Chapter 13: Economic Challenges Section 1

1. Chapter 13: Economic Challenges Section 1

2. Objectives • Differentiate between frictional, seasonal, structural, and cyclical unemployment. • Describe how full employment is measured. • Explain why full employment does not mean that every worker is employed.

3. Key Terms • frictional unemployment: type of unemployment that occurs when people take time to find a job • structural unemployment: type of unemployment that occurs when workers’ skills do not match those needed for the jobs available • globalization: the shift from local to global markets as countries seek foreign trade and investment

4. Key Terms, cont. • seasonal unemployment: type of unemployment that occurs as the result of harvest schedules, vacations, or when industries make seasonal shifts in their production schedules • cyclical unemployment: unemployment that rises during economic downturns and falls when the economy improves • unemployment rate: the percentage of the nation’s labor force that is unemployed

5. Key Terms, cont. • full employment: the level of employment reached when there is no cyclical unemployment • underemployed: working at a job for which one is overqualified or working part-time when full-time work is desired • discouraged worker: someone who wants a job but has given up looking

6. Introduction • What are the causes of unemployment? • Unemployment is caused by: • People being between jobs for one reason or another • A company or industry shuts down for a season • Workers skills not matching those needed for the jobs that are available • Economic downturns

7. Types of Unemployment • Unemployment always exists, even in a booming economy. • Economists look at four categories of unemployment: frictional, seasonal, structural, and cyclical. • Frictional unemployment occurs when people take time to find a job. • A person who is frictionally unemployed may be: • Changing jobs to find more satisfying works • Laid off and looking for a new job • Just out of school and interviewing for a job • Returning to the workforce after a voluntary absence

8. Structural Unemployment • When the structure of the economy changes, the skills that workers need to succeed also change. • Workers who lack necessary skills lose their jobs. • Structural unemployment occurs when workers’ skills do not match those needed for the jobs that are now available.

9. Structural Unemployment, cont. • There are five major causes of structural unemployment: • The development of new technology • The discovery of new resources • Changes in consumer demand • Globalization • Lack of education

10. Structural Unemployment, cont. • In the 1990s and 2000s, policymakers developed training programs to help workers gain new computer skills in light of the fact that computer technology, globalization, and other structural changes threatened the future of many workers. • Retraining takes time, however, and the new skills do not ensure that the trainees will obtain high-wage jobs.

11. Seasonal Unemployment • Seasonal unemployment occurs when industries slow or shut down for a season or make seasonal shifts in their production schedules. • Seasonal unemployment can also occur as a result of harvest schedules or vacations. • Economists expect to see seasonal unemployment throughout the year. • Government policymakers do not take steps to prevent this kind of unemployment because it is a normal part of a healthy economy.

12. Seasonal Unemployment, cont. • The lives of seasonally unemployed workers can be very difficult. • Migrant farm workers, for example, face seasonal unemployment once the harvest season is over. Harvest schedules are often unpredictable, making the transition from one crop to another hard to gauge.

13. Cyclical Unemployment • Unemployment that rises during economic downturns and falls when the economy improves is called cyclical unemployment. • During a recession, many workers lose their jobs. Many of these laid-off employees will be rehired when the recession ends and the business cycle resumes an upward trend. • Today, unemployment insurance provides weekly payments to workers who have lost their jobs. The payments usually provide about half of a worker’s lost wages each week for a limited amount of time.

14. Factors Outside the Economy • Sometimes, events outside the economy can cause unemployment. • Many jobs in travel and tourism were lost following the 9/11 attacks. • In 2005, the destruction by Hurricane Katrina caused thousands of people to lose their jobs.

15. Measuring Unemployment • Checkpoint: How is the unemployment rate calculated? • The government keeps track of how many people are unemployed and why. • The Bureau of Labor Statistics (BLS) computes the unemployment rate from a monthly household survey of 60,000 families who represent a cross-section of the United States.

17. Measuring Unemployment, cont. • The unemployment rate is adjusted for seasonal unemployment. • Taking this step allows economists to more accurately compare unemployment rate from month to month. This comparison helps them better detect changing economic conditions. • The unemployment rates is only an average for the nation. It does not reflect regional differences.

18. Full Employment • Economists generally agree that in an economy that is working properly, an unemployment rate of around 4 to 6 percent is normal. • Full employment is achieved when no cyclical unemployment exists. • Why does a high unemployment rate correspond with a recession?

19. Full Employment, cont. • Full employment means that nearly everyone who wants a job has a job. • However, some people remain underemployed, which means they are working at a job for which they are overqualified, or working part-time when they desire full-time work. • Other people simply give up hope of finding work. These discouraged workers have stopped searching for employment. • Although they are without work, discouraged workers do not appear in the unemployment rate determined by the BLD because they are not actively looking for work.

20. Review • Now that you have learned about the causes of unemployment, go back and answer the Chapter Essential Question. • How much can we reduce unemployment, inflation, and poverty?

21. Chapter 13: Economic Challenges Section 2

22. Objectives • Explain the effects of rising prices. • Understand the use of price indexes to compare changes in prices over time. • Identify the causes and effects of inflation. • Describe recent trends in the inflation rate.

23. Key Terms • inflation: a general increase in prices across an economy • purchasing power: the ability to purchase goods and services • price index: a measurement that shows how the average price of a standard group of goods changes over time • Consumer Price Index: a price index determined by measuring the price of a standard group of goods meant to represent the “market basket” of a typical urban consumer

24. Key Terms, cont. • market basket: a representative collection of goods and services • inflation rate: the percentage rate of change in price level over time • core inflation rate: the rate of inflation excluding the effects of food and energy prices • hyperinflation: inflation that is out of control

25. Key Terms, cont. • quantity theory: the theory that too much money in the economy causes inflation • wage-price spiral: the process by which rising wages cause higher prices, and higher prices cause higher wages • fixed income: income that does not increase even when prices go up • deflation: a sustained drop in the price level

26. Introduction • What are the causes and effects of inflation? • Inflation is caused by: • The growth of the money supply • Changes in aggregate demand • Changes in aggregate supply • The effects of inflation include: • Decrease in purchasing power • Erodes income • Decrease in interest rates

27. The Effects of Rising Prices • Inflation is a general increase in prices across an economy. • Over the years, prices generally go up. Inflation shrinks the value, or purchasing power of things. • The effects of inflation over the years can be seen in this comparison of prices for basic food items.

28. Price Indexes • To measure inflation, economists compare price levels. • To help them calculate price level, economists use a price index, which is a measurement that shows how the average price of a standard group of goods changes over time. • Price indexes help consumers and businesspeople make economic decisions. The government also uses indexes in making policy decisions.

29. Consumer Price Index • The best-known price index, the Consumer Price Index (CPI), focuses on consumers. • The CPI is determined by measuring the price of a standard group meant to represent the “market basket” of a typical urban consumer. • The market basket (right) is divided into eight categories of goods and services.

30. Consumer Price Index, cont. • About every 10 years, the items in the market basket are updated to account for shifting consumer buying habits. • Economists also find it useful to calculate the inflation rate—the percentage rate of change in price level over time. • To determine the CPI, the BLS establishes a based period to which it can compare prices. • Currently the base period is 1982-1984. • The BLS determines the CPI for a given year using the following formula: CPI = updated cost x 100 base period cost

31. Types of Inflation • Inflation rates in the United States have changed greatly over time. • When the inflation rate exceeds 5 percent, it makes economic planning difficult. • The worst kind of inflation is hyperinflation in which inflation rates can go as high as 100 or even 500 percent per month. In what years was inflation so high that it made economic planning difficult?

32. Causes of Inflation • Checkpoint: What are the three causes of inflation? • Growth of money supply—too much money in the economy causes inflation • Changes in aggregate demand—inflation can occur when demand for goods and services exceeds existing supplies • Changes in aggregate supply—inflation can occur when producers raise prices in order to meet increased costs. • Wage increases are the largest single production cost for most companies.

33. Wage-Price Spiral • Increasing wages can lead to a spiral of ever-higher price because one increase in costs leads to an increase in prices, which leads to another increase in costs, and on and on. • This process is known as the wage-price spiral.

34. Effects of Inflation • High inflation is a major economic problem, effecting purchasing power, income, and interest rates. • Inflation can erode purchasing power. It the inflation rate is 10 percent, $1.00 will buy the equivalent of only $.90 world of goods today.

35. Effects on Income • Inflation sometimes, by not always, erodes income. • If workers’ wages do not increase as much as inflation does, they are in a worse economic position than before. • People living on a fixed income, like retired people, are especially hard hit by inflation because their money does not increase, even when prices go up.

36. Effects on Interest Rates • People receive a given amount of interest on money in their savings accounts, but their true return depends on the rate of inflation. • If the inflation rate is higher than the bank’s interest rates, savers lose money.

37. Recent Trends • Americans under age 30 have experienced fairly low inflation rates for most of their lifetimes. • In the 2000s, the economy actually seemed to be experiencing a period of deflation, or a sustained drop in the price levels. • However, by mid-2008, inflation was becoming a worry. The CPI rose 1.1 percent in June. Higher production costs, fueled by a 6.6 percent increase in energy prices, helped push the annual inflation rate to more than 4 percent.

38. Review • Now that you have learned about the causes and effects of inflation, go back and answer the Chapter Essential Question. • How much can we reduce unemployment, inflation, and poverty?

39. Chapter 13: Economic Challenges Section 3

40. Objectives • Define who is poor, according to government standards. • Describe the causes of poverty. • Analyze the distribution of income in the United States. • Summarize government policies intended to combat poverty.

41. Key Terms • poverty threshold: the income level below which income is insufficient to support a family or household • poverty rate: the percentage of people who live in households with income below the official poverty threshold • income distribution: the way in which a nation’s total income is distributed among its population • food stamp program: government program that helps low-income recipients buy food

42. Key Terms, cont. • Lorenz curve: the curve that illustrates income distribution • enterprise zone: area where businesses can locate free of certain state, local, and federal taxes and restrictions • block grants: federal funds given to the states in lump sums • workfare: a program requiring work in exchange for temporary government assistance

43. Introduction • What factors affect the poverty rate? • Race and ethnic origin • Type of family • Age • Residence • Education • Growth of low-skill service jobs

44. The Poverty Threshold • According to the government, a poor family is one whose total income is less than the amount required to satisfy the family’s minimum needs. • The Census Bureau determines the poverty threshold required to meet those minimum needs. The poverty threshold often varies with the size of the family. • If a family’s total income is below the poverty threshold, everyone in the family is counted as poor.

45. The Poverty Rate • The poverty rate is the percentage of people who live in households with incomes below the official poverty threshold. • In 2006, 12% of the population equaled 36.5 million. • What happened to the poverty rate from 1994 to 2000?

46. The Poverty Rate, cont. • Poverty rates differ sharply by group, according to several indicators: • Race and ethnic origin—the poverty rate among minorities is higher than among whites • Type of family—single mother families have a greater poverty rate • Age—children are the largest age group living in poverty • Residence—inner cities have double the poverty rate of those who live outside the inner city

47. Poverty Rates by Group • Households headed by women, African Americans, Hispanics, and Native Americans are more likely than other groups to have incomes below the poverty threshold. • Which population group has the highest poverty rate?

48. Causes of Poverty • The failure to earn adequate income is often the result of unemployment. However, more than half of poor households have someone who works at least part-time, and one in five have a full-time, year-round worker. • For these “working poor,” the problem is usually low wages or a limited work schedule. • Shifts in the family structure, from a two-parent family to a single-parent family, tend to lead to an increase in the amount of families living in poverty.

49. Causes of Poverty, cont. • People who live in the inner city earn less than people living outside the inner city. • White workers generally earn higher salaries than minority workers, and men generally earn more than women. • Inequality results from differences in hours worked, education, work experience, and discrimination.

50. Causes of Poverty, cont. • The growth of globalization has led to a decrease in high-paying manufacturing jobs forcing many less-educated people to work in low-skill service jobs where wages are low. • Lack of education also leads to poverty. • Checkpoint: What are three causes of poverty?