Macroeconomic Problems:

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Chapter 8

• Macroeconomic Problems
• Unemployment and Inflation

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Introduction

• The twin evils of unemployment and inflation are
  concerns of macroeconomists, along with the size
  of the long run growth rate output.

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Recessions and Depressions

• A recession is roughly a period in which real GDP
  declines for at least two consecutive quarters.
• A recession is marked falling output and rising
  unemployment.
• A depression is a prolonged and deep recession.

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Defining and Measuring Unemployment

• The unemployment statistics released to the press
  on the first Friday of each month are based on a
  survey of households conducted by the bureau of
  labor statistics, a branch of the department of
  labor.
• To be classified as employed a person over the
  age of 16 must have worked one hour or more as a
  paid employee either for someone else or for his
  or her own business or farm.

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• Those who are not employed are unemployed,
  meaning that the person is available for work and
  has made specific efforts to find work, or not in
  the labor force (those who are not looking).
• The total number of employed and unemployed makes
  up the labor force.

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• The unemployment rate is found by taking the
  number of unemployed divided by the labor force.
• The labor force participation rate is found by
  taking the labor force divided by the population
  (where the population is the labor force plus
  those not in the labor force).

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Understanding the Level of Unemployment

• To understand the level of unemployment better we
  must look at unemployment rates across groups of
  people, regions, and industries.
• Unemployment rates for different demographic
  groups there are large differences by gender,
  age, and race.

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• Unemployment rates in states and regions not all
  have the same level of unemployment.
• Unemployment rates in different industries are
  also different.
• Discouraged-workers effects
• Those no longer looking for work are no longer
  counted as unemployed which lowers unemployment
  rate.

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Costs of Unemployment

• Some unemployment is inevitable It is simply
  part of the natural workings of the labor market.
  
• The duration of unemployment tends to be longer
  in recessions.
• 1. Frictional and structural unemployment refer
  to the portion of unemployment that is due to the
  natural workings of the labor market and to
  changes in the industrial structure of the U.S.
  Economy respectively.

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• The difference is that while the first refers to
  short-run job/skill matching problems the second
  denotes longer-run adjustment problems that may
  last for years.
• 2. The natural rate of unemployment is the
  unemployment that occurs as a normal part of the
  functioning of the economy.

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• Estimates of its magnitude range from 4 to 7,
  but most labor market analysts assume it lies
  somewhere in the 5 to 6 range.

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• 3. Cyclical unemployment and lost output the
  increase in unemployment that occurs during
  recessions and depressions is called cyclical
  unemployment and it is associated with a
  reduction in output.

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• 4. Seasonal unemployment is predicable changes in
  the unemployment rate due to seasonal factors.
• An example close to home is the increase in
  unemployment is the increase in unemployment
  every summer, when college and high-school
  students start looking for temporary jobs.

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• This brings about seasonal adjustment which
  basic idea is to remove the predictable seasonal
  unemployment from the reported unemployment rate
  so that we are left with a measure that more
  accurately reflects changes in the same of
  economy.

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• For example, if the unemployment rate generally
  tends to rise by .5 percent each June, then the
  seasonally adjusted unemployment rate for June
  would be actual unemployment rate minus .5
  percent.

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• In this way, if the seasonally adjusted rate
  changes we know it is not because college
  students are looking for jobs, but rather because
  of some non-seasonal change in labor market
  conditions.

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• Social consequences of unemployment include
  economic hardship as well as a number of social
  and personal ills (anxiety, depression, a
  deterioration of physical and psychological
  health, drug abuse and suicide).

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Inflation

• Inflation is an increase in the overall price
  level, and happens when many prices increase
  simultaneously.
• Sustained inflation continues over a significant
  period of time.
• Price indexes are used to measure overall price
  levels.

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• The most popular is the consumer price index
  which is based on a bundle of goods meant to
  represent the market basket purchased monthly
  by the typical urban consumer.
• Other popular price indexes are producer price
  indexes which are indexes of prices producers
  receive for products at all stages in the
  production process.

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The Costs of Inflation

• Inflation changes the distribution of income
  Some groups may be hurt more than others.
• Effects on debtors and creditors if inflation is
  unanticipated creditors can be hurt.
• Administrative costs and inefficiencies include
  changing price tags, more frequent bank
  transactions.

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• Increased risk and slower economic growth
  unanticipated inflation creates uncertainty which
  may make investors reluctant to invest in capital
  and to make long-term commitments.

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