Chapter 8 Notes

Chapter 8 Notes - $1 8 Snemgiioynient and inflation Each...

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Unformatted text preview: $1. 8 Snemgiioynient and inflation. Each month the Department of Labor’s Bureau of Labor Statistics (BLS) uses the household survey to calculate several variables such as the labor force, the unemployment rate, the discouraged workers, and the iabor force participation. 0 Labor Force—- the sum of employed and unemployed workers in the economy Victims? \or‘io sale at“ 3’le v.1. rife-“h in. i. ' e i ‘ i .1 a; ‘2’ o Unemployment Rate-- the percentage of the labor force that is unemployed. W % hit-LL Li’ _ Li: a Discouragecl Workers" people who are available for work who have not looked for a job during the previous four weeks because they believe no jobs are available for them. 5 as", l l‘ 0 Labor Force Participation Rate-~ the percentage of the working-age population in the labor force. Hi? ‘" L30 gflfllfii Old - ‘\ W N9 Cr‘ggggwa {fl :ii’mi‘ta’ZS-ra; a A few problems with measuring the Unemployment rate: 1.) One measurement problem is underemployment. This problem refers to the state of working significantly below skill level or working fewer hours than desired. 2.) Another problem is the discouraged worker effect, which happens when bad news induces people to stop looking for work, ca using the unemployment rate to fall. 3.) Another probiem can be the encouraged worker effect, which occurs when good news induces people to start looking for work, causing the unemployment rate to rise (until they succeed in finding work). 90' V0 prlgij :3 “:5 l I: L— ‘EJP \ \ zzzzz Ft”: ‘E’Ni ‘ 1 flag: a; V u‘ 12" .m, in £de The iaborforce participation rate is important. 0 The higher the iabor force participation rate, the more labor will be available and the higher a country's level of GDP and GDP per person. 0 The iabor force participation rate of adult men has declined gradually since 1948, but the labor force participation rate of aduit women has increased significantly, leaving the overaii labor force participation rate higher today than it was in 1948. Unemployment rates differ depending on the demographic in question. - The unemployment rate of black adults is more than twice that of white adults, and the unemployment rate of black teenagers is more than twice that of white teenagers. The US. economy creates and destroys millions of jobs every year. The creation and destruction of jobs results from changes in consumer tastes, technologicai- progress, and the success and faiiures of entrepreneurs. Types of finempioyment ,_ o Frictionai Unemployment" short—term unemployment arising from the process of matching " workers with jobs. 0 Some unemployment is due to seasonal factors, such as weather or fluctuations in demand during different times of the year. . Seasonal unemployment refers to unemployment due to factors such as weather, variations in tourism, and other calendar-related events. 0 Some frictional unemployment is good for the economy because it represents workers and firms taking the time necessary to ensure a good match between the attributes of workers and the characteristics of jobs. ;\ 0 Structural Unemployment" arises from a persistent mismatch between the skills and -‘\‘ i . . . . . /RQQ“‘ characteristlcs of workers and the requrrements of Jobs. 0 This type of unemployment can last for ionger periods than frictional unemployment because workers need time to learn new skills. 0 For example, the transition of America from a largely agricultural economy to a manufacturing economy. o Cyciical Unemploymen _- unemployment caused by a business cycle recession. . Qw’ju/ 0 Higher employment during expansions and lower employment during recessions. 0 Natural Rate of Unemployment— the normal rate of unemployment, consisting of frictional ‘ unemployment plus structural unemployment. ; o The natural rate of unemployment is currently estimated by the economists to be about 5 percent. 0 The natural rate of unemployment is also called the full-employment rate of unemployment. ' ‘= :r - gems) fieived Frohlem - Unemployment Reason for unemployment Job losers Job New Year Number Total layoff Other Eeavers Reentrants entrants -1664 - 02 I- 03 n- 04 I- 2 05 7 591 3, 667 - 2 734 872 2 386 2006 4 5 7 001 3 321 -2 400 327 2 237 7 .. 22;: ._ :7.“ (EEG WV“ if V3: '5" 5i r-x. .5; ‘12" 51“- 2 “5991.0! fie 2353.153 ‘- 9?:t“: 79 {:2 « qfl 5205??) , . , a. Calculate the percentage of the unemployed who have just lost their JObS and the percentage who have left their jobs. b. Calculate the percentage of the unemployed who are unemployed as the result of entering the labor force, either for the first time or as a reentrant. SOLVING THE PROBLEM Step 1: Review the chapter material. This problem is about definitions of unemployment, so you may want to review the section “Types of Unemployment,” which begins on page 248 in the textbook. Step 2: Answer question (a) by calculating the percentages of unemployed. For example, the percentage of job losers in 2002 can be calculated as: (4,607/8,377) x 100 = 55.0%. The percentage of reentrants and new entrants in 2002 is: [(2,368 + 536)/8,377] x 100 : 34.7%. The percentages for the three categories in each year are: Percentages of those unempioyed due to Job Job Losers Leavers Reentrants and new entrants 55.0 55.1 51.5 Step 3: Answer part (b) by comparing the different sources of unemployment. Notice that the major source of unemployment is job losers, followed by reentrants and new entrants. The majority of the reentrants and new entrants group is reentrants, which are people who lost or quitjobs in the pest, dmpped out of the labor force for some reason, and are now looking for jobs. 3- ‘ 0W?” — meet H ken, a Sawm. Ger ”5:“?wa Licwmeww‘“ L 5../ i VJ 2“ 5. -. i 5 r“ 5 ~55 ,_ "rift-'1“ 13%an are-c5 $.53.er 515:5“; av 5 5 NJ job LQQEVS‘» 5 aegecm-recfi W5 F” ' do. ' .5 ,5 L «#513555. ”'25 Ire-4%“? "”1555? I‘m-5...: v; As?‘ I 5%? . <.15,J5(_..v\5:3&:..x we» ”3. E 5, _ i ' 1;. w, '5 -, X 5.3 f.,.__ ~5nmémr‘m, Qée weeifléreii £5 5 - -- ' dUrw’ké} (J’s {flow—A £5: ‘5 511,53? Expiaintng Enemgéeyment Government Policies and Unemployment 0 Government policies can reduce the level of frictional and structural unemployment by aiding job search and worker retraining. 0 Some government policies, however, can add to the level of frictional and structural unemployment. o Unemployment insurance payments can raise the unemployment rate by extending the time that unemployed workers search forjobs. Government policies have caused the unemployment rates in most other industrial countries to be higher than in the United States. Labor Unions and Unemployment - Labor unions are organizations of workers that bargain with employers for higher wages and better working conditions for their members. a Wages above market levels can also increase unemployment. _ o Wages may be above market levels because of the minimum wage, labor unions, and efficiency wages. Efficiency Wages o Efficiency Wage-— a higher—than-market wage paid by a firm to increase worker productivity. 0 For example, Chick—Fil-A (i think). - \ M“: f" ,' 5‘31“; \" /,/ '\ a" fly“; ‘flk‘? in) i,\.)0..—.»,2. -‘ _ :‘l/l CL.,\..-‘€ -- - _ ._/ " " Measuring inflation - Price Level-- a measure of the average prices of goods and services in the economy. - inflation Rate“ is the percentage increase in the price level from one year to the next. 0 Consumer Price lndex lCPIl-— an average 'of the prices of the goods and services purchased by the typical urban family of four. 0 Look at Fig. 20-6. % , if: . v A o The CP! is the most widely used measure-of inflation. 0 There are four biases that make changes in the CPI overstate the true inflation rate: a) Substitution bias b} increase in quaiity bias c) New product bias ) Outlet bias. NO 4335 he»; i Kiwi... Paw? ,mew- I \fxg ”WV“ \k If; «:11, ’1' u, did {rising ‘irice indexes in Adiust for inflation - Price indexes are designed to measure changes in the price level over time, not the absolute levei of prices. I To correct for the effects-of inflation, we can divide a nominai variable by a price index and multipiy by 100 to obtain a real variable. 0 The real variable will be measured in dollars of the base year for the price index. 0 Nominal average hourly earnings are often referred to as the nominal wage, and reai average hourly earnings are often referred to as the real wage. Before its merger with Alcatel, Lucent Technology and its unionized workers signed a contract that caiied for nominal wages to increase 16 percent over a period of seven years. With nominal wages rising 16 percent and the price fevel rising 23 percent, Lucent’s workers will have experienced falling real wages. Reai vs. Nominet interest Rates 0 Nominal interest Rate—~ the stated interest rate on a ioan. 0 Real interest Rate—- the nominal interest rate minus the inflation rate. - Deflation-— a decline in the price level. ‘ ' '5 '61» v . If": f“ . r i if? - I‘ ”/3 5 H Cs waif?! gm. , .. M"? minim M.» xxx“ 145%.6 / r - t t 5 g .e $0 H” :5; Wtfimfir re recesses, 5 5’5 o 5 I ’V (3" ’3‘" 5 5 ‘ ‘ ‘ - 5\/: P ‘5‘; ‘ : ‘.\ Jr'fl 06 f“? GU") “5 iCfi’st l 3, \(‘L935 {L +0 5. "fléiKJO/fi ‘Jf'if‘iz ‘2 2' W i ()5, C {\« {($53 Q; t \ e w.— 2. ‘ fl . A .. M _ ‘ \nro. nee-- er ‘5 if» 2» re a u r i u . o The difference between nominal and real values is important when money is being honoured and lent. - Because it is corrected for the effects of inflation, the real interest rate provides a better measure of the true cost of borrowing and the true return to lending than does the nominai interest rate. .:.5 r“ , 2‘“: . 1 t Va- ; 9,? , i \‘,fl‘{, : ,~’u«."r‘”=.rw’t ,/ {‘1 5L3 Jr, . WK ELM” H . t. t..- Wm (err-«c, : iOrta {Insts 3f inflatinn Inflation affects the distribution of income. - Inflation does not reduce the affordability ofgoods and services to the average consumer, but it still imposes costs on the economy. 0 Inflation affects the distribution of income. Some people will find their incomes rising faster than the rate of inflation, and so their purchasing power will rise. Other people will find their incomes rising slower than the rate of inflation and so their purchasing power will fall. Problems with anticipated inflation 0 When inflation is anticipated, its main costs are that paper money loses some of its value. Menu costs refer to the costs to firms of changing prices. Problems with unanticipated inflation 0 When inflation is unanticipated, the actual inflation rate can turn out to be different from the expected inflation rate. 0 This outcome seems unfair to most people because they are either winning or losing only because something unanticipated has happened. \lgU béwa-ivg Ci (it lOOQ - f\ e ~ . x i . A E, 2““ — r “l iii-flair"! Oi: i 5-,L5‘K2=-’)i- if L“ £1?wa ‘ 5:23». ij’ixr’ ”if” 1.2%: t W; ' _ n . l ”a. ‘ . . ~ n er {N33- iaflm’l’? - L64 lift? r" (agave?) fiz’ilflfe WW fiffiigggnfi _. . _. ,, D{1i§2<m%<éa.§ z r ' d __._LE P... ,. . r‘sflfifieLoxL-JOM—‘am.-. ,__;, Li: 1.0+ E ,. ,,,,. . 1 P~%ke..,0§fl§003_....§“,..Div’lflmgfiagwflfii _ __._._. .....\._.v __., .. ...
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