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Unemployment and Inflation

Unemployment and Inflation. Lucent Technologies Deals with Unemployment and Inflation. 1. 2. 3. 4. 5. 6. 7. After studying this chapter, you should be able to: Define the unemployment rate and the labor force participation rate, and understand how they are computed.

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Unemployment and Inflation

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  1. Unemployment and Inflation

  2. Lucent Technologies Deals with Unemployment and Inflation 1 2 3 4 5 6 7 • After studying this chapter, you should be able to: Define the unemployment rate and the labor force participation rate, and understand how they are computed. Identify the three types of unemployment. Explain what factors determine the unemployment rate. Define the price level and the inflation rate, and understand how they are computed. Use price indexes to adjust for the effects of inflation. Distinguish between the nominal interest rate and the real interest rate. Discuss the problems caused by inflation. LEARNING OBJECTIVES …, the contract between Lucent and its union workers increased wages by less than the increase in prices expected by the firm and the workers.

  3. Measuring the Unemployment Rateand the Labor Force Participation Rate 1 LEARNING OBJECTIVE The Household Survey Labor force The sum of employed and unemployed workers in the economy. Unemployment rate The percentage of the labor force that is unemployed. Discouraged workers People who are available for work, but who have not looked for a job during the previous four weeks because they believe no jobs are available for them.

  4. Measuring the Unemployment Rateand the Labor Force Participation Rate 12 - 1 The Employment Status of the Civilian Working-Age Population, June 2005 The Household Survey

  5. Measuring the Unemployment Rateand the Labor Force Participation Rate • The Household Survey • The unemployment rate measures the percentage of the labor force that is unemployed: • The labor force participation ratemeasures the percentage of the working-age population that is in the labor force:

  6. 12 - 1 1 LEARNING OBJECTIVE • What Happens If You Include the Military? People on active military service are not included in the employment, labor force, or working-age population totals compiled in the BLS household survey. Suppose people in the military were included in these statistics.

  7. Measuring the Unemployment Rateand the Labor Force Participation Rate 12 - 2 Trends in the Labor ForceParticipation Rates of AdultMen and Women Since 1948 Problems with Measuring the Unemployment Rate Trends in Labor Force Participation

  8. Measuring the Unemployment Rateand the Labor Force Participation Rate 12 – 2 Household and Establishment Survey Data for May and June 2005 The Establishment Survey: Another Measure of Employment

  9. Measuring the Unemployment Rateand the Labor Force Participation Rate 12 – 3 Establishments Creating and Eliminating Jobs, September-December 2004 Job Creation and Job Destruction Over Time

  10. Types of Unemployment 2 LEARNING OBJECTIVE 12 - 4 The Annual Unemployment Rate in the United States, 1950-2004

  11. Types of Unemployment Frictional Unemployment and Job Search Frictional unemployment Short-term unemployment arising from the process of matching workers with jobs. Structural Unemployment Structural unemployment Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of jobs.

  12. Types of Unemployment Cyclical Unemployment Cyclical unemployment Unemployment caused by a business cycle recession. Full Employment Natural rate of unemployment The normal rate of unemployment, consisting of structural unemployment plus frictional unemployment.

  13. Explaining Unemployment 3 LEARNING OBJECTIVE 12 - 5 Average Unemployment Ratesin the United States, Canada,Japan, and Europe, 1995-2004 Government Policies and the Unemployment Rate UNEMPLOYMENT INSURANCE AND OTHER PAYMENTS TO THE UNEMPLOYED INTERNATIONAL COMPARISONS

  14. Explaining Unemployment Government Policies and the Unemployment Rate MINIMUM WAGE LAWS Labor Unions Efficiency Wages Efficiency wage A higher-than-market wage paid by a firm to increase worker productivity.

  15. 12 - 3 • Why Did Henry Ford Pay His Workers Twice As Much As Other Car Manufacturers? Henry Ford claimed that paying a wage twice as high as his competitors was the finest cost-cutting move he ever made.

  16. Measuring Inflation 4 LEARNING OBJECTIVE Price level A measure of the average prices of goods and services in the economy. Inflation rate The percentage increase in the price level from one year to the next.

  17. Measuring Inflation 12 - 6 The CPI Market Basket,December 2004 The Consumer Price Index Consumer price index (CPI) An average of the prices of the goods and services purchased by the typical urban family of four.

  18. Measuring Inflation CPI = Don’t Miscalculate the Inflation Rate

  19. Measuring Inflation • Is the CPI Accurate? • Substitution bias. • Increase in quality bias. • New product bias. • Outlet bias.

  20. Measuring Inflation The Producer Price Index Producer price index (PPI) An average of the prices received by producers of goods and services at all stages of the production process.

  21. Using Price Indexes to Adjust for the Effects of Inflation 5 LEARNING OBJECTIVE Value in 2004 dollars = Value in 1980 dollars Falling Real Wages at Lucent

  22. 12 - 2 5 LEARNING OBJECTIVE • Calculating Real Average Hourly Earnings

  23. Real versus Nominal Interest Rates 6 LEARNING OBJECTIVE Nominal interest rate The stated interest rate on a loan. Real interest rate The nominal interest rate minus the inflation rate. Deflation A decline in the price level.

  24. Real versus Nominal Interest Rates 12 - 7 Nominal and Real Interest Rates, 1970-2004

  25. Does Inflation Impose Costs on the Economy? 7 LEARNING OBJECTIVE Inflation Affects the Distribution of Income The Problem with Anticipated Inflation Menu costs The costs to firms of changing prices. The Problem with Unanticipated Inflation

  26. 12 - 4 • Why a Lower Inflation Rate Is Like a Tax Cut for Lucent’s Bondholders A lower inflation rate is like a tax cut for investors.

  27. Consumer price index (CPI) • Cyclical unemployment • Deflation • Discouraged workers • Efficiency wage • Frictional unemployment • Inflation rate • Labor force • Labor force participation rate Menu costs Natural rate of unemployment Nominal interest rate Price level Producer price index (PPI) Real interest rate Structural unemployment Unemployment rate

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