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Economic Challenges

Understand the different types of unemployment (frictional, structural, cyclical, seasonal), measuring unemployment, underemployment, and discouraged workers. Explore the impacts of low and high unemployment rates and assess their economic consequences.

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Economic Challenges

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  1. Economic Challenges Chapter 13

  2. Unemployment Chapter 13, Section 1

  3. Full Employment • Although it seems desirable, full employment is not a characteristic of a strong economy • Full employment will lead to some inefficiency • A strong economy exhibits an unemployment rate of 4-6 percent…the natural rate of unemployment

  4. Unemployment • Economists characterize unemployment in four categories • Frictional • Structural • Cyclical (Demand Deficient) • Seasonal

  5. Frictional Unemployment • Unemployment that occurs when people take time to find a job • There are jobs available but they have not found one yet • Switching jobs • Just finished school • Left labor force and trying to return • Part of the Natural Rate of Unemployment

  6. Structural Unemployment • There is a job available but the worker’s skills do not match the skills required for jobs • 5 causes of structural unemployment • Development of new technology • Discovery of new resources • Changes in consumer demand • Globalization • Lack of education • Part of the Natural Rate of Unemployment

  7. Cyclical Unemployment • Also known as demand deficient unemployment because there are not jobs available. • Unemployment that changes with business cycles • Considered bad unemployment

  8. Seasonal Unemployment • Unemployment that occurs due to changes in seasons • Growing seasons • Construction • Vacation or resort industries • Accounted for and adjusted in the unemployment rate

  9. Measuring Employment • Unemployment is an important indicator in the economy • BLS (Bureau of Labor Statistics) polls the population and reports on unemployment • Used to compute the unemployment rate • Represents the % of people in the labor force who are unemployed

  10. Underemployment and Discouraged Workers • In various cases, people may have a job but be overqualified for that position. This is underemployment. • Discouraged Workers are those who have stopped looking for a job • They do not appear in the unemployment rate because they are not part of the labor force

  11. Unemployment that is too low?? • Very low unemployment can lead: • To unneeded positions • High competition by companies to find workers • Higher wages • Higher prices (inflation)

  12. Review 1. Unemployment that occurs when workers’ skills do not match the jobs that are available is known as • (a) frictional unemployment. • (b) structural unemployment. • (c) seasonal unemployment. • (d) cyclical unemployment. 2. The unemployment rate • (a) is the percentage of the labor force that is unemployed. • (b) is the number of people who are unemployed. • (c) includes only discouraged workers. • (d) is the percentage of the labor force that is underemployed.

  13. Inflation Chapter 13, Section 2

  14. Inflation • Inflation is the term used to describe an increase in price levels • It does not always mean that things have become more expensive. If wages increase with inflation, the change in prices is not felt. • Inflation also represents a decrease in purchasing power …the power to purchase goods and services. • If prices increases and wages do not, one loses purchasing power

  15. Price Indexes • Price indexes are measurements that show the average price of a collection of goods from one year to the next • Consumer Price Index (CPI) • Best known price index • Calculated monthly and focuses on consumer goods…establishes the rate of inflation • Uses the market basket • The market basket is a collection of representative goods

  16. Market Basket • Updated every 10 years • Includes products from following categories • Food and drink • Housing • Apparel • Transportation • Medical care • Entertainment • Education • Other services

  17. Inflation Rate • Inflation rate measures the percent change in prices over time • Calculation: • CPI for year A minus CPI for year B / CPI for year B x 100

  18. Types of Inflation • Creeping inflation...low inflation rate (1-3% per year) for a long period of time. • Not harmful to the economy • Chronic Inflation...steady accelerating inflation over a period of time • Hard on an economy (things are unpredictable) • Hyper Inflation...out of control inflation (100-500%) • Extremely hard on the economy

  19. Causes of Inflation • Many factors can lead to an increase in prices. • Quantity Theory...too much money causes inflation • Demand-Pull Theory...there is higher demand and prices rise • Cost-Push Theory...cost of production goes up so prices rise (wage increases caused by low unemployment, raw materials)

  20. Wage-Price Spiral • Occurs when higher wages cause higher prices and higher prices cause higher wages

  21. Effects of Inflation • High inflation can cause many problems for an economy. • Hard to predict the future • Loss of purchasing power

  22. Effects of Inflation • Income...if prices increase but wages do not, one’s disposable income decreases (troublesome for those on a fixed income) • Interest Rates...if inflation increase faster than interest rates, savings and investments may lose money

  23. Review 1. Inflation is • (a) the process by which rising wages cause higher prices. • (b) the price increase of a typical group of goods. • (c) a general increase in prices. • (d) the ability to purchase goods and services. 2. Chronic inflation occurs when the inflation rate • (a) drops to zero. • (b) remains low for a long time. • (c) grows out of control. • (d) rises steadily over an extended period.

  24. Poverty Chapter 13, Section 3

  25. Poverty • Poverty Threshold...income level that is too low to support a family • Current threshold for family of 4…$24,600 • Poverty rate...percentage of households below the poverty line

  26. Causes of Poverty • Lack of Education • Location • Racial and Gender Discrimination • Economic Shifts...layoffs etc...last hired, first fired • Family Structure...single parent families etc...

  27. Income distribution • Median income for US...$51,939, yet millions live in poverty • This is due to uneven income distribution • 20% of US households make 50% of the income (80% of the wealth)

  28. Antipoverty Policies • Enterprise zones...companies are encouraged to locate in areas and received incentives to do so • Employment Assistance... • Programs to place workers • Minimum Wage

  29. Antipoverty Policies • Welfare Reform • Personal Responsibility and Work Opportunity Reconciliation Act • Aimed at reducing reliance on welfare assistance • Set a 5 year limit on benefits from federal funds • Sent responsibility to the states • Block grants...money to the states for distribution rather than directly to the people • Workfare...exchange of work for assistance • States can apply fro waivers regarding requirements

  30. Review 1. An income level below which income is insufficient to support a family or household is known as the • (a) income gap. • (b) poverty rate. • (c) poverty threshold. • (d) income inequality. 2. The Personal Responsibility and Work Opportunity Act of 1996 • (a) provides lump sums of money to poor families. • (b) provides federal payments to poor families to supplement state payments. • (c) set a 5-year limit on receipt of benefits. • (d) provides direct cash payments to poor families.

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