LECTURE4- Ch 8 Unemployment and Inflation

8/12/2019 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,.

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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 .

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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.

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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.)

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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.

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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.

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Exhibit 1

The adult population sums: employed, unemployed,

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

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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.

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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.

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Exhibit 2

The US unemployment rate since 1900

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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.

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Exhibit 3 (a)

Unemployment rates for 20 years of age and older

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Exhibit 3 (b)

Unemployment rates for 16 to 19 years of age

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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

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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

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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.

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Exhibit 4

Unemployment rates differ: US metropolitan areas

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Sources of Unemployment

People become unemployed due tovarious reasons;

Four sources of unemployment:

Frictional Seasonal

Structural

cyclical

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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

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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.

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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.

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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.

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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.

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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.

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Exhibit 5

Since 1980, the US unemployment rate fell, Europes

remained high, and Japans rose

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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

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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

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E hibit 7 ( )


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Exhibit 7 (a)

Consumer price index since 1913

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E hibit 7 (b)


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Exhibit 7 (b)

Inflation since 1913

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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

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Inflation

Unpopular Imposes transaction costs

Obscures relative price changes

Differ across metropolitan areas Housing prices

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E hibit 8


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Exhibit 8

Average annual inflation between 2002 and 2006

differed across US metropolitan areas

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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

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E hibit 9


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Exhibit 9

Inflation rates in major economies have trended lower

over the last quarter century

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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

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Exhibit 10


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Exhibit 10

The market for loanable funds

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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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LECTURE4- Ch 8 Unemployment and Inflation

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