Unemployment and Inflation
i.e. two evils of the economy will
be discussed.
Two Definitions of Economic Growth
• The increase in REAL GDP
• The increase in REAL GDP per capita
Statistics Current
• GDP 2.6% in Q4
• Current inflation rate (Jan. 2014, 0.1%)
• Unemployment 5.5%
• Per Capita Income 2013 = $51,749
Bar Chart – Unemployment recent
http://www.tradingeconomics.com/charts/unite
d-states-unemployment-rate.png?s=usurtot
BLS Chart for latest unemployment.
Unemployment Rate 2011 to 2012
GDP 2007 to 2012 Q3
GDP Growth to March, 2013
Now- was that a bad recession????
Why does growth matter?
Allows wages and incomes to rise.
Standard of living increases
Takes the pressure of scarce resources…
(why?)
Main Sources of Growth
Two ways that society can increase its real
output and income:
1) increase inputs of resources (l/3 of our
growth comes from this)
2) increase productivity of those inputs (2/3
of our growth here.)
BLS Latest Numbers
Macroeconomic Problems
High inflation rate
High unemployment rate
High interest rates
Low economic growth or stagnation
Macroeconomic Policies
Fiscal Policy deals with
changes in government
expenditures and/or taxes. to
achieve particular
macroeconomic goals.
Monetary Policy deals with.
changes in the money supply,
or the rate of growth of the
money supply, to achieve
particular macroeconomic
goals.
Different Views of How the Economy WorksStable-Unstable
 The economy is inherently
stable and selfregulating.-Classical
 The economy is inherently
unstable and requires
intervention to correct
problems.-Keynesian
Macro deals with entire economy
Subject matter includes:
 Macroeconomic problems – high
unemployment
 Macroeconomics theories – government
spending
 Macroeconomics policies- use fiscal policy
 Different view on how the economy worksself-correcting, government stimulus
The Idealized Course of Business
Fluctuations
Consensus among Economists says
swings due to:
Changes in REAL levels of output and
employment brought about by
changes in levels of TOTAL SPENDING.
Spending
Businesses no longer produce at current level
Output, employment and income fall
In reverse… the opposite results.
What are component parts of GDP?
?
Component Parts GDP
Consumption
Investment
Government Spending
Exports- Imports (Net Exports)
C+I+G+(X-M) = GDP
What will we focus on?
• This will focuses on economic growth, the
business cycle, unemployment and inflation.
– When is a person “unemployed”?
– What are the costs of unemployment?
– -When will money not buy as much?
Unemployment since 1990
The Labor Force
• Labor force: all persons age 16 and over who
are either employed or actively seeking work.
– Out of the labor force: those not working and not
actively seeking employment.
Total
population
Out of the
labor force
Employed
Labor force
Unemployed
6-23
Bureau Labor Statistics determines perimeters
for unemployment.
Persons over 16 are considered employed
IF:
 They worked at all for pay or profit even
if for an hour
 Worked 15 hours or more w/out pay in a
family-operated enterprise.
 Have a job which they did not work
during (survey week) due to illness,
vacation, industrial disputes, bad
weather, time off or personal reasons.
How is unemployment measured?
• U.S. Census Bureau surveys about 60,000 households a month
to determine how many people are actually unemployed.
Done by random calling.
• This translates into approximately 110,000
individuals, a large sample compared to public
opinion surveys which usually cover fewer
than 2,000 people.
Measuring Unemployment
(participation rate)
• A person is counted as unemployed if he or
she is not working but is actively seeking
work.
• Unemployment rate: the proportion of the
labor force that is unemployed:
Unemployment rate =
Number of unemployed people
Labor force
14,825,000
2010 unemployment rate =
= 9.6%
153,889,000
6-26
Exercise
Unemployment rate =
Number of unemployed people
Labor force
• Calculate the unemployment rate.
– #in labor force = 200,000
– #unemployed = 10,000
– Unemployment rate = (10,000/200,000) x 100
= 5%
6-27
The Labor Force
• The labor force comprises about half the
population.
• The size of the labor force has more than
doubled since 1960 due to population growth.
• The labor force participation rate increased
rapidly due to the increasing numbers of
women joining the labor force.
6-28
BLS Continued
Persons are considered
unemployed IF: (during the
survey week)
 Do not have a job
 Are available for work
 Have actively looked for
work during past four
weeks (this requirement is
very weak…)
Reason for unemployment
• How long a person remains unemployed is
affected by the nature of the joblessness.
– Job leavers
– Job losers
– Re-entrants
– New entrants
What happens if you can’t find work…….
• If unemployment persists… workers often
give-up looking.
• Discouraged workers are not counted as part
of the unemployment problem after they give
up looking for a job.
• Some people are forced to take any job
available which means…no longer
unemployed, but now
“underemployed.”
How could one be underemployed?
Underemployment exists when people seeking
full-time paid employment, work only part
time, or are employed at jobs below their
capability.
Underemployed workers represent labor
resources that are not being fully utilized.
The Human Costs
of Unemployment
•
•
•
•
6-33
Loss of income.
Loss of confidence.
Social stress.
Declining health.
Defining Full Employment
• Full employment is not the same as zero
unemployment.
• There are four categories of unemployment.
– Seasonal unemployment.
– Frictional unemployment.
– Structural unemployment.
– Cyclical unemployment.
6-34
Unemployment Cont.
Seasonal unemployment is the unemployment
due to seasonal changes in employment or
labor supply. What would be an example?
At the end of each season, thousands of workers
must go searching for new jobs, experiencing
seasonal unemployment in the process.
Three basic kinds of unemployment:
1. Frictional Unemployment
• Frictional unemployment is the brief periods of
unemployment experienced by people moving between
jobs or into the labor market.
• Frictional unemployment differs from other
unemployment in three ways:
• Demand is there
• Frictionally unemployed have the skills required
• Job search relatively short
3 Kinds of Unemployment Cont.
Structural Unemployment
• Structural unemployment is the
unemployment caused by a mismatch
between the skills (or location) of job seekers
and the requirements (or location) of available
jobs.
Periods between jobs will be lengthened when
the unemployed lack the skills that employers
require.
3 Kinds of Unemployment Cont.
Cyclical Unemployment
• Cyclical unemployment is the
unemployment attributable to the lack of
job vacancies – i.e., to an inadequate
level of aggregate demand.
• Cyclical unemployment occurs when
there are simply not enough jobs to go
around.
More Than a Century of
Unemployment
Source: U.S. Department of Labor, Bureau of Labor Statistics
OKUN’S Law
• Okun’s Law
• Arthur Okun quantified the relationship
between the shortfall in real output and
unemployment.
• High unemployment in 1992 left the U.S. $240
billion short of its production possibilities — a
loss of $920 of goods and services for every
American.
Labor Force? Okun’s Law
• Slow Growth….
• The economy must grow at least as fast as the
labor force to avoid cyclical unemployment.
• Relationship between the shortfall in output and
unemployment.
• When you have unemployment of any
significance, your economy will have reduced
output. Ratio accepted today is 1% of
unemployment yields 2% less output.
• A 2/1ratio then allows economists to put a $$$
amount on the cost of unemployment to the
economy.
Think about this!
Unemployment = 5% (NARU)
Unemployment = 8% (x 2 = 16% less
production)
Unemployment = 25% (depression era x 2) =
50% less production!
Today (2014) 6.7 x 2 = 13.4%
Important economic fact:
As the economy gets close to
FULL EMPLOYMENT
It is more difficult to obtain further gains in REAL
OUTPUT.
Continued increasing levels of spending bring
about INFLATION
So… what is full employment?
Full employment is not the same as zero
unemployment.
The economy strives to reach its potential
which means that full employment is
essential.
When the actual rate of unemployment
exceeds the natural rate, the actual output
of the economy will fall below its potential.
Resources are underutilized (inside
production possibility curve.)
SRAS
P
R
I
C
E
L
E
V
E
L
AD
GDP
QF
LRAS
Full Employment
•
The condition that
exists when the
unemployment rate is
equal to the natural
unemployment rate.
• Full productive
capacity has been
• Reached.
Image Cylinder= Economy…
Businesses, factories, economy
not working at full capacity
Full Employment
AD
AS
LRAS
Full Employment Act of 1946
• The Full-Employment Goal
• In the Employment Act of 1946, Congress committed the
federal government to pursue a goal of “maximum”
employment.
• Congress didn’t specify what the rate of unemployment
should be.
Congress creates confusion
First attempt to define “full employment” came about 1960Council of Advisors decided that full employment meant
“watching prices” …..
Rising prices they said would signal that full employment was
being reached.*** believed inverse relationship
unemployment/inflation
In 1970-80 Full employment potential was considered overly
optimistic.
Unemployment rates stayed far above 4% even when the
economy expanded.
Inflation began to accelerate at higher levels of
unemployment.
Confusion Continued
• The redefinition of full employment goal needed to be
addressed.
• Needed to realize more youth and women in the labor
force
• Needed to acknowledge the increased transfer payments
• Needed to acknowledge the structural changes in demand
(for such things as technology and trade) old industries
were not in such demand (steel, textiles, auto)\
• Most economists say 5% today
• (6% is on the way…. In my opinion)
Humphrey-Hawkins Act of 1978
• This Act was passed to require the Federal
Reserve to maintain a 4% rate of unemployment
without inflation while holding the inflation to a
goal of 3% by implementing monetary policy
where needed.
• Today- target is 5% and 2%.
• Fiscal policy might undo this law, but it is still a
focus of the Fed and the Fed has to report to
Congress twice a year on the health of the
American economy.
Natural Rate of Unemployment
NARU
NARU = the difference between full employment
and 100% employment.
A level of unemployment that will not trigger
inflation. i.e. this figure will not bid up wages.
The natural rate of unemployment is not a
temporary high or low… it is a rate that is
sustainable into the future.
Depression Unemployment
• Our greatest failure occurred during the Great Depression,
when as much as one-fourth of the labor force was
unemployed.
The Historical Record
• Unemployment rates fell dramatically during World War II
— the civilian unemployment rate reached a rock bottom
1.2 percent.
• Since 1950, unemployment rate has fluctuated from a low
of 2.8 percent during the Korean War (1953) to a high of
10.8 percent during the 1981-82 recession.
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From 1982 to 1989, unemployment fell, but shot up again in the 1990-91
recession.
In…2002…unemployment was circa 5.7%
March 2015 5.5%
In…2004…unemployment was circa 6.5%
February, 2005… 5.4%
September, 2005….5.1%
February, 2006….. 4.8%
January, 2007…….4.6%
October, 2007…….4.7%
October, 2008…….6.1%
February, 2009 …..7.6%
July, 2009 ………. 9.5%
September 2009….9.7%
October, 2009 – 10.1
February. 2010 – 9.7
May, 2010 – 9.3
June, 2010- 9.7
October, 2010 9.6
October, 2012 7.8%
March 2013 7.9%
March 2014 6.7%
New Jobs
• The new jobs of tomorrow will require increasing levels of
education and skill.
• And, new type skills no doubt.
Old Skills
• As the skills gap widens, structural unemployment increases.
• The skills gap is the gap between skills required for emerging
jobs and the skills of workers.
Monster – What’s out there?