Unemployment/InflationChapter 13

Breakdown of Total U.S. Population by Employment Status

Total Population

Persons under 16Persons in the armed forcesPersons institutionalized

Non-institutional adult civilian population

Not in labor force Civilian labor force

Employed Unemployed

Unemployment Rate

• Percentage of the civilian labor force that is unemployed

• Civilian Labor Force – 16 years or older either employed or actively seeking employment

• Idaho unemployment rate July 2008 – 4.1% - today 6.8%

• U.S. unemployment rate July 2008 – 5.7%- Today 8.5%

More…..

• Individuals who are actively looking for a job but work less than 1 hour per week for pay or profit

• Does not include people who are underemployed, working part time, or have given up the job search

• Government takes monthly surveys to measure the unemployment rate

Full Employment

• Even in an economy that is working properly, economists expect some unemployment.

• An unemployment rate of 3% is considered full employment.

• However, some people with jobs could be underemployed – they work part-time but want full

One Economic Indicator

• Economists measure how healthy the economy is at any given time by counting the number of people who are unemployed.

Unemployment Insurance

• Way of tracking unemployment in U.S.• Not public assistance – paid for by your

employers – based on type of work done• Two qualifications

– Personal eligibility – able to work– Monetary requirements – worked last 5

quarters

• Automated system• $28,000 per year would make one eligible

for $275/week for 6 months

Types of Unemployment

• Frictional

• Seasonal

• Technological

• Structural

• Cyclical

Frictional Unemployment

• People take time to find a job– Get laid off, take time

to find right job– Graduate from high

school or college– Looking for a new job– Left job to take care of

a parent, coming back

Seasonal Unemployment

• Unemployment that occurs as a result of harvest schedules or vacations

• Industries slow down or shut down due to cold weather – Summer Job –

Boondocks– Winter Jobs - Bogus

Technological Unemployment

• Automation makes some workers skills obsolete

Structural Unemployment

• Worker’s skills do not match the jobs that are available– Need skills to success– Move from farming to

manufacturing– Manufacturing to

service – Takes time to retrain

Cyclical Unemployment

• In economic downturns people are laid off because there is a surplus of inventories and no demand

• Unemployment can cause uncertainly, political instability, and social problems

Inflation

What is Inflation?• An increase in the

price level, or the average level of prices

• The same amount of money buys less

• Inflation reduces people’s purchasing power (ability to buy goods and services)

How Do We Measure Inflation?• Economists use a price index• If the price index increases from year to

year – we are experiencing inflation• CPI (Consumer Price Index) - most

commonly used inflation measure– measuring the price of a standard group of

goods meant to represent the “market basket” of a typical urban customer

– Watching from year to year helps determine the inflation rate (% change in prices over time)

Three Causes of Inflation

• Quantity theory – too much money in the economy chasing too few goods

• Demand Pull – • Demand-side inflation• When demand for goods and services exceeds

supply• Government increase in spending on war goods

causes the price to go up for those goods– Johnson years – Vietnam War and Great Society– Civilian demands outpaced supply pulling prices up

• Cost Push• Supply-side inflation• Inflation occurs when producers raise

prices to meet increased costs for labor and raw materials

• Wage-Price Spiral– Increase in one type of prices can cause other

prices to rise to make up for lost profit - oil– Price-wage spiral – lack of competition results

in businesses increases prices – causes an increase in wage demand

Affects of Inflation

• Reducing purchasing power• People on fixed incomes, such as social

security and investment proceeds, are negatively effected.

• The greater the inflation rate, interest earned on savings loses value – can buy less with the money you have

• If you have a long-term contract – can eat up profits over time.

Deflation

• Opposite of inflation

• A decline in the price level, or average level of prices

• A downward change in the CPI indicates deflation

• PROBLEMS – when prices do not fall at the same time, some firms go out of business or lay off workers

Hyperinflation

• Inflation that exceeds 50% per month

• The value of money decreases

• CAUSES – government needs to pay for government services but does not want to raise taxes, so they print more money

• People immediately convert money to goods and services because they are worth more

Examples of Hyperinflation

• U.S. – 1918 – 20.4% - booming economy after WW I

• Germany – 1922-1923 – 3 trillion % inflation - prices doubled every two days – economic crisis helped rise Hitler to power

• Greece – 1941-44 – prices doubled every 28 hours

• Hungary – after WWII – prices doubled every 15 hours

• Yugoslavia – 1994 – prices doubled every 18 hours

• Zimbabwe – December 2008 – 13.22 million % inflation per month