Download Economic Fluctuations, Unemployment, and Inflation

Unemployment,
and Inflation
Economic Fluctuations
and the Labor Market
1. Employed
– a person (16 years old or over) who is
• working for pay at least one hour per week,
• self employed, or,
• working 15 hours or more each week without
pay in a family-operated enterprise.
2. Unemployed
– a person not currently employed who is either
• actively seeking a job, or,
• waiting to begin or return to a job.
3. Civilian Labor force
– civilians (16 years and older) who are either
employed or unemployed.
4. Not in the labor force
– persons (16 years and older) who are neither
employed
nor unemployed (like retirees,
4 Labor Market
Classifications
students, homemakers, or disabled persons).
•The
Employment
Status of the
Civilian
Working-Age
Population,
September
2011
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Economic Fluctuations
and the Labor Market
• The non-institutional civilian adult population
is grouped into two broad categories:
• Persons not in the labor force, and,
• persons in the labor force.
Labor Force
Participation Rate
=
# in the Labor Force
Civilian population (16+)
Recall the Labor Force = Employed + Unemployed
154.0 million
100  64.1%
240.1 million
Economic Fluctuations
and the Labor Market
• To be classified as unemployed, one must
either be on layoff or actively seeking work.
Rate of
Unemployment
=
# Unemployed
# in the Labor Force
14.0 million
100  9.1%
154.0 million
Unemployment and
Measurement Problems
• The definition of unemployed involves some
subjectivity.
• Some argue the employment/population ratio
is a better indicator of job availability than the
unemployment rate.
Employment /
Population Ratio
=
# employed
Civilian population (16+)
140.0 million
100  58.3%
240.1 million
•The Official Unemployment Rate and a Broad Measure
of the Unemployment Rate, 1994–2011
•The red line shows the usual measure of the unemployment rate.
•The blue line shows what it would be if the BLS had counted as unemployed all people
who were available for work but not actively looking for jobs and all people who were
in part-time jobs but wanted full-time jobs.
•The difference between the measures was particularly large during the 2007–2009
recession and the weak recovery that followed.
•Shaded areas indicate months of recession.
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•Trends in the Labor Force: Participation Rates of
Adult Men and Women since 1948
•The labor force participation rate of adult men has declined gradually since 1948,
•but it has increased significantly for adult women, making the overall rate higher
today than it was then.
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Labor Force Participation Rate
of Men and Women: 1948-2003
• During the same period the rate of men has been falling.
•Labor Force Participation Rate of Men and
Women
•87 % •83%
•78 % •76 % •74 %
• 58 % •59 %
•33 %
•1948 •1960 •1975 •1990 •2006
•––––––– Men –––––––
•Source: www.bls.gov.
•38 %
•46 %
•1948 •1960 •1975 •1990 •2006
•–––––– Women ––––––
• The labor force participation rate of women has been
steadily increasing for several decades.
The Unemployment Rate
By Age and Gender: 2006
•Unemployment Rate, 2006
•16.9 %
•13.8 %
• 8.7 %
•7.6 %
•3.5 %
•16-19 •20-24 •25+
•–– Men aged ––
•Source: www.bls.gov.
•4.6 % •4.6 % •4.6 %
•3.7 %
•All •All
•All
men workers women
•16-19 •20-24 •25+
•–– Women aged ––
• Little difference in the rate of unemployment between men
and women.
• Rate for persons under age 25 is much higher than for both
•Unemployment Rates for Different Groups in the US
September 2011
•The unemployment rate of African Americans is the highest of the four ethnic groups
shown, while the unemployment rate of Asians is the lowest.
•High school dropouts have an unemployment rate that is triple the unemployment rate
for college graduates.
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Classify each of the following as (a) employed,
(b) unemployed, or (c) not in the labor force:
a. a person who is not working but applied for a job at WalMart last week
b. a person working part-time who is searching diligently
for a full-time job
c. an auto worker vacationing in Florida during a layoff at a
General Motors plant who expects to be recalled in a
couple of weeks
d. a 17-year-old who works six hours per week as a route
person for the local newspaper
e. homemaker working 70 hours a week preparing meals
and performing other household services
f. a college student who spends between 50 and 60 hours
per week attending classes and studying
g. a retired Social Security recipient
• How Long Are People Typically Unemployed?
•During the Great Depression of the 1930s, some people were
unemployed for years at a time.
•In April 2007—a period of economic expansion—82 percent of
the people who were unemployed had been unemployed for less
than six months.
•In September 2011, only 55 percent of the unemployed had been
jobless for less than six months.
•The average period of unemployment was only 17 weeks in April
2007 but was 41 weeks in September 2011.
•A sharp break from the normal U.S. experience.
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•How Unusual Was the Unemployment Situation Following the
2007–2009 Recession?
•The average period of unemployment was twice as high following the 2007–
2009 recession as following any other recession since the end of WWII.
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•How Unusual Was the Unemployment Situation Following the
2007–2009 Recession?
•The fall of the employment–population ratio may give an even better
indication of how weak the U.S. labor market was during and after the
2007–2009 recession.
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• Job Creation and Job Destruction over Time
•When the BLS announces each month the increases or decreases in the
number of persons employed and unemployed, these are net figures.
•The change in the number of persons employed is equal to the total
number of jobs created minus the number of jobs eliminated.
•Establishments Creating and Eliminating
Jobs, September-December 2010
Number of Establishments
Number of Jobs
1,447,000
5,609,000
382,000
1,345,000
Existing establishments
1,418,000
5,162,000
Closing establishments
352,000
1,229,000
Establishments Creating Jobs
Existing establishments
New establishments
Establishments Eliminating Jobs
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1. Frictional
between jobs
Short-term unemployment that arises from the process of matching
workers with jobs.
2.
Structural
job replaced
•Unemployment that arises from a persistent mismatch between the
skills and attributes of workers and the requirements of jobs.
3. Cyclical
less business
4. Seasonal
temporary job
•Unemployment caused by a business cycle recession.
•refers to unemployment due to factors such as weather, variations in
tourism, and other calendar-related events.
•Unemployment that arises from a persistent mismatch between the
skills and attributes of workers and the requirements of jobs.
•Unemployment caused by a business cycle recession.
• Full Employment
•When the only remaining unemployment is structural and frictional
unemployment, the economy is said to be at full employment.
•Natural rate of unemployment The normal rate of unemployment, consisting of
frictional unemployment plus structural unemployment.
•The natural rate of unemployment is also sometimes called the full-employment rate of
unemployment.
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Deals with which type?
1. Frictional?
2. Structural?
3. Cyclical?
•When the only remaining unemployment is structural and frictional
unemployment, the economy is said to be at full employment.
At full employment there
will still be some:
1. Frictional
2. Structural
but no Cyclical
actual unemployment
may only get as low as
4–5%
•The Annual Unemployment Rate in the US,
1950–2010
•The unemployment rate rises during recessions and falls during expansion.
•Shaded areas indicate recessions.
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• 1. A student who decides at midsemester to devote the rest of the term
to studying quits her part-time job
• 2. A graphic artist who is out of work
because a computer now does her job.
• 3. A waiter who quits his job and is
applying for the same type of work in a
restaurant where morale is better.
• 4. The son of a local farmer who works
20-hour weeks without pay on the farm
while waiting for a job at a nearby
factory.
• 5. A travel agent who is laid off
because the economy is in a slump and
vacation travel is at a minimum.
• 6. A plumber who works 5 hours per
week for his church (on a paid basis) until
he can get a full-time job
The Business Cycle
• Cycles are irregular
•Share of labor
force unemployed
•Actual rate of
unemployment
•10
•8
•6
•4
•Natural rate of
unemployment
•2
•1960
•1965
•1970
•1975
•1980
•1985
•1990
•2008
•1995
•2000
•2005
• Ups and downs characterize business activity.
• There has been an upward trend in real GDP in the
United States and other industrial nations.
Unemployment Across Economies
• Recently, the unemployment rate in the U.S. and Japan has been
lower than in major European economies.
• Higher unemployment benefits, less flexible bargaining, and
more regulated labor markets of Europe explain this.
Average Unemployment Rate
(1990-1999)
Spain
19.9 %
France
11.2 %
Italy
10.6 %
U.K.
8.2 %
Germany
7.5 %
U.S.
Japan
5.8 %
3.1 %
Source: Economic Outlook, OECD (Dec. 2000).
Unemployment Across Economies
Average Unemployment Rate
(1994-2003)
(1990-1999)
Spain
14.6 % 19.9 %
France
11.2 % 10.6 %
Italy
10.6 %
U.K.
8.2 %
Germany
8.6 %
7.5 % 6.5 %
U.S.
5.8 %
Japan
3.1 % 4.2 %
Source: Economic Outlook, OECD (Dec.
2000).
(June 2004).
5.1 %
10.5 %
Unemployment Across Economies
•Average Unemployment Rate
•(1997-2006)
•11.6 %
•Spain
•9.7 %
•Italy
•9.2 %
•France
•8.5 %
•Germany
•U.K.
•5.4 %
•U.S.
•4.9 %
•Japan
•4.6 %
•Source: Economic Outlook, OECD (June 2007).
• U.S. and Japan lower than major European economies.
• Higher unemployment benefits, less flexible collective
bargaining, and more regulated labor markets in Europe.
Actual and Potential GDP
• Potential output :
Maximum sustainable output level consistent with the
economy’s resources,
(on the production possibilities curve.)
• Actual and potential output will be equal when the
economy is at full employment.
• Here we illustrate both actual and potential GDP.
•Real GDP
(billions of 2000 $)
•12,000
•2001
recession
•10,000
•1990-91
recession
•8,000
•Potential
GDP
•Actual
GDP
•6,000
•4,000
•2,000
•1960
recession
•1970
recession
•1982
recession
•1980
recession
•1974-75
recession
•1960 •1965 •1970 •1975 •1980 •1985 •1990 •1995 •2000 •2005
• Note the gap (shaded area) between actual and potential
GDP during periods of recession.
Historically Speaking
• Inflation is an increase in the general level of prices.
• The Rate of Inflation is calculated as:
Inflation
rate =
This year’s
price index
-
Last year’s
price index
Last year’s
price index
* 100
The Inflation Rate, 1956-2006
•Inflation rate
•15
•10
•1973-1981 average
inflation rate = 9.2 %
•1956-1965 average
inflation rate = 1.6 %
•1983-2006 average
inflation rate = 3.1 %
•5
•0
•1956•1960 •1965 •1970 •1975 •1980 •1985 •1990 •1995 •2000 •2005
• Between 1956 and 1965, the general price level
increased at an average annual rate of only 1.3%.
• In contrast, the inflation rate averaged 9.2% from 1973
to 1981, reaching double-digits during several years.
• Since 1982, the average rate of inflation has been lower
(3.1% from 1983-2006) and more stable.
There are 2 Kinds of Inflation
1. Anticipated inflation:
A widely expected change in the price level.
2. Unanticipated inflation:
An increase in the price level that comes as
a surprise, at least for most individuals.
1. Hyperinflation
2. Money loses value
1. Savings
Lose value
2. Loans Are easier to repay
3. Wealth May increase
4. Politics May cause changes
• Nearly all economists believe
that rapid expansion in the
money supply is the primary
cause of inflation.
1. Demand-Pull
2. Cost-Push
1. Demand-Pull
Price
S1
New price
and output
P2
Orig. price
and output
P1
D2(increase in demand)
D1
Q1 Q2
Quantity
buyers demands greater than
producers supply
2. Cost Push
Price
S2(new equilibrium)
S1(initial equilibrium)
P2
P1
D
Q2
Q1
Quantity/time
sellers’ costs are passed
on to buyers
Questions for Thought:
1. Suppose that the CPI was 150 at the end of
last year and 157.5 at the end of this year.
What was the inflation rate during the year?
2. If decision makers anticipate an inflation rate
of 3% at the start of a year and prices during
the year rise by 7%, this is an example of
a. anticipated inflation.
b. an inflation rate higher than anticipated.
c. an inflation rate lower than anticipated.
3. True or false: when the inflation rate is high
and variable, decision makers will generally
be able to anticipate year-to-year changes in
inflation quite accurately.
• 4. How would an unanticipated 5 percent jump in
inflation impact the wealth of:
• a. Joe, who has a 30-year home mortgage at a fixed
interest rate
• b. The McCoy's, who hold most of their wealth in
long-term fixed yield bonds
• c. Hanna, a retiree drawing a pension of a fixed
dollar amount
• d. Jose, a heavily indebted small-business owner.
• e. Mike, the owner of an apartment complex with
substantial debt at a fixed interest rate
• f. Tina, a worker whose wages are determined by a
3-year union contract ratified three months ago
•1. During this century, the growth rate of real GDP in
the United States has averaged approximately
6%
•a. 1 % •b. 3 % •c.
•d. 10 %
•2. Economists use the term “business cycle” to refer to
•a.
•b.
•c.
•d.
the growth of small businesses into major corporations.
changes in products that occur from improved technology.
fluctuations in the level of real output and employment.
periods of increases and decreases in the rate of inflation.
•3. The labor force participation rate of women in the
United States has been
a.
b.
•c.
•d.
increasing for several decades.
decreasing for the past several decades after increasing
dramatically in the early 1900s.
approximately constant during the last three decades.
decreasing since the early 1900s.
•4.
Suppose there was a country with an adult (age 16 and over)
population of 1,000, of which 100 were unemployed and 700 were
employed. Which of the following is true?
•a.
The employment population ratio is 87.5 percent.
•b.
The labor force participation rate is 70 percent.
•c.
The unemployment rate is 12.5 percent.
•d.
There are 700 individuals in this country’s labor force.
•5.
The type of unemployment caused by changes in the business
cycle is
•b. natural
•c. frictional
•a. cyclical
•d. structural.
•6.
Frictional unemployment is the result of
•a.
not enough jobs for everyone to be employed.
•b.
unemployed workers’ skills not matching those needed for the
available jobs.
•c.
a decline in the demand for labor, such as during a recession.
•d.
imperfect information and temporary periods of
unemployment while workers are changing jobs.
•7.
Which of the following individuals would be considered
unemployed by the official government definition?
• George, who returned to graduate school after failing to find a
a.
job
• the last four months
b.
• Gwen, a medical student, who is still in college and is not working
c. Morgan, who is employed part-time but desires a full-time job
•
•d. Ralph, an auto worker vacationing in Florida during a layoff at
a General Motors plant.
•8.
Suppose that the consumer price index at year-end 2004 was
140 and by year-end 2005 had risen to 150. What was the inflation
rate during 2005?
•a.
7.1 %
•b.
10 %
•c.
14.2 % •d.
50 %
•9.
Which of the following is true?
•a. Anticipated inflation is an increase in the price level that comes
as a surprise, at least to most individuals
•b. Unanticipated inflation is a change in the price level that is
widely expected.
•c. Decision makers are generally able to anticipate slow steady
rates of inflation with a fairly high degree of accuracy.
•d. Inflation will increase the prices of goods and services that
households purchase but not the wage rates of workers