERATE

UNEMPLOYMEUNEMPLOYMENTNT

RATERATE

19531953 107.1107.1 63.063.0 61.261.2 1.81.8 58.958.9 2.92.9

19601960 117.2117.2 69.669.6 65.865.8 3.93.9 59.459.4 5.55.5

19701970 137.1137.1 82.882.8 78.778.7 4.14.1 60.460.4 4.94.9

19801980 167.7167.7 106.9106.9 99.399.3 7.67.6 63.863.8 7.17.1

19821982 172.3172.3 110.2110.2 99.599.5 10.710.7 64.064.0 9.79.7

19901990 189.2189.2 125.8125.8 118.8118.8 7.07.0 66.566.5 5.65.6

20022002 211.9211.9 141.8141.8 135.1135.1 6.76.7 66.966.9 4.74.7\\

The Discouraged-Worker EffectThe Discouraged-Worker Effect

The The discouraged-worker effectdiscouraged-worker effect lowers lowers the unemployment rate.the unemployment rate.Discouraged workersDiscouraged workers are people who are people who want to work but cannot find jobs. They want to work but cannot find jobs. They grow discouraged and stop looking for grow discouraged and stop looking for work, thus dropping out of the ranks of the work, thus dropping out of the ranks of the unemployed and the labor force.unemployed and the labor force.

Types of UnemploymentTypes of Unemployment

Frictional unemploymentFrictional unemployment is the portion is the portion of unemployment that is due to the normal of unemployment that is due to the normal working of the labor market; used to working of the labor market; used to denote short-run job/skill matching denote short-run job/skill matching problems.problems.


Structural unemploymentStructural unemployment is the portion is the portion of unemployment that is due to changes in of unemployment that is due to changes in the structure of the economy that result in the structure of the economy that result in a significant loss of jobs in certain a significant loss of jobs in certain industries.industries.


Cyclical unemploymentCyclical unemployment is the increase in is the increase in unemployment that occurs during unemployment that occurs during recessions and depressions.recessions and depressions.


The The natural rate of unemploymentnatural rate of unemployment is the is the unemployment that occurs as a normal unemployment that occurs as a normal part of the functioning of the economy. part of the functioning of the economy. Sometimes taken as the sum of frictional Sometimes taken as the sum of frictional unemployment and structural unemployment and structural unemployment.unemployment.

InflationInflation

InflationInflation is an increase in the overall price is an increase in the overall price level.level.DeflationDeflation is a decrease in the overall price is a decrease in the overall price level.level.Sustained inflationSustained inflation is an increase in the is an increase in the overall price level that continues over a overall price level that continues over a significant period.significant period.

Price IndexesPrice IndexesPrice indexesPrice indexes are used to measure are used to measure overall price levels. The price index overall price levels. The price index that pertains to all goods and services that pertains to all goods and services in the economy is the in the economy is the GDP price GDP price indexindex..The The consumer price index (CPI)consumer price index (CPI) is a is a price index computed each month by price index computed each month by the Bureau of Labor Statistics using a the Bureau of Labor Statistics using a bundle that is meant to represent the bundle that is meant to represent the “market basket” purchased monthly “market basket” purchased monthly by the typical urban consumer.by the typical urban consumer.

Price IndexesPrice Indexes

The The consumer price index consumer price index (CPI)(CPI) is the most popular fixed- is the most popular fixed-weight price index.weight price index.One version of the CPI is the One version of the CPI is the “Chained Consumer Price “Chained Consumer Price Index,” which uses changing Index,” which uses changing weights.weights.The CPI differs from the GDP The CPI differs from the GDP deflator in important ways.deflator in important ways.


The CPI market basket shows how a typical The CPI market basket shows how a typical consumer divides his or her money among consumer divides his or her money among various goods and services.various goods and services.

Food and Beverages

15.6%

Other Goods and Services

4.3%

Apparel4.2%

Housing40.9%

Transportation17.3%

Medical Care6.0%

Education and Communication

5.8%

Recreation5.9%


Other popular price indexes are Other popular price indexes are producer price indexesproducer price indexes ( (PPIsPPIs), ), which measure price changes which measure price changes for products at all stages in the for products at all stages in the production process.production process.

The three main categories are:The three main categories are:– finished goodsfinished goods,,– intermediate materialsintermediate materials, and, and– crude materialscrude materials..

The Costs of InflationThe Costs of Inflation

People’s income increases during People’s income increases during inflations, when most prices, including inflations, when most prices, including input prices, tend to rise together.input prices, tend to rise together.Inflation changes the distribution of Inflation changes the distribution of income. People living on fixed incomes income. People living on fixed incomes are particularly hurt by inflation.are particularly hurt by inflation.


The benefits received by many retired The benefits received by many retired workers, including social security, are fully workers, including social security, are fully indexedindexed to inflation. When prices rise, to inflation. When prices rise, benefits rise.benefits rise.The poor have not fared so well. Welfare The poor have not fared so well. Welfare benefits are not indexed and have not kept benefits are not indexed and have not kept pace with inflation.pace with inflation.


Unanticipated inflationUnanticipated inflation—an inflation that —an inflation that takes people by surprise—can hurt takes people by surprise—can hurt creditors.creditors.Inflation that is higher than expected Inflation that is higher than expected benefits debtors; inflation that is lower than benefits debtors; inflation that is lower than expected benefits creditors.expected benefits creditors.The The real interest ratereal interest rate is the difference is the difference between the interest rate on a loan and between the interest rate on a loan and the inflation rate.the inflation rate.


Inflation creates administrative costs and Inflation creates administrative costs and inefficiencies. Without inflation, time could be inefficiencies. Without inflation, time could be used more efficiently.used more efficiently.The opportunity cost of holding cash is high The opportunity cost of holding cash is high during inflations. People therefore hold less during inflations. People therefore hold less cash and need to stop at the bank more often.cash and need to stop at the bank more often.People are not fully informed about price People are not fully informed about price changes and may make mistakes that lead to a changes and may make mistakes that lead to a misallocation of resources.misallocation of resources.


Some people consider inflation to be our Some people consider inflation to be our public enemy number one. Elected public enemy number one. Elected leaders have vigorously pursued policies leaders have vigorously pursued policies designed to stop inflation.designed to stop inflation.The recessions of 1974 to 1975 and 1980 The recessions of 1974 to 1975 and 1980 to 1982 were the price we had to pay to to 1982 were the price we had to pay to stop inflation. Stopping inflation is costly.stop inflation. Stopping inflation is costly.

Causes of InflationCauses of Inflation

InflationInflation is an increase in is an increase in the overall price level.the overall price level.Sustained inflationSustained inflation occurs occurs when the overall price level when the overall price level continues to rise over continues to rise over some fairly long period of some fairly long period of time.time.

Causes of InflationCauses of InflationDemand-pull inflationDemand-pull inflation is inflation initiated by an is inflation initiated by an increase in aggregate increase in aggregate demand.demand.

• Cost-push, or supply-side, inflation is inflation caused by an increase in costs.

Expectations and InflationExpectations and Inflation

If every firm expects every other firm to raise If every firm expects every other firm to raise prices by 10%, every firm will raise prices by prices by 10%, every firm will raise prices by about 10%. This is how expectations can about 10%. This is how expectations can get “built into the system.”get “built into the system.”

• In terms of the AD/AS diagram, an increase in inflationary expectations shifts the AS curve to the left.

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