Unemployment, and Inflation Economic Fluctuations and the Labor Market

Unemployment,

and Inflation

Economic Fluctuations

and the Labor Market

4 Labor Market Classifications

1. Employed – a person (16 years old or over) who is• working for pay at least one hour per week,• self employed, or,• working 15 hours or more each week without

pay in a family-operated enterprise.2. Unemployed

– a person not currently employed who is either• actively seeking a job, or,• waiting to begin or return to a job.

3. Civilian Labor force – civilians (16 years and older) who are either employed or unemployed.

4. Not in the labor force – persons (16 years and older) who are neither employed nor unemployed (like retirees, students, homemakers, or disabled persons).

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•The Employment Status of the Civilian Working-Age Population, September 2011

Labor ForceParticipation Rate =

# in the Labor ForceCivilian population (16+)

Economic Fluctuations and the Labor Market

• The non-institutional civilian adult population is grouped into two broad categories: • Persons not in the labor force, and,• persons in the labor force.

Employed + UnemployedRecall the Labor Force =

%1.64100million 240.1

million 154.0

Economic Fluctuations and the Labor Market

• To be classified as unemployed, one must either be on layoff or actively seeking work.

Rate ofUnemployment =

# Unemployed# in the Labor Force

%1.9100million 154.0

million 14.0

• The definition of unemployed involves some subjectivity.

• Some argue the employment/population ratio is a better indicator of job availability than the unemployment rate.

Unemployment and Measurement Problems

Employment / Population Ratio =

# employedCivilian population (16+)

%3.58100million 240.1

million 140.0

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•The Official Unemployment Rate and a Broad Measure of the Unemployment Rate, 1994–2011

•The red line shows the usual measure of the unemployment rate. •The blue line shows what it would be if the BLS had counted as unemployed all people who were available for work but not actively looking for jobs and all people who were in part-time jobs but wanted full-time jobs. •The difference between the measures was particularly large during the 2007–2009 recession and the weak recovery that followed. •Shaded areas indicate months of recession.

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•Trends in the Labor Force: Participation Rates of Adult Men and Women since 1948

•The labor force participation rate of adult men has declined gradually since 1948, •but it has increased significantly for adult women, making the overall rate higher today than it was then.

• The labor force participation rate of women has been steadily increasing for several decades.

• During the same period the rate of men has been falling.

Labor Force Participation Rateof Men and Women: 1948-

2003

•Labor Force Participation Rate of Men and Women

•Source: www.bls.gov.

•2006•1975•1948 •1960

•87 % •83%•74 %

•33 % •38 %

•46 %

• 58 %

•––––––– Men ––––––– •–––––– Women ––––––•1990 •2006•1975•1948 •1960 •1990

•78 % •76 %

•59 %

• Little difference in the rate of unemployment between men and women.

• Rate for persons under age 25 is much higher than for both

•Unemployment Rate, 2006

•Source: www.bls.gov.

•Allworkers

•16.9 %

• 8.7 %

•4.6 % •4.6 %

•13.8 %

•7.6 %

•25+•16-19 •20-24•–– Men aged ––

The Unemployment Rate By Age and Gender: 2006

•Allmen

•Allwomen •–– Women aged ––

•25+•16-19 •20-24

•3.5 % •4.6 % •3.7 %

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•Unemployment Rates for Different Groups in the US September 2011

•The unemployment rate of African Americans is the highest of the four ethnic groups shown, while the unemployment rate of Asians is the lowest. •High school dropouts have an unemployment rate that is triple the unemployment rate for college graduates.

a. a person who is not working but applied for a job at Wal-Mart last week

b. a person working part-time who is searching diligently for a full-time job

c. an auto worker vacationing in Florida during a layoff at a General Motors plant who expects to be recalled in a couple of weeks

d. a 17-year-old who works six hours per week as a route person for the local newspaper

e. homemaker working 70 hours a week preparing meals and performing other household services

f. a college student who spends between 50 and 60 hours per week attending classes and studying

g.a retired Social Security recipient

Classify each of the following as (a) employed, (b) unemployed, or (c) not in the labor force:

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• How Long Are People Typically Unemployed?

•During the Great Depression of the 1930s, some people were unemployed for years at a time.

•In April 2007—a period of economic expansion—82 percent of the people who were unemployed had been unemployed for less than six months.

•In September 2011, only 55 percent of the unemployed had been jobless for less than six months.

•The average period of unemployment was only 17 weeks in April 2007 but was 41 weeks in September 2011.

•A sharp break from the normal U.S. experience.

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•How Unusual Was the Unemployment Situation Following the 2007–2009 Recession?

•The average period of unemployment was twice as high following the 2007–2009 recession as following any other recession since the end of WWII.

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•How Unusual Was the Unemployment Situation Following the 2007–2009 Recession?

•The fall of the employment–population ratio may give an even better indication of how weak the U.S. labor market was during and after the 2007–2009 recession.

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•Establishments Creating and Eliminating Jobs, September-December 2010

Number of Establishments Number of Jobs

Establishments Creating Jobs

Existing establishments 1,447,000 5,609,000

New establishments 382,000 1,345,000

Establishments Eliminating Jobs

Existing establishments 1,418,000 5,162,000

Closing establishments 352,000 1,229,000

• Job Creation and Job Destruction over Time

•When the BLS announces each month the increases or decreases in the number of persons employed and unemployed, these are net figures.

•The change in the number of persons employed is equal to the total number of jobs created minus the number of jobs eliminated.

1. Frictional1. Frictional

2. Structural2. Structural

3. Cyclical3. Cyclical

4. Seasonal4. Seasonaltemporary job

less business

job replaced

between jobs Short-term unemployment that arises from the process of matching

workers with jobs.

•refers to unemployment due to factors such as weather, variations in tourism, and other calendar-related events.

•Unemployment that arises from a persistent mismatch between the skills and attributes of workers and the requirements of jobs.

•Unemployment caused by a business cycle recession.

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•Natural rate of unemployment The normal rate of unemployment, consisting of frictional unemployment plus structural unemployment.

• Full Employment

•Unemployment caused by a business cycle recession.

•When the only remaining unemployment is structural and frictional unemployment, the economy is said to be at full employment.

•The natural rate of unemployment is also sometimes called the full-employment rate of unemployment.

•Unemployment that arises from a persistent mismatch between the skills and attributes of workers and the requirements of jobs.

1. Frictional?

1. Frictional?2. Structural?2. Structural?

3. Cyclical?3. Cyclical?

Deals with which type?Deals with which type?

•When the only remaining unemployment is structural and frictional unemployment, the economy is said to be at full employment.

1. Frictional1. Frictional2. Structural2. Structural

but no Cyclical

but no Cyclical

At full employment there will still be some:

At full employment there will still be some:

actual unemployment may only get as low as

actual unemployment may only get as low as

4 – 5 %

4 – 5 %

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•The Annual Unemployment Rate in the US, 1950–2010

•The unemployment rate rises during recessions and falls during expansion. •Shaded areas indicate recessions.

• 1. A student who decides at mid-semester to devote the rest of the

term to studying quits her part-time job

• 1. A student who decides at mid-semester to devote the rest of the

term to studying quits her part-time job

• 2. A graphic artist who is out of work because a computer now does

her job.

• 2. A graphic artist who is out of work because a computer now does

her job.• 3. A waiter who quits his job and is

applying for the same type of work in a restaurant where morale is

better.

• 3. A waiter who quits his job and is applying for the same type of work

in a restaurant where morale is better.

• 4. The son of a local farmer who works 20-hour weeks without pay on the farm while waiting for a job

at a nearby factory.

• 4. The son of a local farmer who works 20-hour weeks without pay on the farm while waiting for a job

at a nearby factory.• 5. A travel agent who is laid off because the economy is in a slump

and vacation travel is at a minimum.

• 5. A travel agent who is laid off because the economy is in a slump

and vacation travel is at a minimum.

• 6. A plumber who works 5 hours per week for his church (on a paid

basis) until he can get a full-time job

• 6. A plumber who works 5 hours per week for his church (on a paid

basis) until he can get a full-time job

• Ups and downs characterize business activity.• There has been an upward trend in real GDP in the

United States and other industrial nations.

The Business Cycle• Cycles are irregular

•Share of labor force unemployed

•10

•8

•6

•4

•2

•1960 •1965 •1970 •1975 •1980 •1985 •1990 •1995 •2000 •2005

•2008

•Natural rate ofunemployment

•Actual rate ofunemployment

Unemployment Across Economies• Recently, the unemployment rate in the U.S. and Japan has been

lower than in major European economies.• Higher unemployment benefits, less flexible bargaining, and

more regulated labor markets of Europe explain this.

5.8 %

8.2 %

11.2 %

3.1 %

7.5 %

10.6 %

19.9 %Spain

Italy

Germany

Japan

Average Unemployment Rate(1990-1999)

France

U.K.

U.S.

Source: Economic Outlook, OECD (Dec. 2000).

5.8 %

8.2 %

11.2 %

3.1 %

7.5 %

10.6 %

19.9 %Spain

Italy

Germany

Japan

Average Unemployment Rate(1990-1999)

France

U.K.

U.S.

Source: Economic Outlook, OECD (Dec. 2000).

5.1 %

8.6 %

10.6 %

4.2 %

6.5 %

10.5 %

14.6 %Spain

Italy

Germany

Japan

Average Unemployment Rate(1994-2003)

France

U.K.

U.S.

Source: Economic Outlook, OECD (June 2004).

Unemployment Across Economies

Unemployment Across Economies

• U.S. and Japan lower than major European economies. • Higher unemployment benefits, less flexible collective

bargaining, and more regulated labor markets in Europe.

•4.9 %

•8.5 %

•9.7 %

•4.6 %

•5.4 %

•9.2 %

•11.6 %•Spain

•France

•U.K.

•Japan

•Average Unemployment Rate•(1997-2006)

•Italy

•Germany

•U.S.

•Source: Economic Outlook, OECD (June 2007).

Actual and Potential GDP• Potential output :

Maximum sustainable output level consistent with the economy’s resources, (on the production possibilities curve.)

• Actual and potential output will be equal when the economy is at full employment.

• Here we illustrate both actual and potential GDP.

• Note the gap (shaded area) between actual and potential GDP during periods of recession.

Historically Speaking

•Real GDP(billions of 2000 $)

•1970recession

•1974-75recession

•1980recession

•1982recession

•1990-91recession

•2001recession

•1960recession

•8,000

•6,000

•4,000

•2,000

•1960 •1965 •1970 •1975 •1980 •1985 •1990 •1995 •2000 •2005

•10,000

•PotentialGDP

•12,000

•ActualGDP

• The Rate of Inflation is calculated as:

Inflationrate =

Last year’sprice index

This year’s price index

Last year’s price index-

* 100

• Inflation is an increase in the general level of prices.

• Between 1956 and 1965, the general price level increased at an average annual rate of only 1.3%.

• In contrast, the inflation rate averaged 9.2% from 1973 to 1981, reaching double-digits during several years.

• Since 1982, the average rate of inflation has been lower (3.1% from 1983-2006) and more stable.

The Inflation Rate, 1956-2006

•1983-2006 averageinflation rate = 3.1 %

•Inflation rate

•1956•1960 •1965 •1970 •1975 •1980 •1985 •1990 •2000•1995

•10

•5

•0

•15

•2005

•1956-1965 averageinflation rate = 1.6 %

•1973-1981 averageinflation rate = 9.2 %

There are 2 Kinds of Inflation

1. Anticipated inflation: A widely expected change in the price level.

2. Unanticipated inflation: An increase in the price level that comes as a surprise, at least for most individuals.

1. Hyperinflation1. Hyperinflation

2. Money loses value

2. Money loses value

1. Savings1. Savings

2. Loans2. Loans

3. Wealth3. Wealth

4. Politics4. PoliticsMay cause changes

May increase

Are easier to repay

Lose value

• Nearly all economists believe that rapid expansion in the money supply is the primary cause of inflation.

1. Demand-Pull

1. Demand-Pull

2. Cost-Push2. Cost-Push

1. Demand-Pull

1. Demand-Pull

buyers demands greater than producers supply

Price

Quantity

P2

P1

Q1

D1

S1

Q2

New price and output

D2(increase in demand)

Orig. price and output

2. Cost Push2. Cost Push

sellers’ costs are passed on to buyers

Price

Quantity/time

P2

P1

Q1

D

S1(initial equilibrium)

Q2

S2(new equilibrium)

Questions for Thought:1. Suppose that the CPI was 150 at the end of

last year and 157.5 at the end of this year. What was the inflation rate during the year?

2. If decision makers anticipate an inflation rate of 3% at the start of a year and prices during the year rise by 7%, this is an example of a. anticipated inflation. b. an inflation rate higher than anticipated. c. an inflation rate lower than anticipated.

3. True or false: when the inflation rate is high and variable, decision makers will generally be able to anticipate year-to-year changes in inflation quite accurately.

• 4. How would an unanticipated 5 percent jump in inflation impact the wealth of:

• a. Joe, who has a 30-year home mortgage at a fixed interest rate

• b. The McCoy's, who hold most of their wealth in long-term fixed yield bonds

• c. Hanna, a retiree drawing a pension of a fixed dollar amount

• d. Jose, a heavily indebted small-business owner. • e. Mike, the owner of an apartment complex with substantial debt at a fixed interest rate• f. Tina, a worker whose wages are determined

by a 3-year union contract ratified three months

ago

•1. During this century, the growth rate of real GDP in the United States has averaged approximately•a. 1 % •b. 3 % •c. 6 % •d. 10 %•2. Economists use the term “business cycle” to refer to •a. the growth of small businesses into major corporations.•b. changes in products that occur from improved technology.•c. fluctuations in the level of real output and employment.•d. periods of increases and decreases in the rate of inflation.•3. The labor force participation rate of women in the United States has been a. increasing for several decades. b. decreasing for the past several decades after increasing dramatically in the early 1900s.•c. approximately constant during the last three decades.•d. decreasing since the early 1900s.

•4. Suppose there was a country with an adult (age 16 and over) population of 1,000, of which 100 were unemployed and 700 were employed. Which of the following is true? •a. The employment population ratio is 87.5 percent.•b. The labor force participation rate is 70 percent.•c. The unemployment rate is 12.5 percent.•d. There are 700 individuals in this country’s labor force.

•5. The type of unemployment caused by changes in the business cycle is•a. cyclical •b. natural •c. frictional •d. structural.

•6. Frictional unemployment is the result of•a. not enough jobs for everyone to be employed.•b. unemployed workers’ skills not matching those needed for the available jobs.•c. a decline in the demand for labor, such as during a recession.•d. imperfect information and temporary periods of unemployment while workers are changing jobs.

•7. Which of the following individuals would be considered unemployed by the official government definition?••••

a. George, who returned to graduate school after failing to find a job the last four monthsb. Gwen, a medical student, who is still in college and is not workingc. Morgan, who is employed part-time but desires a full-time job•d. Ralph, an auto worker vacationing in Florida during a layoff at a General Motors plant.•8. Suppose that the consumer price index at year-end 2004 was 140 and by year-end 2005 had risen to 150. What was the inflation rate during 2005?•a. 7.1 % •b. 10 % •c. 14.2 % •d. 50 %•9. Which of the following is true?•a. Anticipated inflation is an increase in the price level that comes

as a surprise, at least to most individuals•b. Unanticipated inflation is a change in the price level that is

widely expected.•c. Decision makers are generally able to anticipate slow steady rates of inflation with a fairly high degree of accuracy.•d. Inflation will increase the prices of goods and services that households purchase but not the wage rates of workers