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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 1 of 25
Economic Goals
UnemploymentMeasuring UnemploymentComponents of the Unemployment RateThe Costs of Unemployment
InflationThe Costs of Inflation
Long-Run GrowthOutput and Productivity Growth
Looking Ahead
OUTLINE
Unemployment,Inflation, and
Long-Run Growth
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster
Economic Goals
1. Full Employment2. Stable Price3. Economic Growth4. Balanced Budget5. Balance of Payments
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster
Unemployment rate (%)
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster
LABOUR LAST DATE PREVIOUS HIGHEST LOWEST FORECAST UNIT
EMPLOYED PERSONS 38175.00 2013-09-30 37819.00 38545.00 18567.00 38201.64THOUSAND PERSONS
JOB VACANCIES 319720.00 2009-06-15 199942.00 319720.00 3036.00 307692.81 JOBS
UNEMPLOYMENT RATE 7.30 2013-06-30 7.50 13.90 6.30 7.40 PERCENT
UNEMPLOYED PERSONS 3002.00 2013-09-30 3086.00 4989.00 1720.00 2935.54THOUSAND PERSONS
WAGES 2613.30 2012-11-15 2509.00 2613.30 870.27 2351.02 INDEX POINTS
WAGES IN MANUFACTURING
1240.20 2012-11-15 1298.00 1391.40 638.86 1020.57 INDEX POINTS
POPULATION 95.80 2012-12-31 94.85 95.80 27.06 95.88 MILLION
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 5 of 25
Unemployment
employed Any person 16 years old or older (1) who works for pay, either for someone else or in his or her own business for 1 or more hours per week, (2) who works without pay for 15 or more hours per week in a family enterprise, or (3) who has a job but has been temporarily absent with or without pay.
Measuring Unemployment
unemployed A person 16 years old or older who is not working, is available for work, and has made specific efforts to find work during the previous 4 weeks.
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 6 of 25
Unemployment
not in the labor force A person who is not looking for work because he or she does not want a job or has given up looking.
Measuring Unemployment
labor force The number of people employed plus the number of unemployed.
labor force = employed + unemployed
population = labor force + not in labor force
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 7 of 25
Unemployment
unemployment rate The ratio of the number of people unemployed to the total number of people in the labor force.
Measuring Unemployment
unemployedunemployment rate =
employed + unemployed
labor force participation rate The ratio of the labor force to the total population 16 years old or older.
labor forcelabor force participation rate =
population
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 8 of 25
Unemployment
Components of the Unemployment Rate
Unemployment Rates in States and Regions
A Quiet Revolution: Women Join the Labor Force
If you are interested in learningmore about the economic history of American women, read the book Understanding the Gender Gap: An Economic History of American Women by Harvard University economist Claudia Goldin.
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 9 of 25
Unemployment
Components of the Unemployment Rate
Discouraged-Worker Effects
discouraged-worker effect The decline in the measured unemployment rate that results when people who want to work but cannot find jobs grow discouraged and stop looking, thus dropping out of the ranks of the unemployed and the labor force.
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 10 of 25
Unemployment
I. Components of the Unemployment Rate
The Duration of Unemployment
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 11 of 25
Unemployment
2. The Costs of Unemployment
Some Unemployment Is Inevitable
When we consider the various costs of unemployment, it is useful to categorize unemployment into three types:
Frictional unemployment
Structural unemployment
Cyclical unemployment
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 12 of 25
Unemployment
The Costs of Unemployment
Frictional, Structural, and Cyclical Unemployment
frictional unemployment The portion of unemployment that is due to the normal working of the labor market; used to denote short-run job/skill matching problems.
structural unemployment The portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries.
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 13 of 25
Unemployment
The Costs of Unemployment
Frictional, Structural, and Cyclical Unemployment
natural rate of unemployment The unemployment that occurs as a normal part of the functioning of the economy. Sometimes taken as the sum of frictional unemployment and structural unemployment.
cyclical unemployment The increase in unemployment that occurs during recessions and depressions.
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 14 of 25
Unemployment
The Costs of Unemployment
Social Consequences
In addition to economic hardship, prolonged unemployment may also bring with it social and personal ills: anxiety, depression, deterioration of physical and psychological health, drug abuse (including alcoholism), and suicide.
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster
ASSUMPTIONS IN ATTAINING ECONOMIC EQUILIBRIUM
AE = Y
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster
Sectoral Flow of Economy and its Criteria
• 2 Sector Flow – HH and BF
• 3 Sectoral Flow– HH, BF and Govt
• 4 Sectoral Flow– HH, BF, Govt, Foreign Market
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster
Criteria
1. INCOME = SPENDING (SIMPLE ECONOMY)2. S = I
– S> I = RECESSION– S<I = INFLATION– Savings is discourage during recession (Figure of Planned and Savings vs Income)– Effect: Increase S, same I, decrease Y, reduce AE, Increase Unemployment– Investment is discourage during inflation– Read “Paradox of Thrift”
3. C + S + T = C + I + G (leakages = Injections) with Govt InterventionY = AEY = Yd
Since Yd = Y – TY = C + SY = C + S + TAE = C + I + G
Therefore AE = YC + S + T = C + I + GS + T = I + G
G > T = Budget Deficit
G< T = Budget Surplus
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster
Policies of Government
1. Monetary Policy• Contractionary• Expansionary• Mechanisms
2. Fiscal Policy• Contractionary• Expansionary• Mechanisms
• Multiplier effects• Any Change in I and G would result to increase in Y while an increase in T will cause a decrease in Y.
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster
Interaction Between Money and Goods Market
• Goods Market (effects of Tax and Govt spending)• Investment (crowding- out effect)• Money market (effects of interest rate). An in crease in Y of
consumers and price level change the Money demand. Change in RR, rediscount rate and stocks and bonds activities affects Money supply.
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster
RELATIONSHIP OF CHANGES IN MONEY AND GOODS MARKET TO UNEMPLOYMENT
• Change in goods market affects money market, and change in money market affects investment. • Change in investment leads to crowding out effect that limits the effects of change in government spending.• Any changes of the Y would affect the IS – LM model/• IS (investment-saving) and LM model indicates the relationship beetwen interest rate and Y when goods market is at
equilibrium. LM shows the relationship between interest rate and Y when money market is at equilibrium.• IS and LM model affects Aggregate Demand and Aggregate Supply.• Any change in AD and AS affects Price (inflation)• Inflation of price change negatively affects unemployment rate (Phillips Curve)• This is what we call the natural rate of inflation
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 21 of 29
The Classical View of the Labor Market
Classical economists believe that the labor market always clears. If the demand for labor shifts from D0 to D1, the equilibrium wage will fall from W0 to W1. Anyone who wants a job at W1 will have one.
FIGURE 29.1 The Classical Labor Market
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 22 of 29
The Classical View of the Labor Market
The Classical Labor Market and the Aggregate Supply Curve
The classical idea that wages adjust to clear the labor market is consistent with the view that wages respond quickly to price changes. This means that the AS curve is vertical.
When the AS curve is vertical, monetary and fiscal policy cannot affect the level of output and employment in the economy.
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 23 of 29
The Classical View of the Labor Market
The Unemployment Rate and the Classical View
The unemployment rate is not necessarily an accurate indicator of whether the labor market is working properly.
The measured unemployment rate may sometimes seem high even though the labor market is working well.
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 24 of 29
Explaining the Existence of Unemployment
Sticky Wages
sticky wages The downward rigidity of wages as an explanation for the existence of unemployment.
If wages “stick” at W0 instead of falling to the new equilibrium wage of W* following a shift of demand from D0 to D1, the result will be unemployment equal to L0 - L1.
FIGURE 29.2 Sticky Wages
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 25 of 29
Explaining the Existence of Unemployment
Sticky Wages
social, or implicit, contracts Unspoken agreements between workers and firms that firms will not cut wages.
Social, or Implicit, Contracts
relative-wage explanation of unemployment An explanation for sticky wages (and therefore unemployment): If workers are concerned about their wages relative to other workers in other firms and industries, they may be unwilling to accept a wage cut unless they know that all other workers are receiving similar cuts.
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 26 of 29
Explaining the Existence of Unemployment
Sticky Wages
explicit contracts Employment contracts thatstipulate workers’ wages, usually for a period of 1 to 3 years.
Explicit Contracts
cost-of-living adjustments (COLAs) Contract provisions that tie wages to changes in the cost of living. The greater the inflation rate, the more wages are raised.
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 27 of 29
Explaining the Existence of Unemployment
Efficiency Wage Theory
efficiency wage theory An explanation forunemployment that holds that the productivity of workers increases with the wage rate. If this is so, firms may have an incentive to pay wages above the market-clearing rate.
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 28 of 29
Explaining the Existence of Unemployment
Imperfect Information
Firms may not have enough information at their disposal to know what the market-clearing wage is. In this case, firms are said to have imperfect information.
If firms have imperfect or incomplete information, they may set wages wrong—wages that do not clear the labor market.
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 29 of 29
Explaining the Existence of Unemployment
Minimum Wage Laws
minimum wage laws Laws that set a floor for wage rates—that is, a minimum hourly rate for any kind of labor.
An Open Question
The aggregate labor market is very complicated, and there are no simple answers to why there is unemployment.
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 30 of 29
The Short-Run Relationship Betweenthe Unemployment Rate and Inflation
The AS curve shows a positive relationship between the price level (P) and aggregate output (income) (Y).
FIGURE 29.3 The Aggregate Supply Curve
In the short run, the unemployment rate (U) and aggregate output (income) (Y) are negatively related.
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 31 of 29
The Short-Run Relationship Betweenthe Unemployment Rate and Inflation
inflation rate The percentage change in the price level.
Phillips Curve A curve showing the relationship between the inflation rate and the unemployment rate.
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 32 of 29
The Short-Run Relationship Betweenthe Unemployment Rate and Inflation
The Phillips Curve shows the relationship between the inflation rate and the unemployment rate.
FIGURE 29.5 The Phillips Curve
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster
• Keynesians who favored low unemployment targets argued for further government intervention in the form of wage and price controls• “Keynesian” models—short run models with various types of market imperfections• Long run models of a more “classical” character—rational expectations, policy neutrality• More emphasis on long run issues of government debt, growth, intergenerational issues