Measuring the Unemployment Rate and the Labor Force Participation Rate

1. Measuring the Unemployment Rate and the Labor Force Participation Rate The Household Survey • Labor forceThe sum of employed and unemployed workers in the economy. • Employed can be in any job -- part-time, underemployed • Unemployment rate The percentage of the labor force that is unemployed: not working and looking. Discouraged workers: Available for work but haven’t looked for a job (for the past four weeks) because they believe no jobs are available for them.

2. The Employment Status of the Civilian Working-Age Population, April 2007

3. • Unemployment rate: the percentage of the labor force that is unemployed … not working and looking. • Labor force participation rate: the percentage of the working-age civilian population in the labor force.

4. 8-1 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.

5. Trends in Labor Force Participation FIGURE 8-2 Trends in the Labor Force Participation Rates of Adult Men and Women Since 1948

6. How Long Are People Usually Unemployed?

7. The Establishment Survey: Another Measure of Employment Household and Establishment Survey Data for March and April 2007

8. Learning Objective 8.1 Measuring the Unemployment Rate and the Labor Force Participation Rate Job Creation and Job Destruction Over Time Establishments Creating and Eliminating Jobs, April–June 2006

9. Unemployment Rates for Demographic Groups FIGURE 8-3 Unemployment Rates in the United States by Demographic Group, April 2007

10. Types of Unemployment Frictional Unemployment and Job Search Frictional unemployment Short-term unemployment that arises from the process of matching workers with jobs. Structural Unemployment • Structural unemployment Unemployment because of persistent mismatch between worker skills and characteristics and job requirements. • Declining industries and regions / Expanding industries and regions Cyclical Unemployment Cyclical unemployment Unemployment caused by a business cycle recession.

11. Full Employment and “Natural” Rate of Unemployment Natural rate of unemployment A normal rate of unemployment, consisting of frictional plus structural unemployment.

12. Explaining Unemployment Government Policies and the Unemployment Rate International Comparisons Average Unemployment Rates in the United States, Canada, Japan, and Europe, 1997–2006

13. Explaining Unemployment Unemployment Insurance and Other Payments to the Unemployed Minimum Wage Laws Seniority / Probation Periods Labor Unions / Work Rules Efficiency Wages: higher-than-market wage that a firm pays to increase worker productivity  wait unemployment. • Reduce hiring costs, turnover, monitoring costs, shirking • Increase morale

14. Measuring Inflation Price level (= P) A measure of the average prices of goods and services in the economy. Inflation rate (= π) The percentage increase in the price level from one year to the next. Π = 100 x (Pt - Pt-1 ) / Pt-1 • Price Indices of Note • GDP Deflator • Consumer Price Index • Core CPI: CPI excluding energy and food • Producer Price Index

15. Measuring Inflation The Consumer Price Index The CPI Market Basket, December 2006

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

17. CPI = The Consumer Price Index 2008 - 2009 Inflation Rate = Π = 100 x (P2009 - P2008 ) / P2008 Π =

18. Is the CPI Accurate? • Substitution bias. • Increase in quality bias. • New product bias. • Outlet bias. CPI inflation overstates the increase in the “Cost of Living”

19. Using Price Indexes to Adjust for the Effects of Inflation Value in constant 1983$ = Value in 2006$ x [CPI in 1983/CPI in 2006] = Value in $2006$ x [100/CPI in 2006] Calculating Real Average Hourly Earnings (Real Wage)

20. 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.

21. Real versus Nominal Interest Rates FIGURE 8-7 Nominal and Real InterestRates, 1970–2006

22. Does Inflation Impose Costs on the Economy? The Problem with Anticipated Inflation Menu costs The costs to firms of changing prices. Price Uncertainty  fear  Stagnation The Problem with Unanticipated Inflation • Inflation Affects the Distribution of Income • Arbitrary redistribution • Debtors gain / Creditors lose  disincentive to save • Pensioners lose

23. K e y T e r m s Natural rate of unemployment Nominal interest rate Price level Producer price index (PPI) Real interest rate Structural unemployment Unemployment rate Consumer price index (CPI) Cyclical unemployment Deflation Discouraged workers Efficiency wage Frictional unemployment Inflation rate Labor force Labor force participation rate Menu costs