Download Unemployment and Inflation

Explorations in Economics
Alan B. Krueger & David A. Anderson
Chapter 14: Unemployment and Inflation
- Module 41: Unemployment
- Module 42: Inflation
- Module 43: Unemployment, Inflation, and the
Business Cycle
MODULE 41:
UNEMPLOYMENT
KEY IDEA:
High unemployment is costly to the economy.
OBJECTIVES
• To explain how unemployment is measured.
• To explore the types of unemployment and what causes
each type.
• To identify the economic costs of unemployment.
EMPLOYMENT AND
UNEMPLOYMENT
Total employment in an economy is
the total number of employed workers,
whether they work part time or full
time.
The labor force is the combination of
the employed workers and the
unemployed workers, excluding those
in the military or in prison.
Total unemployment in an economy is
the number of workers who are
actively seeking jobs but not actually
working.
EMPLOYMENT AND
UNEMPLOYMENT
The unemployment rate is the percentage of the labor
force without a paid job.
Issues in Measuring Unemployment
• Discouraged workers would like to work but have given up
on their job search.
• Underemployed workers would like to work more hours or
prefer a job that better matches their skills.
• Some unemployed hide their status since they are trying to
avoid paying income tax.
TYPES OF UNEMPLOYMENT
AND THEIR CAUSES
Frictional unemployment is short-term unemployment that
occurs while workers search for the jobs best suited for their
skills and interests.
The frictionally unemployed include people who have left one job in search for
another, perhaps to earn a higher wage or to find a better place to live.
Also included are new labor-force entrants, such as students graduating from high
school or college, and reentrants, such as a parent who left the labor force to raise a
child.
Frictional Unemployment is sometimes referred to as the normal process of turnover
in the labor market as new workers enter the market and search for jobs. Existing
workers quit one job to look for another.
Types of Unemployment and their
Causes
Seasonal unemployment occurs when workers lose
their jobs due to a change of seasons.
During the winter season, job loss is common in the construction industry
landscaping, crop agriculture, and beach resorts. Once the winter is over,
many workers are rehired to fill these jobs again.
Not considered a serious problem.
Seasonal Adjustment
The Bureau of Labor Statistics remove the typical and
predictable changes in unemployment from each
month’s unemployment numbers.
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Chapter 14-Modules 41-43
TYPES OF UNEMPLOYMENT
AND THEIR CAUSES
Structural unemployment arises from a mismatch between
job seekers and the types of jobs available.
One cause is a mismatch of skills.
Structural unemployment is a result of the imperfect labor
market adjustment. Overtime, changes in demand and in
technology skills will displace workers, while some workers be
unwilling or unable to move freely around to keep or find a
job. (geographical mismatch)
Types of Unemployment and Their
Causes
Cyclical unemployment is joblessness caused by an
economic contraction. Usually during Contraction
phase of the business cycle (GDP declines and
unemployment increase)
A well-functioning economy will always have some unemployment. Some
will be frictionally (searching for jobs), seasonally (unemployed due to off
season) or structural (for those whose skills are no longer in demand.)
The natural rate of unemployment is the unemployment rate in
the absence of cyclical unemployment, around which the actual
unemployment rate fluctuates.
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Chapter 14-Modules 41-43
TYPES OF UNEMPLOYMENT
AND THEIR CAUSES
Full employment is the level of employment when there is no cyclical
unemployment. Due to the existence of other types of unemployment, the
achievement of full employment does not mean that every worker is
employed. The unemployment in the economy is at its natural rate. In the
US it is about 5 to 6 percent unemployment.
THE COSTS OF
UNEMPLOYMENT
Unemployment will affect families in financial and
personal ways.
•
•
Some purchases are delayed, savings are depleted or
homelessness may happen.
Family issues arise that include difficulty in school, family
separation, abuse or crime.
Unemployment is costly to the national economy
•
•
•
Total output will be reduced.
Government must pay more for unemployment insurance,
and nutrition assistance.
Lower income tax revenues collected.
How The Costs Of
Unemployment Are Distributed
Not an equal
distribution among
groups or locations
within the nation
•
•
•
•
Work Experience
Lack of Opportunity
Discrimination
Location by state
MODULE 41 REVIEW
What is…
A. Total employment
B. Total unemployment
C. Labor force
D. Unemployment rate
E. Frictional unemployment
F. Seasonal unemployment
G. Structural unemployment
H. Cyclical unemployment
I. Natural rate of
unemployment
J. Full employment
K. Discouraged workers
L. Underemployed
M. Jobless recovery
MODULE 42:
INFLATION
KEY IDEA:
Inflation reduces the purchasing power of money.
OBJECTIVES:
• To explain how inflation is measured.
• To explain what causes inflation and why high inflation is a
problem.
• To identify the dangers of deflation.
DEFINING INFLATION
Inflation is a rise in the price level.
The inflation rate is the annual percentage
increase in the price level.
Deflation is a decline in the price level.
MEASURING INFLATION
The Consumer Price Index (CPI) is a
measure of the overall price level faced
by a typical urban consumer.
MEASURING INFLATION
To construct the CPI, the government first determines a
market basket.
A market basket is a bundle of goods and services that an
average consumer might buy.
Calculating the CPI:
A further look at CPI
• A rise in the CPI is an indicator of inflation
• When prices are falling, the cost of the market basket
decreases, so the CPI falls.
• A fall in the CPI is an indicator of deflation.
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MEASURING INFLATION
Other Price Indexes
The government uses many indexed measures to track changes in price levels.
These measures are important as they are used to make cost of living adjustments
in Social Security payments and many union contracts.
Producer Price Index (PPI)
• Market basket of producer goods like raw materials and
intermediate goods
• Used as predictor for changes in CPI
• Changes in the PPI normally shows up before consumers feel
changes in retail price.
GDP Deflator or GDP Price Index
• Market basket of final goods
• Used to calculate the difference between nominal and real
GDP
• Tracks every good and service contained in GDP: Government
purchases as well as investment purchases by firms.
THE COSTS OF INFLATION
The Inflation Myth
Price Stability exists when inflation is low—2 or 3% per year.
Inflation reduces the
number of goods and
services we can buy
with each dollar that
we earn, and that
makes us poorer.
The overall effect of
inflation on your
purchasing power
depends on how the
increase in your
earnings compares
with the increase in the
price level.
THE COSTS OF INFLATION
The True Costs of High Inflation
Shoe leather costs are the costs of time and effort involved in frequent trips
to the bank or ATM to avoid holding too much cash during periods of high
inflation. In the past, standing in line at the bank trying to withdraw your
money was called a “run on the bank”. Today, does the large of number of
ATM’s changed the “bank run” idea?
Shoe leather Costs
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THE COSTS OF INFLATION
The True Costs of High Inflation
Hyperinflation is very rapid inflation.
Hyperinflation
usually leaves a
country’s
currency
worthless.
THE COSTS OF INFLATION
The True Costs of High Inflation
Menu Costs are the costs of updating prices due to inflation. In Germany
1920s restaurants sometimes changed the prices on their menus several
times each day. Menu costs were coined to reflect the costly inputs such as
labor, paper, and printing services used by restaurants whose menus had to
be constantly updated.
Price changes not just in
restaurants but in
grocery stores,
billboards and sales
contracts—across the
economy changes.
Using resources that
could otherwise be put
to better use.
THE COSTS OF INFLATION
The True Costs of High Inflation
The Costs of Unexpected Inflation
In general, people who borrow money benefit when inflation turns out to be
higher than expected. But people who lend money lose from higher- than
expected inflation.
Unexpected inflation
makes borrowing and
lending more risky.
Lenders may be hesitant
to lend and borrowers
may not wish to borrow.
The Costs of Inflation
• The result of unexpected inflation is that it takes
away the stability in the economy.
• When saving, borrowing and lending shuts down,
spending declines and GDP falls.
• Unemployment increases and a contraction of the
economy can easily become a severe recession.
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DEFLATION AND
ITS EFFECTS
Deflation is a decrease in the price level.
Causes consumers to reduce spending
•
•
Postpone major purchases because they expect prices to
further decrease and hold off large purchases. Leading to
more deflation.
Decrease in Aggregate Demand, contraction in economic
activity
Dollar incomes also fall
•
•
•
More difficult to pay debts that do not change
Banks’ losses mount as more bankruptcies occur
Economic activity becomes risky and spending decreases
Deflation in History
• The United States suffered a serious bout of deflation
during the recession of the early 1920s, but the worst
deflation occurred during the early years of the Great
Depression, when average prices dropped 9 percent
in 1931, 9.9 percent in 1932, and 5.1 percent in 1933.
• Deflation during this period led to waves of
bankruptcies throughout the economy, a reduction of
lending and borrowing, and a decrease in spending.
In short, deflation worsened the depression and
made it last longer.
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Chapter 14-Modules 41-43
Deflation
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Chapter 14-Modules 41-43
Economic Cartoon
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Chapter 14-Modules 41-43
MODULE 42 REVIEW
What is…
A. Inflation?
B. Inflation rate?
C. Deflation?
D. Consumer price index?
E. Market basket?
F. Base period?
G. Producer price index?
H. Hyperinflation?
I. Shoe leather costs?
J. Menu costs?
MODULE 43:
UNEMPLOYMENT, INFLATION AND THE
BUSINESS CYCLE
KEY IDEA:
Changes in unemployment and inflation are caused by changes
in aggregate demand and aggregate supply.
OBJECTIVES:
• To explain how changes in aggregate demand and aggregate
supply affect both unemployment and inflation.
• To discuss the short- run tradeoff between unemployment and
inflation.
• To describe stagflation.
ONGOING INFLATION
AND UNEMPLOYMENT
The “norm” in the economy may be some level of
unemployment and some degree of inflation.
Some levels of frictional and
structural unemployment are part
of a dynamic labor market.
As wages increase and prices
increase to cover higher costs, the
expected inflation becomes a
reality.
HOW AGGREGATE DEMAND AFFECTS
UNEMPLOYMENT AND INFLATION
The economy’s potential output is the level of real GDP
that is produced when there is full employment.
HOW AGGREGATE DEMAND AFFECTS
UNEMPLOYMENT AND INFLATION
The economy’s potential output is the level of real
GDP that is produced when there is full employment.
AGGREGATE SUPPLY AND
STAGFLATION
Stagflation is a combination of sluggish economic growth, high
inflation, and high unemployment.
A negative supply shock causes aggregate supply to decrease.
•
•
costs rise and output falls
unemployment increases but price levels increase
A positive supply shock causes aggregate supply to increase.
•
•
costs fall and output increases
unemployment decreases and price levels decrease
MODULE 43 REVIEW
What is…
A. Potential output
B. Stagflation
C. Negative supply shock
D. Positive supply shock