Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Chapter 9. Unemployment and Inflation
Instructor: JINKOOK LEE
Department of Economics / Texas A&M University
ECON 203 502
Principles of Macroeconomics
Interest Rates
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Interest Rates
The Household Survey
Each month, the U.S. Bureau of the Census conducts the Current
Population Survey (often referred to as the household survey) to collect
data needed to compute the unemployment rate.
People are considered employed if...
they worked during the week before the survey,
or they were temporarily away from their jobs because they were ill, on
vacation, on strike, or for other reasons.
People are considered unemployed if...
they did not work in the previous week but were available for work and
had actively looked for work at some time during the previous four
weeks.
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Interest Rates
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.
The Department of Labor’s Bureau of Labor Statistics (BLS) classifies
people who do not have a job and who are not actively looking for a job as
not in the labor force.
Discouraged workers: People who are available for work but have not
looked for a job during the previous four weeks because they believe no jobs
are available for them.
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Interest Rates
The Household Survey
Employment Status of the Civilian Working-Age Population (Sep. 2011)
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Interest Rates
Three Macroeconomic Indicators
Unemployment rate: The percentage of the labor force that is unemployed
Labor force participation rate: The percentage of the working-age
population in the labor force
Employment-population ratio: The percentage of the working-age
population that is employed
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Problems with Measuring the Unemployment Rate
One problem that the BLS confronts is distinguishing between the
unemployed and people who are not in the labor force.
1
Under-estimating Unemployment Rate.
Not counting discouraged workers as unemployed.
Counting people as employed who are working part time.
(or, not counting part time workers as unemployed.)
Interest Rates
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Interest Rates
Problems with Measuring the Unemployment Rate
Other measurement problems can cause the measured unemployment rate
to overstate the true extent of joblessness because the household survey
does not verify the responses of people included in the survey.
2
Over-estimating of Unemployment Rate.
Some people who claim to be unemployed and actively looking for work
may not be actively looking (due to government payments to the
unemployed).
Other people might be employed but engaged in illegal activity or might
what to conceal a legitimate job to avoid paying taxes.
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Interest Rates
Trends in the Labor Force
The labor force participation rate determines the amount of labor that will
be available to the economy from a given population.
The higher the labor force participation, the more labor will be
available.
The higher the labor force participation, the higher a country’s levels of
GDP and GDP per person.
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Interest Rates
Unemployment Rates for Different Groups
(Unemployment Rates in the United States, September 2011)
The unemployment rate of African Americans is the highest of the four
ethnic groups shown, while the unemployment rate of Asians is the
lowest.
High school dropouts have an unemployment rate that is triple the
unemployment rate for college graduates.
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Interest Rates
Annual Unemployment Rate in the United States, 1950-2010
The unemployment rate rises during recessions and falls during expansion.
Shaded areas indicate recessions.
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Interest Rates
Frictional Unemployment and Job Search
Most workers spend at least some time engaging in job search, just as most
firms spend time searching for a new person to fill a job opening.
Frictional unemployment: Short-term unemployment that arises from the
process of matching workers with jobs.
Seasonal unemployment: unemployment due to factors such as
weather, variations in tourism, and other calendar-related events.
Because of seasonal unemployment, the BLS reports two
unemployment rates each month - one that is seasonally adjusted and
one that is not.
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Frictional Unemployment and Job Search
Interest Rates
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Frictional Unemployment and Job Search
Interest Rates
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Interest Rates
Structural Unemployment
Structural unemployment: Unemployment that arises from a persistent
mismatch between the skills and attributes of workers and the requirements
of jobs.
Structural unemployment can last for longer periods because workers
need time to learn new skills.
e.g. employment by U.S. steel firms dropped by more than half b/w
1980s and 2000s as a result of competition from foreign producers and
technological change.
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Structural Unemployment
Inflation
Interest Rates
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Structural Unemployment
Inflation
Interest Rates
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Interest Rates
Cyclical unemployment
Cyclical unemployment: Unemployment caused by a business cycle
recession.
When the economy moves into recession, many firms cut back on
production, and thus start laying off workers.
e.g. Ford laid off workers during the recession of 2007-2009. As the
economy slowly recovered from the recession, Ford began rehiring those
workers.
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Cyclical unemployment
During Expansion
Inflation
Interest Rates
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Cyclical unemployment
During Recession
Inflation
Interest Rates
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Full Employment
When the only remaining unemployment is structural and frictional
unemployment, the economy is said to be at full employment.
Natural rate of unemployment: The normal rate of unemployment,
consisting of frictional unemployment plus structural unemployment.
The natural rate of unemployment is also sometimes called the
full-employment rate of unemployment.
Interest Rates
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Interest Rates
Government Policies
Unemployment insurance payments from the government
The opportunity cost of continuing to search for a job is the salary you
are giving up at the job you could have taken.
In the United States and most other industrial countries, the
unemployed are eligible for unemployment insurance payments from the
government.
It helps the unemployed maintain their income and spending, lessening
the personal hardship of being unemployed.
Minimum Wage Laws
If the minimum wage is set above the market wage determined by the
demand and supply of labor, the quantity of labor supplied will be
greater than the quantity of labor demanded.
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Interest Rates
Labor Unions
Labor unions: Organizations of workers that bargain with employers for
higher wages and better working conditions for their members.
In unionized industries, the wage is usually above the market wage.
This above-market wage results in employers hiring fewer workers.
Then, does the existence of labor unions significantly increase the overall
unemployment rate in the economy?
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Interest Rates
Efficiency Wages
Many firms pay higher-than-market wages..
not because the gov. requires them to or because they are unionized,
but because they believe doing so will increase their profits.
Many studies have shown that workers are motivated by higher wages to
work harder.
Efficiency wage: A higher-than-market wage that a firm pays to increase
worker productivity.
Minimum wage laws, unions, and efficiency wages can cause economies to
experience some unemployment even when cyclical unemployment is zero.
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Interest Rates
Consumer price index (CPI)
Price level: A measure of the average prices of goods and services in the
economy.
Inflation rate: The percentage increase in the price level from one year to
the next.
In Ch.8, we introduced the GDP deflator as a measure of the price level.
But for some purposes it is too broad.
GDP deflator includes the price of every final good and service.
It may not clearly indicate how inflation affects the typical household.
In this chapter, we focus on measuring the inflation rate by changes in the
consumer price index.
these changes come closest to measuring changes in the cost of living
as experienced by the typical household.
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Interest Rates
Consumer price index (CPI)
CPI: An average of the prices of the goods and services purchased by the
typical urban family of four.
(The CPI Market Basket, December 2010)
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Interest Rates
How to Calculate the CPI?
For the base year: CPI is set equal to 100.
In any other year: CPI equals to the ratio of the dollar amount necessary
to buy the market basket of goods in that year divided by the dollar amount
necessary to buy the market basket of goods in the base year, multiplied by
100.
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Interest Rates
How to Calculate the CPI?
The CPI is intended to measure changes in the price level over time.
Thus, the inflation rate in 2013 would be the percentage change in the CPI
from 2012 to 2013:
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Interest Rates
Is the CPI Accurate?
There are four biases that cause changes in the CPI to overstate the true
inflation rate.
1
Substitution bias: In constructing the CPI, the BLS assumes that
consumers purchase the same monthly amount of each product in the
market basket, but consumers actually buy fewer of those products that
increase most in price.
2
Increase in quality bias: The BLS attempts to make adjustments so
that only the pure inflation part of price increases is included in the
CPI, but some price increases are included that partly reflect an
improved quality of products.
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Interest Rates
Is the CPI Accurate?
3
New product bias: For many years, the BLS updated the market
basket of goods used in computing the CPI only every 10 years, which
excluded new products introduced between updates.
4
Outlet bias: Because the BLS continued to collect price statistics from
traditional full-price retail stores, the CPI did not reflect the prices
some consumers actually paid at discount stores and over the Internet.
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Interest Rates
Using Price Indexes to Adjust for the Effects of Inflation
By using the CPI, we can calculate what $20,000 in 1984 was equivalent to
in terms of 2010 purchasing power.
The consumer price index is 104 for 1984 and 219 for 2010
Prices were 219/104=2.1 times higher in 2010 as in 1984
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Interest Rates
Using Price Indexes to Adjust for the Effects of Inflation
Nominal variables: Economic variables that are calculated in current-year
prices.
For some purposes, we are interested in tracking changes in an economic
variable over time.
Real variables: Economic variables that are calculated in base-year prices.
To obtain a real variable, we can divide the nominal variable by a price index
and multiply by 100 measured in dollars of the base year.
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Interest Rates
Real versus Nominal Interest Rates
Interest rate: the cost of borrowing funds, expressed as a percentage of
the amount borrowed.
Nominal interest rate: The stated interest rate on a loan.
Real interest rate: The nominal interest rate minus the inflation rate.
A convenient approximation for the real interest rate is:
Real interest rate = Nominal interest rate − Inflation rate
The real interest rate provides a better measure of the true cost of borrowing
and the true return from lending than does the nominal interest rate.
Deflation: A decline in the price level.
Measuring the Unemployment Rate
Types of Unemployment
Explaining Unemployment
Inflation
Real versus Nominal Interest Rates
Nominal and Real Interest Rates, 1970-2010
Interest Rates