Facing Economic Challenges

1. Facing Economic Challenges Economics Chapter 13 Notes

2. Economic Challenges - Unemployment • Unemployment has a variety of causes. • Some level of unemployment is expected, even when an economy is healthy. • As the nation goes through business cycles, it faces the problems of unemployment and inflation. • Persistent unemployment can lead to poverty. • During periods of inflation, wages buy less.

3. Measuring Unemployment • The Unemployment Rate • Civilian labor force—people over 16 who are working, looking for work • Bureau of Labor Statistics determines unemployment rate • divides number of unemployed workers by total in civilian labor force • does not count discouraged who have stopped looking or underemployed • Underemployed—work part-time, want full-time or work below skill level

4. Measuring Unemployment • Full Employment • Full employment—no unemployment caused by decreased economic activity • Always some degree of unemployment: • people relocate; look for better job; can’t find appropriate job • Unemployment rate of 4 to 6 percent considered full employment in U.S. • other rates in countries with different labor markets, economic policies

5. Types of Unemployment • Type 1: Frictional Unemployment • Frictional unemployment not a threat to economic stability. • Includes: • Childrearing parents returning to work • new college graduates looking for first job • experienced workers who want to switch jobs • Reflects workers’ freedom to find best job for them at highest wage

6. Types of Unemployment • Type 2: Seasonal Unemployment • Demand for some jobs changes dramatically from season to season • construction work falls off in winter • tourism peaks at certain times of year; varies by region • migrant farm work drops off in winter; migrant families suffer

7. Types of Unemployment • Type 3: Structural Unemployment • As businesses become more efficient, require fewer workers • new technologies replace workers or require them to retrain • new industries requiring specialized education do not employ unskilled • change in consumer demand can shift type of workers needed • offshore outsourcing sometimes leaves people out of work

8. Types of Unemployment • Type 4: Cyclical Unemployment • Employers lay off workers during low points in business cycle • During recession, hard to find new jobs since demand for labor drops • Unemployment period varies by type; average relatively short • over one third of unemployed find work in five weeks or less

9. Section 2:Poverty and Income Distribution What Is Poverty? • The Poverty Threshold • People considered in poverty if income falls below poverty threshold • Also called the poverty line • Calculated based on costs of nutritious food, other necessities • differs by size of household • adjusted annually

10. What Is Poverty? • The Poverty Rate • Poverty rate—percent of people in households below poverty threshold • based on population as a whole • Poverty does not hit all sectors of society equally. Most at risk: • Children, minorities; inner-city, rural, and single–mother families

11. The Problem of Poverty • Factors Affecting Poverty • Education—the higher the level of education, the higher the income • Discrimination against minorities, women • sometimes face wage discrimination, occupational segregation • Demographic trends—single-parent families have more economic problems • Change from manufacturing to service jobs has resulted in lower wages for low-skilled workers

12. Income Distribution • Income distribution—how income is divided among people in a nation • Income inequality—unequal distribution of income; some always exists

13. Antipoverty Programs • Programs for Low-Income Households • Food stamp program gives card, government deposits funds in account • card can be used only to buy food at grocery stores • Medicaid offers health care; funded by federal and state governments • Earned-income tax credit—refunds taxes deducted from paychecks • money usually spent in own communities, helping boost their economies

14. General Antipoverty Programs • Social Security program pays benefits to retirees, survivors, disabled • Medicare is government health insurance for seniors • Unemployment insurance helps laid-off workers while looking for job • Social Security, Medicare funded by payroll taxes; reduced poverty • Unemployment insurance paid mostly by taxes on employer

15. Antipoverty Programs • Other Programs • Some programs supplement the largest programs, including: • Community Services Block Grants, job training, Empowerment Zones • In 1996, federal welfare programs changed to welfare-to-work • workfare requires welfare recipients to do some work • Temporary Assistance for Needy Families has five-year limit

16. Inflation • Types of Inflation • Moderate, Creeping & Galloping Inflation • All refer to the speed of inflation • Hyperinflation • over 50 percent per month • Deflation • decrease in general price level; happens rarely

17. What Is the Impact of Inflation? • Effect 1: Decreasing Value of the Dollar • Rising consumer price index represents declining value of the dollar • People on a fixed income are especially vulnerable • each dollar they have buys less every year • Inflation helps people who borrow at a fixed rate of interest

18. What Is the Impact of Inflation? • Effect 2: Increasing Interest Rates • Lenders raise interest rates to ensure profit on loans • Businesses avoid borrowing to expand or make capital improvements • Consumers less likely to finance high-priced items • Monthly credit card payments go up as rates rise

19. What Is the Impact of Inflation? • Effect 3: Decreasing Real Returns on Savings • Interest on savings tends to increase during inflationary times • Inflation worries people about drop in standard of living, retirement

20. The Effects of Inflation in the 1970s • Background • In the 1970s, the United States experienced the longest period of inflation in its history. By 1979, inflation had risen to 10 percent per year or higher. Prices of consumer goods rose dramatically. Those on fixed incomes were particularly affected. • What’s the Issue • How did inflation affect people and businesses in the 1970s? • Thinking Economically • Name one example from each document that shows how inflation has a negative impact on the economy. • Inflation is a general rise in price levels. Are the examples of price increases in documents B and C symptoms of inflation or isolated price increases? • Compare the tone of documents A and C. Do economists care as much about inflation as consumers? Explain.