Chapter 6 MONITORING CYCLES, JOBS, AND THE PRICE LEVEL

Chapter 6 MONITORING CYCLES, JOBS, AND THE PRICE LEVEL

The business cycle Measures of labor market activityUnemployment

SourcesDurationGroups affected most

Measuring the price level & inflation rate.

Business cycle periodic but irregular up-and-down movement in

production and jobs.

NBER defines phases and turning pointsRecession

• significant decline in activity spread across the economy,• lasts more than a few months• visible in industrial production, employment, real income, and

wholesale-retail trade. • begins just after the economy reaches a peak of activity• ends as the economy reaches its trough.

Expansion occurs between trough and peak Bus. Cycle dates: http://www.nber.org/cycles.html/

Jobs and Wages

Current Population SurveyThe U.S. Census Bureau conducts monthly surveys

to determine the status of the labor force in the United States.

Approximately 60,000 households interviewed monthly.

Four months in, eight months out, four months in.

Jobs and Wages

To be considered unemployed, a person must be:without work and have made specific efforts to

find a job within the past four weeks, orwaiting to be called back to a job from which he or

she was laid off, orwaiting to start a new job within 30 days.

Jobs and Wages

the population labor force categories and the magnitudes for 2006.

December 2008 Labor Force Statistics

Jobs and Wages

forcelabor

unemployedratentunemployme

populationageworking

employedratiopopulationemployment

#

populationageworking

forcelaborrateionparticipatforcelabor

What was the unemployment rate in Dec 2008? (round your answer to nearest 10th and don’t use % sign -- e.g.

5.4)

20

What was the labor force participation rate in Dec 2008? (round your answer to nearest 10th and don’t

use % sign -- e.g. 5.4)

20

What was the employment-population ratio participation rate in Dec 2008? (round your answer to

nearest 10th and don’t use % sign -- e.g. 5.4)

20

Trends in Employment Measures

The unemployment rate is pro-cyclical.

50%50%1. Yes2. No

20

The employment-population ratio is pro-cyclical.

50%50%1. True2. False

20

The labor force participation rate is pro-cyclical.

50%50%1. True2. False

20

Cyclical behavior of employment statistics.

Are each of the following, pro- or counter-cyclical? Unemployment rateLFPR

• Effect of discouraged workersEmployment-population ratio

Trends in employment statistics

The LFPR increased from 59% in the 1960s to 67% in the

1990s.for men has declined, but for women has increased. fell for older workers since the 1950s, but has

recently begun to rise.The employment-population ratio

increased from 55% in the early 1960s to 67% in 2000.

declined for men and increased for women.

Jobs and Wages

Aggregate Hoursthe total number of hours worked by all workers

during a year. increased since 1960 but less rapidly than the total

number of workers because the average workweek has shortened.

Jobs and Wages

Aggregate hours is proc-cylclical.

50%50%1. True2. False

20

Jobs and Wages

Real Wage Ratethe quantity of goods and services that can be

purchased with an hour’s work. the money wage rate divided by the price level

(more later)

Three measures Hourly earnings in manufacturing Total wages and salaries per hour Total wages, salaries, & supplements per hour

Jobs and Wages

Real Wage Ratecompensation in

2000 dollars per hour of work.

Unemployment and Full Employment

Is duration of unemployment pro- or counter-cyclical?

As duration increases, is “pain” more or less concentrated?

Unemployment and Full Employment

Types of UnemploymentFrictionalStructuralCyclical

Mary quit her job to move to another city. As she searches for a new job in her new location,

she is

33% 33%33%

20

1. Frictionally unemployed2. Structurally unemployed3. Cyclically unemployed

Some believe that the U.S. automobile industry will forever be smaller. If John lost his job as an auto worker as a result of the down-sizing, John is:

33% 33%33%

20

1. Frictionally unemployed2. Structurally unemployed3. Cyclically unemployed

Some believe that the U.S. automobile industry will eventually return to its original size. If John lost his job as an auto worker as a result of the current recession, but expects that he will get his job back, John is:

33% 33%33%

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1. Frictionally unemployed2. Structurally unemployed3. Cyclically unemployed

Unemployment and Full Employment

Full Employmentno cyclical unemployment when all unemployment is frictional or structural.

Natural rate of unemployment. unemployment rate at full employment estimated to have been around 6 percent on average in

U.S.Higher in 1970s, lower in 1990s

• Baby boom• Women

• UI Generosity

Unemployment and Full Employment

Potential GDP Quantity of real GDP produced at full

employment. corresponds to the capacity of the economy to

produce output on a sustained basis; Actual GDP fluctuates around potential GDP with

the business cycle. Actual unemployment fluctuates around natural

rate with the business cycle.

When the unemployment rate is above the natural rate, real GDP will be below potential GDP.

50%50%1. True2. False

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The Consumer Price Index

The price level is the “average” level of prices and is measured by using a price index.

CPI measures the average level of the prices of goods and services consumed by the average urban family.

The GDP deflator is another price index, reflecting the average price of all goods and services produced.

The Consumer Price Index

Constructing the CPI involves three stages: Selecting the CPI basket Conducting a monthly price survey Using the prices and the basket to calculate the CPI

100year basein bundle ofcost

year tin bundle ofcost tCPI

The Consumer Price Index

The CPI basket.

The Consumer Price Index

The CPI basket is based on a Consumer Expenditure Survey.

The current CPI based on a 1993-95 survey, although the reference base period is still 1982-84.

Every month, BLS employees check the prices of 80,000 goods and services in 30 metropolitan areas.

The CPI is calculated using the prices and the contents of the basket.

The Consumer Price Index

Item Quantity Price in 1984

Price in 2005

Oranges 10 $1.00 $2.00

Apples 5 $2.00 $3.00

If 1984 is base year,

1984 CPI ___________ 2005 CPI __________

If 2005 is base year, 1984 CPI ___________ 2005 CPI __________

Using 1984 base year, what is the CPI in 1984? (round answer to nearest 10th – e.g. 103.2)

20

Using 1984 base year, what is the CPI in 2005? (round answer to nearest 10th – e.g. 103.2)

20

Using 2005 base year, what is the CPI in 1984? (round answer to nearest 10th – e.g. 103.2)

20

Using 2005 base year, what is the CPI in 2005? (round answer to nearest 10th – e.g. 103.2)

20

The Consumer Price Index

The inflation rate % change in price level between years.

= (CPI now – CPI last year) / CPI last year= (CPI now / CPI last year) - 1

Avg. annual inflation rate over past t years = (CPI now / CPI t years ago)1/t -1

Avg. annual growth rate over past t years = (X now / X t years ago)1/t -1

Adjusting for changes in price level100

Index Price

Value Nominal Value Real

t

tt

•In base year, how do nominal and real wages compare?

•Suppose that between 2005 and 2006 nominal wages rise from $10 to $11 and the CPI rises from 140 to 150

•What was the inflation rate?

•Growth in nominal wages?

•Growth in real wages?

Inflation Questions

Using BLS data on average prices, answer the following

• Inflation rate between 2004 and 2005.

• Average annual rate of inflation between 1990 and 2005.

• If a person earned $10 per hour in 1990, how much would they have to earn in 2005 to have the same real wage?

Suppose that between 2005 and 2006 nominal wages rise from $10 to $11 and the CPI rises from 140 to 150. What was the inflation rate? (nearest 10th, no % sign; e.g. 4.3).

20

Suppose that between 2005 and 2006 nominal wages rise from $10 to $11 and the CPI rises from 140 to 150. What was annual rate of growth in the nominal wage? (nearest 10th, no % sign; e.g. 4.3).

20

Suppose that between 2005 and 2006 nominal wages rise from $10 to $11 and the CPI rises from 140 to 150. What was the growth rate in the real wage? (nearest 10th, no % sign; e.g. 4.3).

20

The Bias in the CPIA Congressional Advisory Commission estimated that the CPI overstates inflation by 1.1 percentage points a year.

Sources of bias:New commoditiesQuality improvementsCommodity substitution biasOutlet substitution bias.

•Why is the bias costly?•Government spending/taxes.•Social Security proposal•Private Contracts•Biases estimates of real earnings