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1 of 27 © 2014 Pearson Education, Inc. C H A P T E R O U T L I N E 7 Unemployment, Inflation, and Long-Run Growth Unemployment Measuring Unemployment Components of the Unemployment Rate The Costs of Unemployment Inflation The Consumer Price Index The Costs of Inflation Long-Run Growth Output and Productivity Growth Looking Ahead

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Page 1: Unemployment, Inflation, and 7 Long-Run Growthpogodzinski.net/Macro/ECON_1A_Chapter_7.pdf · Unemployment, 7 Inflation, and Long-Run Growth Unemployment Measuring Unemployment Components

1 of 27© 2014 Pearson Education, Inc.

C H A P T E R O U T L I N E

7Unemployment,

Inflation, and

Long-Run Growth

Unemployment

Measuring Unemployment

Components of the Unemployment Rate

The Costs of Unemployment

Inflation

The Consumer Price Index

The Costs of Inflation

Long-Run Growth

Output and Productivity Growth

Looking Ahead

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2 of 27© 2014 Pearson Education, Inc.

employed Any person 16 years old or older (1) who works for pay, either for

someone else or in his or her own business for 1 or more hours per week, (2)

who works without pay for 15 or more hours per week in a family enterprise, or

(3) who has a job but has been temporarily absent with or without pay.

unemployed A person 16 years old or older who is not working, is available for

work, and has made specific efforts to find work during the previous 4 weeks.

Unemployment

Measuring Unemployment

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3 of 27© 2014 Pearson Education, Inc.

not in the labor force A person who is not looking for work because he or

she does not want a job or has given up looking.

labor force The number of people employed plus the number of unemployed.

labor force = employed + unemployed

population = labor force + not in labor force

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unemployment rate The ratio of the number of people unemployed to the total

number of people in the labor force.

labor force participation rate The ratio of the labor force to the total

population 16 years old or older.

unemployedunemployment rate =

employed + unemployed

labor forcelabor force participation rate =

population

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5 of 27© 2014 Pearson Education, Inc.

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6 of 27© 2014 Pearson Education, Inc.

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7 of 27© 2014 Pearson Education, Inc.

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8 of 27© 2014 Pearson Education, Inc.

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TABLE 7.2 Unemployment Rates by Demographic Group, 1982 and 2012

Years November 1982 December 2012

Total 10.8 7.8

White 9.6 6.9

Men 20+ 9.0 6.2

Women 20+ 8.1 6.3

Both sexes 16–19 21.3 21.6

African American 20.2 14.0

Men

Women

20+

20+

19.3

16.5

14.0

12.2

Both sexes 16–19 49.5 40.5

Components of the Unemployment Rate

Unemployment Rates for Different Demographic Groups

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discouraged-worker effect The decline in the measured unemployment rate

that results when people who want to work but cannot find jobs grow

discouraged and stop looking, thus dropping out of the ranks of the

unemployed and the labor force.

Discouraged-Worker Effects

The BLS survey provides some evidence on the size of the discouraged-worker

effect.

Respondents who indicate that they have stopped searching for work are

asked why they stopped. If the respondent cites inability to find employment as

the sole reason for not searching, that person might be classified as a

discouraged worker.

Some economists argue that adding the number of discouraged workers to the

number who are now classified as unemployed gives a better picture of the

unemployment situation.

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When we consider the various costs of unemployment, it is useful to categorize

unemployment into three types:

Frictional unemployment

Structural unemployment

Cyclical unemployment

The Costs of Unemployment

Some Unemployment Is Inevitable

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frictional unemployment The portion of unemployment that is due to the

normal turnover in the labor market; used to denote short-run job/skill-matching

problems.

structural unemployment The portion of unemployment that is due to

changes in the structure of the economy that result in a significant loss of jobs

in certain industries.

Frictional, Structural, and Cyclical Unemployment

natural rate of unemployment The unemployment rate that occurs as a

normal part of the functioning of the economy. Sometimes taken as the sum of

the frictional unemployment rate and the structural unemployment rate.

cyclical unemployment Unemployment that is above frictional plus structural

unemployment.

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The costs of unemployment are neither evenly distributed across the population

nor easily quantified.

The social consequences of the Depression of the 1930s are perhaps the

hardest to comprehend. Few emerged from this period unscathed.

At the bottom were the poor and the fully unemployed, about 25 percent of the

labor force. Even those who kept their jobs found themselves working part-time.

Many people lost all or part of their savings as the stock market crashed and

thousands of banks failed.

Social Consequences

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consumer price index (CPI) A price index computed each month by the

Bureau of Labor Statistics using a bundle that is meant to represent the

“market basket” purchased monthly by the typical urban consumer.

Inflation

The Consumer Price Index

producer price indexes (PPIs) Measures of prices that producers receive for

products at all stages in the production process.

Once called wholesale price indexes, PPIs are calculated separately for various

stages in the production process.

The three main categories are finished goods, intermediate materials, and

crude materials, although there are subcategories within each of these

categories.

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The CPI market basket shows how a typical consumer divides his or her money among

various goods and services.

The CPI market basket for December 2007 shows that most of a consumer’s money goes

toward housing, transportation, and food and beverages.

▲ FIGURE 7.1 The CPI Market Basket

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http://www.bls.gov/data/inflation_calculator.htm

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During inflations, most prices—including input prices like wages—tend to rise

together, and input prices determine both the incomes of workers and the

incomes of owners of capital and land.

So inflation by itself does not necessarily reduce ones purchasing power.

The Costs of Inflation

real interest rate The difference between the interest rate on a loan and the

inflation rate.

Inflation May Change the Distribution of Income

One way of thinking about the effects of inflation on the distribution of income is

to distinguish between anticipated and unanticipated inflation.

The effects of anticipated inflation on the distribution of income are likely to be

fairly small, since people and institutions will adjust to the anticipated inflation.

Unanticipated inflation, on the other hand, may have large effects, depending,

among other things, on how much indexing to inflation there is.

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There may be costs associated even with anticipated inflation, such as the

administrative cost associated with simply keeping up.

Interest rates tend to rise with anticipated inflation. When interest rates are

high, the opportunity costs of holding cash outside of banks is high.

Economists have debated the seriousness of the costs of inflation for decades.

No matter what its real economic cost, it makes us uneasy and unhappy.

In 1974, President Ford verbalized some of this discomfort when he said,

“Our inflation, our public enemy number one, will unless whipped destroy our

country, our homes, our liberties, our property, and finally our national pride,

as surely as any well-armed wartime enemy.”

In this belief, our elected leaders have vigorously pursued policies designed to

stop inflation.

Administrative Costs and Inefficiencies

Public Enemy Number One?

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output growth The growth rate of the output of the entire economy.

per-capita output growth The growth rate of output per person in the

economy.

productivity growth The growth rate of output per worker.

Long-Run Growth

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Productivity grew much faster in the 1950s and 1960s than it has since.

▲ FIGURE 7.2 Output per Worker Hour (Productivity), 1952 I–2012 IV

Output and Productivity Growth

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Capital per worker grew until about 1980 and then leveled off somewhat.

▲ FIGURE 7.3 Capital per Worker, 1952 I–2012 IV

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consumer price index (CPI)

cyclical unemployment

discouraged-worker effect

employed

frictional unemployment

labor force

labor force participation rate

natural rate of unemployment

not in the labor force

output growth

per-capita output growth

producer price indexes (PPIs)

productivity growth

real interest rate

structural unemployment

unemployed

unemployment rate

Equations:

labor force = employed + unemployed

population = labor force + not in labor force

unemployed employed

unemployed ratent unemployme

population

forcelabor rateion participat forcelabor

R E V I E W T E R M S A N D C O N C E P T S