chapter
eight
Unemployment and Inflation
Prepared by: Fernando & Yvonn Quijano
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 8: Unemployment and Inflation
1 LEARNING OBJECTIVE
Measuring the Unemployment Rate
and the Labor Force Participation Rate
The Household Survey
Labor force The sum of employed and unemployed
workers in the economy.
Unemployment rate The percentage of the labor force
that is unemployed.
Discouraged workers People who are available for
work, but who have not looked for a job during the
previous four weeks because they believe no jobs are
available for them.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 8: Unemployment and Inflation
Measuring the Unemployment Rate
and the Labor Force Participation Rate
The Household Survey
 The unemployment rate measures the
percentage of the labor force that is unemployed:
Number of unemployed
x 100  Unemploym
ent rate
Labor Force
 The labor force participation rate measures
the percentage of the working-age population that
is in the labor force:
Labor force
Working
x 100  Labor force participat ion rate
- age population
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 8: Unemployment and Inflation
Measuring the Unemployment Rate
and the Labor Force Participation Rate
Problems with Measuring the Unemployment Rate
Trends in Labor Force Participation
8-2
Trends in the Labor Force
Participation Rates of Adult
Men and Women Since 1948
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 8: Unemployment and Inflation
Measuring the Unemployment Rate
and the Labor Force Participation Rate
Unemployment Rates for Demographic Groups
8-3
Unemployment Rates in the United States
by Demographic Group, June 2005
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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2 LEARNING OBJECTIVE
CHAPTER 8: Unemployment and Inflation
Types of Unemployment
8-4
The Annual Unemployment Rate in the
United States, 1950-2004
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 8: Unemployment and Inflation
Types of Unemployment
Frictional Unemployment and Job Search
Frictional unemployment Short-term unemployment
arising from the process of matching workers with jobs.
Structural Unemployment
Structural unemployment Unemployment arising
from a persistent mismatch between the skills and
characteristics of workers and the requirements of jobs.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 8: Unemployment and Inflation
Types of Unemployment
Cyclical Unemployment
Cyclical unemployment Unemployment caused by a
business cycle recession.
Full Employment
Natural rate of unemployment The normal rate of
unemployment, consisting of structural unemployment
plus frictional unemployment.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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3 LEARNING OBJECTIVE
CHAPTER 8: Unemployment and Inflation
Explaining Unemployment
Government Policies and the Unemployment Rate
UNEMPLOYMENT INSURANCE AND OTHER PAYMENTS TO THE
UNEMPLOYED
INTERNATIONAL COMPARISONS
8-5
Average Unemployment Rates
in the United States, Canada,
Japan, and Europe, 1995-2004
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 8: Unemployment and Inflation
Measuring Inflation
The Consumer Price Index
Consumer price index (CPI) An average of the prices
of the goods and services purchased by the typical urban
family of four.
8-6
The CPI Market Basket,
December 2004
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 8: Unemployment and Inflation
*Measuring Inflation*
BASE YEAR (1999)
PRODUCT
2006
QUANTITY PRICE EXPENDITURES
PRICE
2007
EXPENDITURES PRICE EXPENDITURES
Eye
examinations
1
$50.00
$50.00
$100.00
$100.00
$85.00
$85.00
Pizzas
20
10.00
200.00
15.00
300.00
14.00
280.00
Books
20
25.00
500.00
25.00
500.00
27.50
550.00
Total
750.00
FORMULA
CPI =
Expenditur
Expenditur
es in the current
900.00
APPLIED TO 2006
year
 100
es in the base year
 $ 900 

  100  120
$
750


915.00
APPLIED TO 2007
 $ 915 

  100  122
$
750


Don’t Miscalculate the Inflation Rate
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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5 LEARNING OBJECTIVE
CHAPTER 8: Unemployment and Inflation
Using Price Indexes to Adjust for the Effects of Inflation
 CPI in 2004 

Value in 2004 dollars = Value in 1980 dollars  
 CPI in 1980 
Falling Real Wages at Lucent
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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8-2
CHAPTER 8: Unemployment and Inflation
4 LEARNING OBJECTIVE
Calculating Real Average Hourly Earnings
YEAR
NOMINAL AVERAGE HOURLY EARNINGS
CPI
(1982-1984 = 100)
2002
$14.95
179.9
2003
15.35
184.0
2004
15.67
188.9
NOMINAL AVERAGE
YEAR HOURLY EARNINGS
CPI
(1982-1984 = 100)
REAL AVERAGE
HOURLY EARNINGS
(1982-1984 DOLLARS)
2002
$14.95
179.9
$8.31
2003
15.35
184.0
8.34
2004
15.67
188.9
8.30
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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6 LEARNING OBJECTIVE
CHAPTER 8: Unemployment and Inflation
Real versus Nominal Interest Rates
Nominal interest rate The stated interest rate on a
loan.
Real interest rate The nominal interest rate minus
the inflation rate.
Deflation A decline in the price level.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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7 LEARNING OBJECTIVE
CHAPTER 8: Unemployment and Inflation
Does Inflation Pose Costs on the Economy?
Inflation Affects the Distribution of Income
The Problem with Anticipated Inflation
Menu costs The costs to firms of changing prices.
The Problem with Unanticipated Inflation
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 8: Unemployment and Inflation
Consumer price index (CPI)
Cyclical unemployment
Deflation
Discouraged workers
Efficiency wage
Frictional unemployment
Inflation rate
Labor force
Labor force participation rate
Menu costs
Natural rate of unemployment
Nominal interest rate
Price level
Real interest rate
Structural unemployment
Unemployment rate
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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