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LECTURE4- Ch 8 Unemployment and Inflation

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    Chapter 22

    Unemployment and Inflation

    2009 South-Western/ Cengage Learning

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    INTRODUCTION examines the macroeconomic problems of unemployment

    and inflation. The idea is to show what can go wrong with the economy,

    thereby providing the rationale for studyingmacroeconomics.

    Four types of unemployment are discussed:

    frictional, structural,

    seasonal,

    and cyclical.

    The composition and duration of unemployment, along

    with unemployment insurance, are also examined. Inflation, deflation, disinflation (a reduction in inflation),

    and changes in relative prices.

    The cost of unemployment and inflation,.

    2

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    Unemployment

    Measuring unemployment Categories: employed, unemployed, not

    in the labor force

    Labor Force = Employed + Unemployed

    Unemployment Rate =Unemployed/Labor Force

    Participation Rate = Labor Force/Adult

    Population

    Employment Ratio = Employed/AdultPopulation

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    Unemployment

    Unemployment

    Long stretch of unemployment affect thejobless and their families

    Personal cost

    lose self-esteem and part of identityAlfredMarshall wrote: your job is often the mainobject of your thoughts and intellectualdevelopment.

    loss in steady paychecks Unemployment linked to incidence of crime;

    and other afflictions e.g. heart disease,suicide and clinical depression .

    4

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    Unemployment

    Cost on the economy Fewer goods and services are produced

    Those who want to work cant find jobs, their

    labor are loss forever.

    President Harry Truman remarked, Its

    recession when you neighbor loses his

    job, its depression when you lose your

    own.

    5

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    Unemployment

    Measuring unemployment Civilian (exclude those in the military)

    non-institutional adult population whichconsist of all civilians 16 year old except those in prison or mental

    hospitals.

    Labor forceadult population who are either working orlooking for work.

    Employed + Unemployed ( Bureau of Laborstatistics

    people look for a job at least once during the

    preceding four weeks.)

    6

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    Unemployment

    Unemployment rate Percentage of unemployed in the labor force

    i.e (number of unemployed) / (number of

    labour force).

    Unemployment rate are normally

    reported monthly.

    7

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    Unemployment

    Adult population Employed

    Working full time or part time

    Not working Unemployed (looking for work)

    Not in labor force

    Retired; Students; Dont want to work Discouraged workers

    Unable to work due to long-term illness or

    disability.

    8

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    Exhibit 1

    The adult population sums: employed, unemployed,

    and those not in labor force, June 2007 (in millions)

    9

    LABOR FORCE

    (153.1)

    Employed

    (146.2)

    NOT WORKING(85.5)

    Not in labor force

    (78.6)

    Unemployed

    (6.9)

    Labor force= employed + unemployed

    Not working = not in the labor force + unemployed

    Adult population = employed + unemployed + not in the labor force

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    Unemployment

    Labor force participation rate orproportions of adults in the labor force: Adult population = those in the labor force + those not in the

    labor force = 231.7 million

    Number in labor force / Adult population(from Exhibit 1: labor force participation rate =153.1million / 231.7 million) or 66.1% .

    On the average about 2 out of 3 adults are in the labor

    force.

    10

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    Unemployment

    Unemployment over time Rise during contractions

    Fall during expansions

    most striking is the jump during the great depression in 1930swhen unemployment rate was 25%.

    Overall downward trend (1980s to 2000)

    Growing economy Fewer teenagers in workforcecut the

    overall unemployment rate.

    11

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    Exhibit 2

    The US unemployment rate since 1900

    12

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    Unemployment

    Unemployment rate among youngworkers are much higher than amongolder workers:

    They enter job market with little training

    Took up unskilled jobs and the first to befired

    Move in and out of the job market

    juggling school demand. Those who left school often shop around

    in search for a better job.

    13

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    Exhibit 3 (a)

    Unemployment rates for 20 years of age and older

    15

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    Exhibit 3 (b)

    Unemployment rates for 16 to 19 years of age

    16

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    High school dropouts, labor market dropouts

    High unemployment rates Poorly educated young black males

    2000, 65% of high-school dropouts

    Not working Unemployed

    Not looking for jobs

    In prison

    2004, 72% of high-school dropouts

    Not working

    17

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    High school dropouts, labor market dropouts

    Possible causes Failing schools

    Absent parents

    Racial discrimination Fewer blue collar jobs

    Growing competition

    Stricter child-support enforcement

    Rising incarceration rate (kadar masukpenjara)

    Subculture: downplay the value of work

    18

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    Unemployment

    Varies by occupation Blue-collar workers Higher unemploymentrelative to

    professional and technical workers.

    Varies across regions Certain occupations

    Dominate certain regionsPressure on

    blue-collar jobs in auto and steel(smokestack) industries in 2007 the state ofIllinois, Michigan and Ohio faces highunemployment.

    19

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    Exhibit 4

    Unemployment rates differ: US metropolitan areas

    20

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    Sources of Unemployment

    People become unemployed due tovarious reasons;

    Four sources of unemployment:

    Frictional Seasonal

    Structural

    cyclical

    21

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    Sources of Unemployment

    Frictional unemployment The time required to Bring together

    employers and job seekers

    Doesnt last long Better match workers and jobs, so that

    the economy works more efficiently

    Policy makers and economists are lessconcern about frictional unemployment

    22

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    Sources of Unemployment

    Seasonal unemployment Seasonal changes in labor demand

    during the year.

    Examples: Winter season; demand for farm hands, life-

    guards, landscapers and construction

    worker reduce.

    Christmas and festival seasons there may

    increase in demand for sales clerks, ect.

    23

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    Sources of Unemployment

    Structural unemployment Mismatch of skills or geographic location -

    Such unemployment occurs because changing in tastes, technology,taxes, and competition reduce the demand for certain skills anddecrease in demand for other skills.

    Problem - workers must either develop the skills demanded inthe local job market or look elsewhere.

    Married couples with one spouse still employed may not want to giveup one good job.

    Jobs may be in regions where cost of living is much higher.

    Structural may take a long time before lifting

    off Some retraining programs aim at reducing

    structural unemployment will have to be setup.

    24

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    Sources of Unemployment

    Cyclical unemployment economy isoperating inside its production possibilityfrontier.

    Increases during recessions

    Decreases during expansions

    Output declines during recessions andfirms reduce resources including labor.

    Government policies that stimulateaggregate demand aim to reducecyclical unemployment.

    25

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    Full Employment

    Full employment if there is

    No cyclical unemployment

    Some unemployment

    Frictional

    Structural

    Seasonal

    Full employment does not mean zero

    unemployment. Estimates ranging : 4 - 6%

    unemployment.

    26

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    Unemployment Compensation

    Unemployment often imposes and economic

    and psychological hardship.

    Unemployment benefits Half of the

    unemployed received because of restrictions

    Criteria

    Lost job

    Looking for work

    Time limit: 6 months

    40% of wages

    May reduce the incentive to find work27

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    International Comparisons

    Unemployment trends

    US: down

    Japan: up

    Low unemployment : Job security for life

    Bankruptcyin the 1990s unemploymentincrease.

    Western Europe: remained high

    Higher unemployment benefits Last longer

    Government regulationsworkers are noteasily laid-off.

    28

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    Exhibit 5

    Since 1980, the US unemployment rate fell, Europes

    remained high, and Japans rose

    29

    Europe

    U.S.

    Japan

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    Problems with Unemployment Figures

    Understate unemployment Discouraged workers

    Not counted

    Underemployed

    Only part-time (want full-time)

    Overqualified

    Overstate unemployment

    Looking for work

    Qualify for unemployment benefits

    Only full-time (want part-time)

    Underground economy 30

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    Inflation

    Inflation Sustained increase in price level

    Annual inflation rate

    Percentage increase in price level Hyperinflation

    Extremely high inflation

    Deflation Sustained decrease in price level

    Disinflation

    Decrease in inflation 31

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    Hyperinflation in Brazil

    Price level in 1994 3.6 million times higher than in 1988

    Peopledont want to hold cruzeiro

    Workers Paid daily; purchases

    Exchanges for a stable currency

    Real Cruzeiro: larger denominations Facilitate purchase

    Reduce productivity

    Dropped since 1994 32

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    Two Sources of Inflation

    Increase in AD Demand-pull inflation

    Increased government spending

    Social programs Decrease in AS

    Cost-push inflation

    Increase cost of production

    Push up the price level

    Stagflation33

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    Exhibit 6

    Inflation caused by shifts of AD and AS curves

    34

    Aggregate output0

    Price

    level

    P

    P

    AS

    AD

    AD

    (a) Demand-pull inflation: inflation

    caused by an increase ofaggregate demand

    An outward shift of the aggregate

    demand to AD pulls the price

    level up from P to P.

    Aggregate output0

    Price

    level

    P

    P

    AS

    AD

    (b) Cost-push inflation: inflation caused

    by a decrease of aggregate supply

    A decrease of aggregate supply to

    AS pushes the price level up

    from P to P.

    AS

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    A Historical Look: Inflation; Price Level

    Price level, US, since 1913 Steady increase

    Inflation or deflation, US, since 1913

    Before 1950s High inflationwar related

    Followed by deflation

    Since 1950s Inflation: 3.8% per year

    35

    E hibit 7 ( )

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    Exhibit 7 (a)

    Consumer price index since 1913

    36

    E hibit 7 (b)

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    Exhibit 7 (b)

    Inflation since 1913

    37

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    Anticipated vs. Unanticipated Inflation

    Anticipated inflation Expected inflation

    If inflation > expected

    Sellers lose Buyers gain

    If inflation < expected

    Sellers gain

    Buyers lose

    38

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    Inflation

    Unpopular Imposes transaction costs

    Obscures relative price changes

    Differ across metropolitan areas Housing prices

    39

    E hibit 8

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    Exhibit 8

    Average annual inflation between 2002 and 2006

    differed across US metropolitan areas

    40

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    International Comparisons of Inflation

    First half of 1980s Declining inflation

    Mid-1980s to early 1990s

    Rising inflation Mid-1990s

    Lower trend

    Similar trend

    Overall: lower inflation

    41

    E hibit 9

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    Exhibit 9

    Inflation rates in major economies have trended lower

    over the last quarter century

    42

    Europe

    U.S.

    Japan

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    Inflation and Interest Rates

    Interest Dollar amount

    Paid by borrowers to lenders

    Interest rateAs percentage

    Supply of loanable funds

    Upward sloping Demand of loanable funds

    Downward sloping43

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    Inflation and Interest Rates

    Nominal interest rate Current dollars

    Real interest rate

    =Nominal interest rateInflation rate Expected real interest rate

    44

    Exhibit 10

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    Exhibit 10

    The market for loanable funds

    45

    Loanable funds per period0

    Nominalin

    terestrate

    i

    D

    S The upward sloping supply

    curve, S, shows that more

    loanable funds are supplied at

    higher interest rates.

    The downward-sloping

    demand curve, D, shows thatthe quantity of loanable funds

    demanded is greater at lower

    interest rates.

    The two curves intersect to

    determine the market interest

    rate, i.

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    Why is Inflation Unpopular?

    Pay higher prices Inflation = Penalty

    Receive higher receipts

    Higher income well-deserved reward

    Fixed nominal income

    Unadjusted for inflation

    Social Security

    Adjusted for inflation (COLA)46


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