Unemployment and Inflation

1. Unemployment and Inflation EVERYONE’S NIGHTMARE Chapter 6

2. Unemployment and Inflation • The two key concepts of Macroeconomics • Either can destabilize the economy. • When BOTH happen together – REALLY, REALLY BAD. • STAGFLATION

3. Unemployment • People who are looking for work but have no jobs. • ACTIVELY LOOKING is critical to the definition.

4. Definitions for Unemployment • Labor Force = Employed + unemployed • Unemployment Rate = number of unemployed / total labor force • Labor Force Participation Rate = labor force / population 16 and over

5. Definitions of Unemployment • Discouraged Workers • People who left the labor force because they could not find jobs. • Underemployed • Workers holding part-time work, but prefer full-time work OR hold jobs that are far below their capabilities.

6. The reasons for unemployment • Frictional Unemployment • Structural Unemployment • Seasonal Unemployment • Cyclical Unemployment

7. Cyclical Unemployment • When GDP fluctuates demand in the economy is not sufficient to provide jobs for all those who seek work. • Recession • Depression

8. Frictional Unemployment • People in between jobs. • Short period of time while changing jobs. • 3% - 4% frictional employment is considered normal.

9. Structural Unemployment • When changes in market supply or demand conditions affect major industries or regions. • The part of unemployment that results from the mismatch of skills and jobs.

10. Causes of Structural Unemployment • Decline in demand for a product • Increased foreign competition • Automation of production • Increased raw material costs • Lack of labor mobility between occupations or regions.

11. Seasonal Unemployment Not included in your book – but in most other Econ texts • Most seasonal unemployment is tends to occur in certain industries. • Hotel and catering • Tourism • Fruit picking • Christmas

12. Suspicious Unemployment Statistics • Natural Rate of Unemployment • Level of unemployment at which there is no cyclical unemployment. • Full Employment • Level of employment that occurs when the unemployment rate is at the “natural rate.”

13. QOD: • Why do we need unemployment to make the economy healthy?

14. The Natural Rate of Unemployment • Depending on whom you talk to … • 4% to 5% is considered the natural rate. • Consists of only structural and frictional unemployment.

15. Historic Unemployment Rates • 1933 during the Great Depression – 25% • 1998 – Unemployment fell to 3.9%

16. 3.9% Unemployment • Why wouldn’t this be good for the economy???

17. Wage Inflation • How do employers attract or keep employees if there is not enough workers? • Higher Wages • More Benefits • 1999, Amigos was paying $9 per hour and McDonalds offered $500 signing bonuses.

18. Why would that be bad? • Costs go up (labor), so prices have to be upped to cover labor. • Higher prices make workers demand more money. • Cost – Push Inflation

19. BTW: Current Data on Unemployment for the US • According to the Bureau of Labor Statistics (www.bls.gov) • Unemployment Rate in February: 4.8% Average Hourly Earnings are up $ .05 in February.

20. Unemployment Data • Previously: 303,000 new jobless claims were filed. • On March 16, new numbers will be posted. • See www.usatoday.com / money and click on economic calendar for the latest posting.

21. Review • How do economists measure the unemployed? • Previously unemployed individuals who have stopped looking for work are called ____ workers. • What are the types of unemployment? • The natural rate of unemployment consists solely of _______ and ____ unemployment.

22. The Consumer Price Index and the Cost of Living The INFLATION Indicators

23. What do you think? • 1976: Starting salary for an economics professor was $15,000 • 2001: Starting salary for an econ prof was $55,000. • Considering the REALITY PRICIPLE, who had a better life?

24. Reality Principle • What matters to people is the real value of money – its PURCHASING POWER – not the nominal or face value of money.

25. CPI: • Consumer Price Index • A price index that measures the cost of a fixed basket of goods chosen to represent the consumption pattern of individuals. • Tracks the cost of living over time.

26. What is in the “market basket”? • Food and Beverages • Housing • Apparel • Transportation • Medical Care • Recreation • Education • Other goods and services

27. Food and Beverages • Breakfast Cereal • Milk • Chicken • Wine • Coffee • Service meals • Snacks

28. Housing • Rent for primary residences • Owners equivalent rent • Fuel Oil (home heating) • Bedroom furniture

29. Apparel • Men’s shirts and sweaters • Women’s dresses • Jewelry

30. Transportation • New cars • Airline fares • Gasoline • Car insurance

31. Medical Care • Prescription drugs • Medical supplies • Doctor services • Eyeglasses • Eyeglass services • Hospital care

32. Recreation • Television • Pets • Pet products • Sports equipment • Admissions

33. Education and Communication • College Tuition • Postage • Telephone Services • Computer Software • Computer accessories

34. Other Goods and Services • Tobacco and smoking products • Haircuts • Other personal services • Funeral Expenses

35. BTW • CPI for 2006: • UP .7% so far for the year. • How does that compare with our wages? • Statistics from bls.gov

36. CPI • Used by both government and the private sector to measure changes in prices facing consumers. • SEE PAGE 122 to calculate CPI

37. CPI versus Chained GDP • CPI measures goods produced in prior years (older cars) as well as imported goods. • Chained GDP does not measure either of these. ONLY new goods and those produced in the country.

38. CPI v. Chained GDP • Because consumers will cut back on goods that cost more – the CPI will tend to overstate true changes in cost of living. • If chicken goes up in price, we switch to hamburger.

39. CPI Problems • Does not “cut back” on higher priced goods like consumers do. • Would still count the same share of chicken as it did before the price index.

40. What Economists THINK • CPI may be overestimated by .5% to 1.5% each year. • BIG argument among the econ community.

41. Cost of Living Adjustments Automatic increases in wages or other payments that are tied to a price index. For Future Reference on contract negotiations: Called COLA.

42. COLA and CPI • As CPI goes up, our wages or Social Security makes adjustments to keep up with the cost of living. • SEE PAGE 124 THE CPI AND SOCIAL SECURITY

43. INFLATION!!! • Inflation Rate: • The percentage rate of change of the price level of the economy.

44. Calculating Inflation Rates • Inflation Rate = percentage rate of change of a price index. • See page 124 for more on how to calculate!

45. Looking Ahead • Two “Schools” of Macroeconomics • Classical Economics • Keynsian Economics

46. Classical Economics • A school of economic thought that provides insights into the economy when it operates at or near full employment. • Popular thought so far in 2006. • Picture of David Ricardo (Travis’ favorite economist) • Darwin meets Economics

47. Keynsian Economics • A school of economic thought that provides insights into the economy when it operates away from full employment. • Economic fluctuations, business cycles, sharp changes in the economy.

48. THIS Concludes what the book has on unemployment and inflation I THINK you need and deserve more info on inflation!

49. So what is so wrong if everyone who wants a job has a job?

50. THE ANSWER???? • INFLATION • The trade-off with more employment.