Economics NINTH EDITION Chapter Unemployment and Inflation Prepared by Brock Williams Copyright © 2017, 2015, 2012 Pearson Education, Inc All Rights Reserved Learning Objectives 6.1 Define these concepts: the labor force, the labor force participation rate, and the unemployment rate 6.2 Distinguish between cyclical, structural, and frictional unemployment 6.3 Describe the costs of unemployment 6.4 Discuss how the Consumer Price Index is calculated 6.5 Explain the difference between inflation and the price level 6.6 Summarize the costs of anticipated and unanticipated inflation Copyright © 2017, 2015, 2012 Pearson Education, Inc All Rights Reserved 6.1 EXAMINING UNEMPLOYMENT (1 of 9) How Is Unemployment Defined and Measured? • The Unemployed: Individuals who not currently have a job but are actively looking for work Actively looking is critical Copyright © 2017, 2015, 2012 Pearson Education, Inc All Rights Reserved 6.1 EXAMINING UNEMPLOYMENT How Is Unemployment Defined and Measured? • Labor force The total number of workers, both the employed and the unemployed labor force = employed + unemployed • Unemployment rate The percentage of the labor force that is unemployed Copyright © 2017, 2015, 2012 Pearson Education, Inc All Rights Reserved (2 of 9) 6.1 EXAMINING UNEMPLOYMENT (3 of 9) How Is Unemployment Defined and Measured? • Labor force participation rate The percentage of the population over 16 years of age that is in the labor force Copyright © 2017, 2015, 2012 Pearson Education, Inc All Rights Reserved 6.1 EXAMINING UNEMPLOYMENT How Is Unemployment Defined and Measured? Approximately 63 percent of the civilian population is in the labor force The unemployment rate in January 2015 was 5.7 percent SOURCE: Bureau of Labor Statistics, U.S Department of Labor, 2015 Copyright © 2017, 2015, 2012 Pearson Education, Inc All Rights Reserved (4 of 9) 6.1 EXAMINING UNEMPLOYMENT How Is Unemployment Defined and Measured? Among the developed countries, unemployment rates vary substantially SOURCE: The Economist , February 14, 2015 Copyright © 2017, 2015, 2012 Pearson Education, Inc All Rights Reserved (5 of 9) 6.1 EXAMINING UNEMPLOYMENT (6 of 9) How Is Unemployment Defined and Measured? Labor Force Participation by women • In 1948, the labor force participation rate for women 20 years and older was 32 percent • By 1970, it had grown to 43 percent, and by 1997 it had reached 60 percent This trend reflected remarkable changes in our economy and society as women dramatically increased their presence in the workforce • Since 1997, the figure has remained virtually constant at 60 percent Copyright © 2017, 2015, 2012 Pearson Education, Inc All Rights Reserved 6.1 EXAMINING UNEMPLOYMENT Alternative Measures of Unemployment and Why They Are Important • Discouraged workers Workers who left the labor force because they could not find jobs Including discouraged workers, marginally attached workers, and individuals working part time for economic reasons substantially increases measured unemployment in 2015 from 8.98 million to 17.99 million SOURCE: Bureau of Labor Statistics, U.S Department of Labor, 2015 Copyright © 2017, 2015, 2012 Pearson Education, Inc All Rights Reserved (7 of 9) 6.1 EXAMINING UNEMPLOYMENT Who Are the Unemployed? The incidence of unemployment differs sharply among demographic groups • SOURCE: Bureau of Labor Statistics, U.S Department of Labor, 2015 Copyright © 2017, 2015, 2012 Pearson Education, Inc All Rights Reserved (8 of 9) APPLICATION LESS UNEMPLOYMENT INSURANCE, MORE EMPLOYMENT? APPLYING THE CONCEPTS #2: Did reductions in unemployment insurance lead to more rapid growth in employment in 2014? • Higher unemployment benefits reduce the incentive to search for new jobs and increase unemployment • Economists Marcus Hagedorn, Kurt Mitman, and Lourii Manovskii used a sudden policy change to address this issue • The federal government had provided subsidies to states to extend the number of weeks of unemployment, but after December 2013, almost all states reduced the benefits to 26 weeks • They compared employment growth in high and low benefit states before and after the change They found that the states that had reduced benefits the most grew faster Copyright © 2017, 2015, 2012 Pearson Education, Inc All Rights Reserved 6.3 THE COSTS OF UNEMPLOYMENT • Unemployment insurance Payments unemployed people receive from the government SOURCE: Bureau of Labor Statistics, U.S Department of Labor, 2015 Copyright © 2017, 2015, 2012 Pearson Education, Inc All Rights Reserved APPLICATION SOCIAL NORMS, UNEMPLOYMENT, AND PERCEIVED HAPPINESS APPLYING THE CONCEPTS #3: Are you less upset about being unemployed if unemployment is common in your peer group? Individuals not like to become unemployed A seven year British study showed that: • Well-being declines when we become unemployed • If employed, having peers lose their job also decreases happiness • Interestingly, losing one’s job causes less of a decrease in well-being if peers were also unemployed • In other words, misery loves company Why is this significant? • The more unhappy an unemployed person is, the more aggressive they are about finding another job • If your peer group is unemployed, you may be less aggressive about trying to find another job Copyright © 2017, 2015, 2012 Pearson Education, Inc All Rights Reserved 6.4 THE CONSUMER PRICE INDEX AND THE COST OF LIVING (1 of 3) REAL-NOMINAL PRINCIPLE What matters to people is the real value of money or income—its purchasing power—not the face value of money or income • Consumer Price Index A price index that measures the cost of a fixed basket of goods chosen to represent the consumption pattern of a typical consumer The CPI index for a given year, say year K, is defined as Copyright © 2017, 2015, 2012 Pearson Education, Inc All Rights Reserved 6.4 THE CONSUMER PRICE INDEX AND THE COST OF LIVING The CPI versus the Chain Index for GDP Rent and food and beverages make up 44 percent of the CPI basket The remainder consists of other goods and services SOURCE: Bureau of Labor Statistics, U.S Department of Labor, 2006 Copyright © 2017, 2015, 2012 Pearson Education, Inc All Rights Reserved (2 of 3) 6.4 THE CONSUMER PRICE INDEX AND THE COST OF LIVING Problems in Measuring Changes in Prices • Cost-of-living adjustments (COLAs) Automatic increases in wages or other payments that are tied to the CPI Copyright © 2017, 2015, 2012 Pearson Education, Inc All Rights Reserved (3 of 3) APPLICATION THE INTRODUCTION OF CELL PHONES AND THE BIAS IN THE CPI APPLYING THE CONCEPTS #4: How large is the bias in the CPI due to not immediately incorporating new goods? • Cell phones were introduced in 1983, but not included in the CPI until 1998 • According to Jerry Hausman of MIT, this resulted in an upward bias of the telecommunication component of the CPI of 0.8 to 1.9 percent • The reported increase in telecommunication prices during this period might have actually been a decrease of percent • Room air conditioners also took 15 years to be included • Since new products are constantly being introduced, the bias in the CPI can be large Copyright © 2017, 2015, 2012 Pearson Education, Inc All Rights Reserved 6.5 INFLATION (1 of 5) • Inflation rate The percentage rate of change in the price level Inflation rate = percentage rate of change of a price index Copyright © 2017, 2015, 2012 Pearson Education, Inc All Rights Reserved 6.5 INFLATION (2 of 5) Historical U.S Inflation Rates After remaining relatively flat for 60 years, the price level began to steadily increase after World War II The price of a postage stamp in 1940 and 2014 illustrates the change in the overall price level that occurred Copyright © 2017, 2015, 2012 Pearson Education, Inc All Rights Reserved 6.5 INFLATION (3 of 5) Historical U.S Inflation Rates Copyright © 2017, 2015, 2012 Pearson Education, Inc All Rights Reserved 6.5 INFLATION (4 of 5) Historical U.S Inflation Rates Inflation reached its highest peaks in the postwar era during the decade of the 1970s when the economy was hit with several increases in oil prices In recent years, the inflation rate has been relatively low SOURCE: U.S Department of Commerce, 2015 Copyright © 2017, 2015, 2012 Pearson Education, Inc All Rights Reserved 6.5 INFLATION (5 of 5) The Perils of Deflation • Deflation Negative inflation or falling prices of goods and services Copyright © 2017, 2015, 2012 Pearson Education, Inc All Rights Reserved 6.6 THE COSTS OF INFLATION Historical U.S Inflation Rates • Anticipated inflation Inflation that is expected • Unanticipated inflation Inflation that is not expected Copyright © 2017, 2015, 2012 Pearson Education, Inc All Rights Reserved (1 of 2) 6.6 THE COSTS OF INFLATION (2 of 2) Anticipated Inflation • Menu costs The costs associated with changing prices and printing new price lists when there is inflation • Shoe-leather costs Costs of inflation that arise from trying to reduce holdings of cash Unanticipated Inflation • Hyperinflation An inflation rate exceeding 50 percent per month Copyright © 2017, 2015, 2012 Pearson Education, Inc All Rights Reserved KEY TERMS Anticipated inflation Labor force Consumer Price Index (CPI) Labor force participation rate Cost-of-living adjustments (COLAs) Menu costs Cyclical unemployment Deflation Discouraged workers Natural rate of unemployment Seasonal unemployment Shoe-leather costs Frictional unemployment Structural unemployment Full employment Unanticipated inflation Hyperinflation Unemployment insurance Inflation rate Unemployment rate Copyright © 2017, 2015, 2012 Pearson Education, Inc All Rights Reserved ... Defined and Measured? Labor Force Participation by women • In 1948, the labor force participation rate for women 20 years and older was 32 percent • By 1970, it had grown to 43 percent, and by 1997... percent by end of 2011 What can account for this decline? • Two factors have been prominently discussed by economists The past decade experienced two recessions and low economic growth by historical... CONSUMER PRICE INDEX AND THE COST OF LIVING The CPI versus the Chain Index for GDP Rent and food and beverages make up 44 percent of the CPI basket The remainder consists of other goods and services