Top Banner
Unemployment and Inflation Chapter 9 1
40

Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

Mar 19, 2020

Download

Documents

dariahiddleston
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Page 1: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

Unemployment and Inflation Chapter 9

1

Page 2: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

The Annual Unemployment Rate in the United States, 1950–2010

Types of Unemployment

Page 3: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

•Labor force The sum of employed and unemployed workers in the economy.

•Unemployment rate The percentage of the labor force that is unemployed.

Measuring the Unemployment Rate and the Labor Force Participation Rate The Household Survey

• Discouraged workers People who are available for work but have not looked for a job during the previous four weeks because they believe no jobs are available for them.

3

Page 4: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

The Employment Status of the Civilian Working-Age Population, September 2011

Measuring the Unemployment Rate and the Labor Force Participation Rate The Household Survey

4

Page 5: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

100Number of unemployed

Unemployment rateLabor force

• The unemployment rate measures the percentage of the labor force that is unemployed.

Measuring the Unemployment Rate and the Labor Force Participation Rate The Household Survey

• The labor force participation rate measures the percentage of the working-age population in the labor force.

100Labor force

Labor force participation rateWorking-age population

5

Page 6: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

6

Page 7: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

7

Page 8: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

Solved Problem What Happens if You Include the Military?

In the BLS household survey, people on active military service are not included in the totals for employment, the labor force, or the working-age population. Suppose people in the military were included in these categories.

100Number of unemployed

Labor force

100Labor force

Working-age population

8

Page 9: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

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 the labor force participation rate of adult women has increased significantly, making the overall labor force participation rate higher today than it was in 1948.

Trends in Labor Force Participation

Page 10: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

•What Explains the Increase in “Kramers”?

Making the

Connection

Why do more men seem to be adopting Kramer’s lifestyle?

Page 11: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

Duration of Unemployment

LENGTH OF TIME UNEMPLOYED PERCENTAGE OF TOTAL UNEMPLOYED

Less than 5 weeks 35.6%

5 to 14 weeks 31.3

15 to 26 weeks 15.7

27 weeks or more 17.5

(a) Duration of unemployment during an economic expansion.

Less than 5 weeks 22.0%

5 to 14 weeks 24.2

15 to 26 weeks 19.9

27 weeks or more 33.8

(b) Duration of unemployment during an economic recession.

How Long Are People Usually Unemployed?

Page 12: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

13

Page 13: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

14

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 World War II.

Page 14: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

Household and Establishment Survey Data for March and April 2007

HOUSEHOLD SURVEY ESTABLISHMENT SURVEY

MARCH APRIL CHANGE MARCH APRIL CHANGE

EMPLOYED 146,254,000 145,786,000 −468,000 137,596,000 137,684,000 +88,000

UNEMPLOYED 6,724,000 6,801,000 +77,000

LABOR FORCE 152,979,000 152,587,000 −392,000

UNEMPLOYMENT RATE 4.4% 4.5% +0.1%

Measuring the Unemployment Rate and the Labor Force Participation Rate

The Establishment Survey: Another Measure of Employment

15

Page 15: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

Household and Establishment Survey Data for June and July 2009

HOUSEHOLD SURVEY ESTABLISHMENT SURVEY

JUNE JULY CHANGE JUNE JULY CHANGE

Employed 140,196,000 140,041,000 −155,000 131,735,000 131,488,000 −247,000

Unemployed 14,729,000 14,462,000 −267,000

Labor force 154,926,000 154,504,000 −422,000

Unemployment rate 9.5% 9.4% −0.1%

The Establishment Survey: Another Measure of Employment

Page 16: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

Frictional Unemployment and Job Search

Frictional unemployment: Short-term unemployment that arises from the process of matching workers with jobs.

Types of Unemployment

Structural unemployment: Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of jobs.

Cyclical unemployment: Unemployment caused by a business cycle recession.

Cyclical Unemployment

Structural Unemployment

17

Page 17: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

Natural rate of unemployment: The normal rate of unemployment, consisting of frictional unemployment plus structural unemployment.

Full Employment

Types of Unemployment

18

Page 18: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

Average Unemployment Rates in the United States, Canada, Japan, and Europe, 1999–2008

International Comparisons

Government Policies and the Unemployment Rate

The unemployment rate in the United States is usually lower than the unemployment rates in most other high-income countries, other than Japan. This is partly because the United States has tougher requirements for the unemployed to receive government payments. These requirements raise the costs of searching for a better job and lower the unemployment rate.

Page 19: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

Unemployment rates, February 2011–June 2013

20

Page 20: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

Unemployment rates, February 2011–June 2013

21

Page 21: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

Minimum Wage Laws

Government Policies and the Unemployment Rate

Explaining Unemployment

In 1938, the federal government enacted a national minimum wage law.

If the minimum wage is set above the market wage determined by the demand and supply of labor, the quantity of labor supplied will be greater than the quantity of labor demanded.

Economists agree that the current minimum wage is above the market wage for some workers, but they disagree on the amount of unemployment that has resulted.

22

Page 22: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

23

Page 23: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

•Why Does Costco Pay Its Workers So Much More Than Wal-Mart Does?

Costco’s relatively high wages and health benefits reduce employee turnover and raise morale and productivity.

Efficiency Wages

Efficiency wage A higher-than-market wage that a firm pays to increase worker productivity.

Page 24: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

Inflation a tax that no one can avoid

25

Page 25: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

Measuring Inflation

Price level: A measure of the average prices of goods and services in the economy. Measured by the Consumer Price Index CPI.

Inflation rate : The percentage increase in the price level from one year to the next. Measured by the change in CPI

Expenditures in the current yearCPI= 100

Expenditures in the base year

2 1

1

CPI CPIInflation rate=Change in CPI= 100

CPI

26

Page 26: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

Measuring Inflation- The Consumer Price Index

The CPI Market Basket, December 2010

Page 27: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

28

Page 28: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

Measuring Inflation

Consumer price index (CPI): An average of the prices of the goods and services purchased by the typical urban family of four.

The Consumer Price Index

BASE YEAR (1999) 2008 2009

PRODUCT QUANTITY PRICE EXPENDITURES PRICE

EXPENDITURES

(ON BASE-YEAR

QUANTITIES) PRICE

EXPENDITURES

(ON BASE-YEAR

QUANTITIES)

Eye

examinations 1 $50.00 $50.00 $100.00 $100.00 $85.00 $85.00

Pizzas 20 10.00 200.00 15.00 300.00 14.00 280.00

Books 20 25.00 500.00 25.00 500.00 27.50 550.00

Total $750.00 $900.00 $915.00

Price level (CPI) CPI2008= CPI2009=

Inflation (change in CPI) (CPI2009CPI2008)/CPI2009x100%=

Page 29: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

Measuring Inflation

The Consumer Price Index

FORMULA APPLIED TO 2008 APPLIED TO 2009

120100750$

900$

122100

750$

915$

CPI =

Expenditures in the current year100

Expenditures in the base year

122 120100 1.7%

120

Don’t Let This Happen to YOU! Don’t Miscalculate the Inflation Rate

30

Page 30: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

A Simple Year-Year Market Basket Comparison

Basket of Goods Prices

2003 2004

10 Pairs of Jeans $20/pair $25/pair

12 Flannel Shirts $15/shirt $20/shirt

100 lb of apples $0.80/lb $1.05/lb

80 lbs of oranges $1.00/lb $1.00/lb

Total Expenditures

a. Calculate the CPI in 2003.

b. Calculate the CPI in 2004.

31

Page 31: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

Measuring Inflation

Is the CPI Accurate?

• Substitution bias.

• Increase in quality bias.

• Outlet bias.

• New product bias.

It is important that the CPI be as accurate as possible, but there are four biases that make changes in the CPI overstate the true inflation rate:

32

Page 32: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

Other ways to measure inflation

The Producer Price Index

Producer price index (PPI): An average of the prices received by producers of goods and services at all stages of the production process.

GDP deflator

Based on all prices in the economy

33

Page 33: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

Using Price Indexes to Adjust for the Effects of Inflation

1980in CPI

2006in CPIdollars 1980in Valuedollars 2006in Value

34

Page 34: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

Solved Problem Calculating Real Average Hourly Earnings

YEAR

NOMINAL AVERAGE

HOURLY EARNINGS

CPI

(1982-1984 = 100)

2004 $15.69 188.9

2005 16.13 195.3

2006 16.76 201.6

YEAR

NOMINAL

AVERAGE HOURLY

EARNINGS

CPI

(1982-1984 = 100)

REAL AVERAGE

HOURLY EARNINGS

(1982-1984 DOLLARS)

2004 $15.69 / 188.9 x100%= $8.31

2005 16.13 / 195.3 x100%= 8.26

2006 16.76 / 201.6 x100%= 8.31

35

Page 35: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

36

Page 36: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

Real versus Nominal Interest Rates

Nominal interest rate : The stated interest rate on a loan.

Real interest rate: The nominal interest rate minus the inflation rate.

Real interest rate = Nominal interest rate − Inflation rate

Deflation: A decline in the price level.

37

Page 37: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

Real versus Nominal Interest Rates

Nominal and Real Interest Rates, 1970–2008

The real interest rate is equal to the nominal interest rate minus the inflation rate. The real interest rate provides a better measure of the true cost of borrowing and the true return on lending than does the nominal interest rate. The nominal interest rate in the figure is the interest rate on three-month U.S. Treasury bills. The inflation rate is measured by the percentage change in the CPI from the same quarter during the previous year.

What should you do when economy is experiencing deflation?

Page 38: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

Does Inflation Impose Costs on the Economy?

Inflation Affects the Distribution of Income

The Problem with Anticipated Inflation

Menu costs The costs to firms of changing prices.

The Problem with Unanticipated Inflation

The extent to which inflation redistributes income depends in part on whether the inflation is anticipated.

Leads to stronger effects on distribution

Like many of life’s other problems, inflation is easier to manage if you see it coming.

39

Page 39: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

CPI core CPI

Core CPI does not include expenditure on food and energy

40

Page 40: Unemployment and Inflation - Shana M. McDermott, PhDshanamcdermott.weebly.com/uploads/4/1/6/9/4169556/... · Frictional Unemployment and Job Search Frictional unemployment: Short-term

Source: “Inflation ‘s last hurrah”, The Economist print edition, Aug 21st 2008. http://www.economist.com/world/unitedstates/displaystory.cfm?story_id=11967019

41