Unemployment and Inflation

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Unemployment and Inflation
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Unemployment

• Three questions concerning the overall
  unemployment rate
• What does the overall unemployment rate measure?
• What are the sources of overall unemployment?
• How does overall unemployment change over time?

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Measuring Unemployment

• Labor Force
• All noninstitutionalized civialians 16 years of
  age and older who are either working or actively
  looking for work

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Three Groups of individuals

• The number of unemployed individuals expressed as
  a percentage of the labor force
• Employed individuals - Individuals are considered
  employed if they have full time or part time
  jobs.
• Unemployed individuals - Individuals that are
  not working, but have been seeking work within
  the past 4 weeks.
• Individuals not it labor force

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The Unemployment Rate

• The number of unemployed individuals expressed as
  a percentage of the labor force

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The Labor Force Participation Rate

• The number of individuals considered as part of
  the labor force divided by the number of
  noninstitutionalized civilians 16 years of age
  and older.

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Sources of Unemployment

• Question
• How do people become unemployed?

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Sources of Unemployment

• Four Types of Unemployment
• Frictional Unemployment
• Structural Unemployment
• Seasonal Unemployment
• Cyclical Unemployment

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Frictional Unemployment

• Frictional unemployment defined
• Frictional unemployment is temporary for an
  individual, but it is ongoing within the economy
  as a whole.

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Structural Unemployment

• Structural unemployment arises for 2 reasons
• Low skilled or unskilled labor.
• Chronically unemployed
• Workers need to relocate from shrinking
  industries or depressed areas to areas that are
  growing.

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Seasonal Unemployment

• Seasonal unemployment is caused by seasonal
  shifts in labor supply and demand

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Cyclical Unemployment

• Cyclical unemployment occurs because of
  fluctuations in the business cycle.

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Full Employment

• Full employment is the level of employment when
  there is no cyclical unemployment.
• Full employment doesnt mean zero unemployment.
  Why?
• A 4-6 unemployment rate is considered full
  employment

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Unemployment Over Time

• Recessions and Unemployment
• Expansions and Unemployment

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Unemployment Over Time

• Convergence in labor force between men and women
• Participation rates have risen for women from 34
  to 60 since 1950
• Participation rates have declined for men from
  86 to 75 since 1950.
• Why have the participation rates for men and
  women changed?

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Problems with Official Unemployment Figures

• Underestimation of Unemployment Rate
• Doesnt include discouraged workers
• Doesnt include underemployment
• Part-time workers
• Overqualified workers
• Overestimation of Unemployment Rate
• Unemployment benefits
• Individuals that work and dont report their
  income
• Individuals that work a lot of overtime

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Inflation

• Inflation is a sustained increase in the average
  level of prices
• Disinflation is a reduction in the positive
  inflation rate
• Deflation is a sustained decrease in the price
  level (a negative inflation rate)
• Hyperinflation is a very high rate of inflation
• Brazil had inflation over 1000
• Germany between WW1 and WW2
• Hungry experienced inflation over 19,800 after
  the WW2

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Demand-Pull Inflation

• A sustained rise in the price level caused by
  increases in aggregate demand

Price level
AD
AD
AS
Aggregate Output
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Cost-Push Inflation

• A sustained rise in the price level caused by
  reductions in aggregate supply
• The combination of inflation and a falling level
  of output has come to be called stagflation

Price level
AD
AS
AS
Aggregate Output
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Anticipated Versus Unanticipated Inflation

• Anticipated inflation is inflation that is
  correctly predicted
• Unanticipated inflation is the amount of
  inflation that was unexpected.
• A major issue is whether workers can accurately
  anticipate changes in the price level
• Workers seek to anticipate inflation so that the
  purchasing power of wages are maintained

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Inflation and Interest Rates

• Inflation creates a difference between real and
  nominal interest rates
• Nominal Interest Rate vs Real Interest Rate
• Inflation risk makes some lenders offer
  adjustable-rate home loans

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Why is Inflation So Unpopular?

• As an economic problem, inflation is widespread
• Workers wages may not keep up with inflation
• Those on fixed incomes are seriously affected
• Long-term contracts are difficult to negotiate