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Economic Challenges. Chapter 13. Unemployment. Chapter 13, Section 1. Full Employment. Although it seems desirable, full employment is not a characteristic of a strong economy Full employment will lead to some inefficiency
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Economic Challenges Chapter 13
Unemployment Chapter 13, Section 1
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
Unemployment • Economists characterize unemployment in four categories • Frictional • Structural • Cyclical (Demand Deficient) • Seasonal
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
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
Cyclical Unemployment • Also known as demand deficient unemployment because there are not jobs available. • Unemployment that changes with business cycles • Considered bad unemployment
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
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
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
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)
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.
Inflation Chapter 13, Section 2
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
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
Market Basket • Updated every 10 years • Includes products from following categories • Food and drink • Housing • Apparel • Transportation • Medical care • Entertainment • Education • Other services
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
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
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)
Wage-Price Spiral • Occurs when higher wages cause higher prices and higher prices cause higher wages
Effects of Inflation • High inflation can cause many problems for an economy. • Hard to predict the future • Loss of purchasing power
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
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.
Poverty Chapter 13, Section 3
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
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...
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)
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
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
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.