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Unformatted text preview: 7 T HE A NATOMY OF I NFLATION AND U NEMPLOYMENT FOCUS OF THE CHAPTER In this chapter we examine the costs of both inflation and unemployment, and consider some of the policy questions that are raised by the tradeoff between them. We also look very carefully at the anatomy of unemployment the different types of and reasons for unemployment; the difference between unemployment with high frequency and with high duration; and the effect of age distribution, and of other demographic and policy considerations on the natural rate. SECTION SUMMARIES 1. The Anatomy of Unemployment Unemployment in the U.S. can be characterized by 5 stylized facts: a) Different groups of people (groups in this case are defined by age, race, and experience) have very different unemployment rates. b) There are substantial flows into and out of the unemployment pool the number of people who are unemployed at any given point in time. The number of people entering and leaving this pool is large relative to the number of people in and out of it; for this reason, we say there is high labor market turnover . c) The causes of the flows into this pool are somewhat cyclical in nature: layoffs tend to be high during recessions, while voluntary quits are high during booms. d) Most people who become unemployed remain so for only a short time. e) The unemployment pool is made up largely of people who are unemployed for long periods of time. 73 74 C HAPTER 7 It is important to remember that people can only be in the unemployment pool if they are also in the labor force either working or actively seeking work. Individuals can thus enter and leave the unemployment pool by entering and leaving the labor force, as well as by losing and finding jobs. Discouraged workers people who would like jobs but have given up looking for them are not considered a part of the labor force, and thus, technically, are not unemployed. It is also important to understand how the aggregate , or overall, rate of unemployment is formed. Because the labor force is made up of a number of different groups, many of which have radically different rates of unemployment, we must take a weighted average of them to find the overall rate: u = w 1 u 1 + w 2 u 2 + + w n u n The w i , here, are weights, equal to the fraction of the labor force represented by each group. The u i are the unemployment rates for each group. The aggregate rate can change either because are the unemployment rates for each group....
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