Chapter 23: Unemployment and Inflation
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The inflation rate and unemployment rate are important
indicators of performance.
Types of Unemployment
- Unemployment can be classified as frictional, seasonal,
structural, or cyclical
Frictional Unemployment
- Frictional Unemployment results from people between jobs or
entering the labor force.
- Full Employment involves the entire labor force minus the
frictionally unemployed.
Seasonal Unemployment
- Seasonal Unemployment is caused by seasonal variations.
Structural Unemployment
- Structural Unemployment is caused by structural changes in
demand patterns.
- Technological Unemployment is a type of structural
unemployment cause by introduction of labor-saving equipment
or methods.
Cyclical Unemployment
- Cyclical Unemployment is due to cyclical changes in the economy
such as a recession.
The Measurement of Unemployment
The Unemployment Rate
- The Unemployment Rate is the number of unemployed
expressed as a percentage of the labor force. UF = (U divided by
LF) X 100
- The Labor Force includes all the employed and unemployed. (LF
= Unemployed + Employed)
- The Labor Force Participation Rate is the labor force as a
percentage of the adult population.
The Measurement of Unemployment
- Statistics Canada conducts a monthly survey of about 50 000
people to determine the rate of unemployment.
- The official labor force statistics do not accurately measure the
extent of unemployment and under-employment.
- Discouraged Workers are not actively seeking work and are not
counted as “unemployed”.
The Incidence of Unemployment
- The unemployment rate is highest among young workers
between the ages of 15 and 24.
The Costs of Unemployment
Economic Costs
- The economic cost of unemployment can be measured as lost
income or output.
- The level of output the economy would be able to produce with
full employment I called potential GDP. The output actually
produced by the economy is called Actual Output.
- The potential GDP minus the actual output equals the Output
(Income) Gap.
- The Output Gap is the economic cost of unemployment.
Okun’s Law
- Okun’s Law states that output falls by 3% for every 1% rise in
unemployment rate above that defined as full employment.
Non-Economic Costs
- Non-economic costs of unemployment include emotional and
psychological problems faced by the unemployed and their
families.
Theories of Unemployment
- Classical Economists thought that flexible wages and prices
would lead to full employment.
The Classical Theory of Unemployment
- The classical economists claimed that the wage rate would fall to
restore full employment.
- Say’s Law states that supply creates its own demand.
The Keynesian Theory of Employment
- Keynes claimed that a decrease in aggregate expenditure could
result in unemployment.
Inflation
- Inflation is a sustained rise in the average level of prices.
The Measurement of Inflation
- Inflation is measured by changes in the price level.
There are 3 types of price indexes:
- The Consumer Price Index measures price changes in consumer
goods.
- The Wholesale Price Index measures price changes in primary
goods.
- The Implicit Price Deflator measures changes in the average
price level of all final goods.
The Rule of 70
- The Rule of 70 allows quick calculation of the number of years
required for the price level to double.
- Number of years for inflation to double = 70 divided by the rate
of inflation
Effects of Inflation
Creeping Inflation
- Creeping Inflation creeps at a rate lower than 10%
Galloping Inflation
- Galloping Inflation gallops at a rate between about 10% and
100%.
Hyperinflation
- Hyperinflation rates are more than 100%
Winners and Losers
The Winners
- Inflation results in a redistribution of wealth.
- Debtors and producers of goods and services benefit from
inflation
The Losers
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Those who lose as a result of inflation include creditors, people
on fixed incomes. And owners of financial assets.
The Effects of Inflation on the Economy
- Inflation may cause resources to be misallocated.
- Hyperinflation may result in economic collapse.
The Unemployment-Inflation Relationship
- Some economists believe that there is an inverse relationship
between inflation and unemployment.