Chapter 09: Unemployment and Inflation - Yulin Houyulinhou.weebly.com/uploads/7/7/2/9/77292509/hubbard_macro6e_p… · Title: Chapter 09: Unemployment and Inflation Author: R. Glenn

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‹#›Macroeconomics6th edition

Chapter 9Unemployment and Inflation

Modified by Yulin HouFor Principle of MacroeconomicsFlorida International UniversitySummer 2017

Copyright © 2017 Pearson Education, Inc. All Rights Reserved


‹#›‹#›9.1 Measuring the Unemployment Rate, the Labor ForceParticipation Rate.

Instead, the U.S. Department of Labor reports estimates ofemployment, unemployment, and other statistics related to thelabor force each month.

Labor force: The sum of employed and unemployed workers inthe economy.

unemployment rate: the percentage of the labor force that isunemployed.


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‹#›How Long Are People TypicallyUnemployed?Long periods of unemployment are bad for workers, as their skillsdecay and they risk becoming discouraged and depressed.

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

Since World War II, average lengths of unemployment have beenrelatively low, but that changed dramatically with the 2007-2009recession.

• The average length of unemployment more than doubled, from4 months to 10 months.


‹#›‹#›9.2 Types of Unemployment

The three types of unemployment are:

• Frictional unemployment: Short-term unemployment thatarises from the process of matching workers with jobs.

• Structural unemployment: Unemployment that arises from apersistent mismatch between the skills and attributes ofworkers and the requirements of jobs.

• Cyclical unemployment: Unemployment causes by abusiness cycle recession.


‹#›The Annual Unemployment Rate in the United States, 1950-2014

Unemployment rates rise when the economy is faltering and fallwhen the economy is doing well. But they never fall to zero.


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Frictional UnemploymentFrictional unemployment: Short-term unemployment that arisesfrom the process of matching workers with jobs.

Frictional unemployment occurs mostly because of job search:entering or re-entering the labor force or being between jobs.

It also occurs because of seasonal unemployment: some jobsfluctuate in availability due to seasonal demand, like ski instructoror farm work.

Solution: better information


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Structural UnemploymentStructural unemployment: Unemployment that arises from apersistent mismatch between the skills and attributes of workersand the requirements of jobs.

Structural unemployment is associated with longer unemploymentspells.

Workers who are structurally unemployed may require retrainingin order to obtain “modern” jobs.

Solution: investment in worker training.


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Cyclical UnemploymentCyclical unemployment: Unemployment caused by a businesscycle recession.In normal recoveries after a recession, unemployment due tocyclical factors will fall.

Solution: government stimulus..


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Nature rate of unemployment

When all unemployment is due to frictional and structural factors,we say that the economy is at full employment. This means therewill always be some unemployment in the economy.• Natural rate of unemployment: The normal rate of

unemployment, consisting of frictional unemployment andstructural unemployment.

• The general consensus of economists is that the U.S. naturalrate of unemployment is somewhere between 5 percent and5.5 percent.


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Unemployment InsuranceSuppose you have just lost your job. You want to find another andhave two main options:• Take a new low-paying job immediately or• Search for a better job

If unemployment insurance payments are available to you, you willprobably be more likely to choose the second option.

Note: The unemployment insurance payments help theunemployed maintain their income and spending, help reduce theseverity of recessions.


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Evaulation of unemployment

type

duration

severityeg, natural rate of unemployment or more?


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Inflation

Price level：average prices of goods and services.Inflation rate: the percentage of increase in theprive level from one year to the next.

Two measurements:CPI: consumer price indexPPI: producer price index


‹#›Figure 9.7 The CPI Market Basket, December 2014

The consumer priceindex is a measure ofthe average changeover time in the pricesa typical urban familyof four pays for thegoods and servicesthey purchase.

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Calculating the CPITo calculate the CPI in a given year, we need:• A basket of goods• The cost to purchase the basket of goods in a base year• The prices in the current year

The CPI in the current year is the cost to purchase the basket ofgoods this year, divided by the cost in the base year. Byconvention, we multiply this by 100, so that the CPI in the baseyear is 100.


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$915.00Blank$900.00Blank$750.00BlankBlankTOTAL

550.0027.50500.0025.00500.0025.0020Books

280.0014.00300.0015.00200.0010.0020Pizzas

$85.00$85.00$100.00$100.00$50.00$50.001Eyeexaminations

Expenditures(on base-year

quantities)Price

Expenditures(on base-year

quantities)PriceExpendituresPriceQuantityProduct

2017Blank2016BlankBlankBase Year

(1999)BlankBlank

The table above gives the information we need to create the CPIin 2016 and 2017, using the basket of goods from 1999.

Applied to 2017Applied to 2016Formula


‹#›A Simple CPI Calculation (2 of 2)

Applied to 2017Applied to 2016Formula

Based on these data, the inflation rate from 2016 to 2017 is thepercentage change in the CPI:

Since the CPI measures consumer prices, it is often referred to asthe cost of living index. CPI-inflation is sometimes used togenerate “fair” increases in wages for workers and governmentbenefits.


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Producer Price IndexThe producer price index (PPI) is an average of the pricesreceived by producers of goods and services at all stages of theproduction process.

• It is conceptually similar to the CPI, in that it uses a basket ofgoods, but the goods are those used by producers.

The PPI can give early warning of future movements in consumerprices.

• Can you suggest why this is true?


‹#›‹#›9.6 Nominal Interest Rates versus RealInterest Rates

Nominal interest rate:

the stated interest rate on a loan.

Real interest rate:

equal to the nominal interest rate minus the inflation rate.

it matters when individuals make investment decisions.

a better mearsure of the true cost of borrowing and lending.


‹#›‹#›9.7 Does Inflation Impose Costs on theEconomy?

Sometimes inflation seems unimportant.• If all prices doubled overnight, it seems like nothing much

would change: the prices of goods and services would havedoubled, but so would your wage.

• So you could afford exactly as much as before.

But not all prices/wages rise at the same rate.• So some people will see their real wage increase due to

inflation, while others will see it decrease.• Particularly for people on fixed incomes (e.g. retirees), inflation

can seem unfair, as the purchasing power of their income falls.


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The Problem with Anticipated InflationEven if inflation is anticipated, it still causes problems:

• People and firms have increased real costs of holding cash.

• Firms have menu costs: the cost to firms of changing prices.Frequently changing prices are inconvenient for firms (andconsumers too!) to deal with.

• Investors are taxed on nominal returns, rather than real returns;so this can increase the tax due.

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Chapter 09: Unemployment and Inflation - Yulin Houyulinhou.weebly.com/uploads/7/7/2/9/77292509/hubbard_macro6e_p… · Title: Chapter 09: Unemployment and Inflation Author: R. Glenn