Download Unemployment and Inflation

Ch. 13

UNEMPLOYMENT

INFLATION

A closer look….

When people are unemployed, they
experience uncertainty…
on a larger scale, unemployment
causes uncertainty in the American
economy as a whole causing it to
malfunction

Unemployment rate:
the % of the civilian work force out of a
job but actively looking for work
important point: maintaining a low
unemp. rate is one of the major goals in
stabilizing the economy


Those who have stopped looking for
work
Those who work in family businesses
without pay
 Cyclical:
Associated with
ups/downs of
the business
cycle
Characteristics


Up during
recessions
Down during
recoveries or
booms
Structural:
Unemp. caused by
changes in the
economy such as
tech advances or
discoveries of
natural resources


Characteristics
occurs when
workers are
replaced by
machines
Occurs when
workers’ skills no
longer match those
needed to do a job
Seasonal

Caused by changes in the seasons
or weather
Characteristics
Affects construction workers in the north
Affects farm workers
Frictional

Temporary unemp. between jobs
*firings
*layoffs
*retraining
Characteristics

Always exists to some degree



Zero unemployment is NOT achievable or
desireable
A rate of 4%-6% is generally considered
acceptable
Many who have a job are
underemployed…they work in jobs below
their skills/training
 Defined:
prolonged rise in the
general level of prices
High inflation is a major economic problem,
especially when inflation rates change greatly from
year to year.
Purchasing Power


Your money buys less
Income

If wage increases match the inflation rate, a worker's
real income stays the same. If income is fixed income,
or income that does not increase even when prices go
up, the economic effects of inflation can be devastating
use price
indexes…an average price of a
standard group of items and
how that avg. price changes
over time
 Economists

CPI based on a “market basket” of typical
consumer products (see chart on p. 339)

1982-84 prices are the base year

Inflation of 1-3% is acceptable

PPI is similar to CPI, but tracks prices producers
charge their customers
(EG, how much a steel producer charges GM for sheet
metal)


Food and energy prices are volatile … can and
do spike up sharply now and again.
To accurately study long-term trends in the
inflation rate, economists exclude food and
energy from the
“core inflation rate”



The worst kind of inflation…inflation out of
control
Can be 100-500% monthly…money loses most
of its value
Only occurs rarely, but when it does, it can lead
to total economic collapse:
e.g. Post WWI Germany

2 main reasons why inflation occurs:

Prices rise as a result of excessive
business and consumer demand.
what causes excessive demand???
3 causes:



If money supply grows too fast,
consumers spend add’l money on a
limited supply of goods/svcs.
If taxes are reduced, consumers have
extra money to spend
If gov’t increases its spending

The bottom line:
Whatever the causes, excessive demand PULLS
prices higher
(“demand – pull” inflation)


Prices go up because producers’ costs
increase:
For example:
1. higher costs for raw materials
2. Wage demands of labor unions
In general, as costs to produce increase,
producers pass along costs to
consumers…result is higher prices
The Poverty Threshold

…is
an income level
below which
income is
insufficient to
support a family or
household.
The Poverty Rate

…is the % of people
in a particular
group who live in
households below
the official poverty
line.
The Census Bureau collects data about how
many families and households live in poverty.
Lack of Education

The median income of high-school dropouts in 1997 was $16,818,
which was just above the poverty line for a family of four.
Location

On average, people who live in the inner city earn less than people
living outside the inner city.
Shifts in Family Structure

Increased divorce rates result in more single-parent families and
more children living in poverty.
Economic Shifts

Workers without college-level skills have suffered from the
ongoing decline of manufacturing, and the rise of service and high
technology jobs.
Racial and Gender Discrimination

Some inequality exists in wages between whites and minorities,
and men and women.
Income Gap
 A 1999 study showed that the richest 2.7 million
Americans receive as much income after taxes as
the poorest 100 million Americans…

Differences in skills, effort, and inheritances are
key factors in understanding the income gap.
The Income Gap
Productivity is up…but who benefits?