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Chapter 13: Economic Challenges Unemployment ►4 Types of Unemployment Frictional Unemployment ►People are taking time to find another job Dissatisfied with current job Time off for education, or personal reasons Unemployment ►4 Types of Unemployment Seasonal Unemployment ►Industry regularly shuts down during a particular season Ex. – Farm laborers travel across the country to work seasonal crops Ex. - Tax preparation jobs Unemployment ►4 Types of Unemployment Structural Unemployment ►Structure of the economy changes, changing types of jobs available New technologies (farm jobs disappear, new factory jobs) Consumer demand changes Globalization – companies relocate jobs to other countries Unemployment ►4 Types of Unemployment Cyclical Unemployment ►Contraction and recession cause loss of jobs Consumers have less money, demand shifts left for most products Companies lay off workers to accommodate this decrease Unemployment ►The Unemployment Rate U.S. Bureau of the Census polls 50,000 families to calculate % of Americans who are looking for work, but cannot find a job # of ppl. unemployed / # of civilians polled Unemployment ►The Unemployment Rate An unemployment rate of 0% is impossible Full Employment is when there is no cyclical unemployment Economies are considered healthy with an unemployment rate of 4-6% Unemployment ► Problems with using Unemployment Rate as a Measure Does not factor in underemployment – people working in jobs that are beneath their qualifications ►Ex. – someone with a college degree working part time for $8.00 an hour Does not factor in discouraged workers – people who can’t find a job, and are so frustrated that they quit looking Inflation ►Inflation is a general increase in prices Movie Ticket in 1950 - $0.25 Movie Ticket in 2005 - $7.50 Inflation reduces Purchasing Power – the ability of your money to purchase goods and services Say you have $3.00, and tacos cost $1.00 each Your money is worth 3 tacos ►Inflation Inflation reduces Purchasing Power – the ability of your money to purchase goods and services If you hold your $3.00 for a few years, and prices inflate to $1.50 for tacos… Your money is worth 2 tacos! ►Inflation Inflation ►Measuring Inflation Level of Prices is calculated by using Price Indexes ►Consumer Price Index – Bureau of Labor Statistics chooses a “market basket” of commonly bought goods, and tracks changes in price Inflation ►CPI = Current Price X 100 Base Period Price Inflation ►Types of Inflation Creeping Inflation ►1-3% per year, causes no problems Chronic Inflation ►Steady increase each month, takes away incentive to save and invest Hyperinflation ►Out of control, prices could double every month ►Leads to total economic collapse Inflation ►Causes of Inflation Quantity Theory ►Having too much money in the economy causes inflation ►Money supply should be tightly regulated by the government Inflation ►Causes of Inflation Demand-Pull Theory ►Demand for goods exceeds existing supplies ►Businesses, thus, raise their prices Inflation ►Causes of Inflation Cost-Push Theory ►As costs go up for producers, they increase their prices ►Ex. – Employees get a raise, so to cover the additional cost, JC Penny raises its prices by 5% ►This trend is called a wage-price spiral Poverty ►Poverty can mean different things to different people ►Defined by the Census Bureau as “total income less than the amount needed to satisfy the family’s minimum needs” ►Census Bureau sets the poverty threshold – income level below which family is considered impoverished Poverty ►Sample Poverty Thresholds (U.S.) Single parent, one child = $13,020 Two parents, two children = $19,257 Poverty ►Poverty Rate - % of a group that falls below the poverty threshold U.S. poverty rate is 12.7% (2004) ►Poverty Rates help show factors that may contribute to poverty Poverty ►Poverty Rates of Various Population Groups (U.S.) White = 8.6% Black = 24.7% Hispanic = 21.9% 2 Parent Households = 5.5% Single Parent (Female) Household = 31.6% Poverty ►Causes of Poverty Lack of Education ►Median income for high school dropout = $18,144 ►Median income for high school grad or GED = $25,360 ►Median income for 4 year college grad = $42,404 Poverty ►Causes of Poverty Location ►Higher income jobs are located in suburban areas ►Large numbers of minorities concentrated in inner cities, with no means to commute Poverty ►Causes of Poverty Racial/Gender Discrimination ►Women earn $0.75 for every dollar men make ►Blacks and Hispanics make $0.60 for every dollar whites make ►Result of education, location disparities, but also discrimination Poverty ►Causes of Poverty Economic Shifts ►Laborers frequently lose their jobs as new technology replaces them ►Without education and training, they can become left out of the new workforce Poverty ►Causes of Poverty Shifts in Family Structure ►Divorce rate continues to rise, and single parent families are much more likely to be impoverished Income Distribution ►Income Distribution – how the nation’s total income is distributed among the population Shows gap between rich and poor Income Distribution ►Calculating Income Distribution Divide the nation into 5 parts based on income (ex. Highest 5th, next highest 5th, etc.) Total the incomes of each of the 5 parts Compute % of income each group has Income Distribution ►Graphing Income Distribution The Lorenz Curve shows how “unequal” the distribution is Income Distribution ►U.S. Income Distribution Lowest 5th – 3.6% Second 5th – 8.9% Third 5th – 15% Fourth 5th – 23.2% Highest 5th – 49.4% Why the Income Gap? ►Differences in Skill and Effort – Workers with higher skill levels work more hours at more demanding jobs ►Inheritances – many Americans inherit large sums of money and invest it, producing more income How to Fix Poverty ►No “for sure” solution, but many suggestions Enterprise Zones – government lifts all taxes in run-down areas, thus encouraging new businesses How to Fix Poverty ►No “for sure” solution, but many suggestions Employment Assistance – government creates job-training programs for workers who lack skills and institutes a minimum wage How to Fix Poverty ►No “for sure” solution, but many suggestions Welfare Reform ►Welfare – government gives poor people money to cover basic needs, such as food, health care, etc. How to Fix Poverty ►No “for sure” solution, but many suggestions Welfare Reform ►Reform is labeled “workfare” – a program to give temporary assistance until the recipient can find a job