GWARTNEY – STROUP – SOBEL – MACPHERSON
Economic Fluctuations,
Unemployment, and Inflation
Full Length Text — Part: 3
Macro Only Text — Part: 3
Chapter: 8
Chapter: 8
To Accompany: “Economics: Private and Public Choice, 15th ed.”
James Gwartney, Richard Stroup, Russell Sobel, & David Macpherson
Slides authored and animated by: James Gwartney & Charles Skipton
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First page
Swings in the
Economic Pendulum
15th
edition
Gwartney-Stroup
Sobel-Macpherson
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First page
Instability in the
Growth of Real GDP: 1960-2013
15th
edition
Gwartney-Stroup
Sobel-Macpherson
Annual Rate of Growth
in Real GDP
(long-run growth rate approximately 3%)
•Although real GDP in the
United States has grown at an
average rate of approximately
3%, the growth has been
characterized by economic
ups-and-downs.
Note: periods of recession are
indicated with shading.
8%
6%
4%
2%
0%
-2%
-4%
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2013
Source: Economic Report of the President, various issues.
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First page
15th
edition
The Hypothetical Business Cycle
•The four phases of the
hypothetical business cycle
are expansion, peak,
contraction, and recessionary
trough.
•In contrast with the business
cycle represented here, as the
previous exhibit illustrated,
real world business cycles are
characterized by expansions
and contractions of varying
duration and magnitude.
Real GDP
Business
peak
Gwartney-Stroup
Sobel-Macpherson
Trend line
Business
peak
Recessionary
trough
Recessionary
trough
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Time
First page
Economic Fluctuations
and the Labor Market
15th
edition
Gwartney-Stroup
Sobel-Macpherson
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First page
15th
Labor Market Classifications
edition
Gwartney-Stroup
Sobel-Macpherson
• Employed – a person (16 years old or over) who is:
• working for pay at least one hour per week,
• self employed, or,
• working 15 hours or more each week without pay in
a family-operated enterprise.
• Unemployed – a person not currently employed who is:
• actively seeking a job, or,
• waiting to begin a job, or,
• on layoff, waiting to return to a previous job.
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15th
Labor Market Classifications
edition
Gwartney-Stroup
Sobel-Macpherson
• Civilian Labor force – civilians (16 years & older) who are:
• either employed or unemployed.
• Not in the labor force – persons (16 years & older) who are:
• neither employed nor unemployed (like retirees,
students, homemakers, or disabled persons).
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15th
Labor Market Indicators
edition
Gwartney-Stroup
Sobel-Macpherson
• The non-institutional civilian adult population is grouped
into two broad categories:
• Persons not in the labor force, and,
• persons in the labor force (this group includes both
the employed and unemployed).
Labor Force
Participation Rate
=
Recall the Labor Force =
# in the Labor Force
Civilian population (16+)
Employed + Unemployed
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First page
U.S. Population, Employment,
and Unemployment: April 2013
245.2 million
Civilian population
16 and over
143.6 million
Labor Force
Participation Rate
Employment /
Population Ratio
Rate of
Unemployment
edition
Gwartney-Stroup
Sobel-Macpherson
155.2 million
89.9 million
Not in the
labor force
• Household workers
• Students
• Retirees
• Disabled
15th
Civilian
labor force
11.7 million
Unemployed
Employed
• Employees
• Self-employed
workers
• New entrants
• Reentrants
• Lost last job
• Quit last job
• Laid off
=
Civilian labor force
Civilian population (16+)
=
155.2
245.2
=
63.3%
=
Number employed
Civilian population (16+)
=
143.6
245.2
=
58.6%
=
Number unemployed
Civilian labor force
=
11.7
155.2
=
7.5%
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First page
Labor Force Participation Rate
of Men and Women, 1948-2012
15th
edition
Gwartney-Stroup
Sobel-Macpherson
Labor Force Participation Rate
of Men and Women
•The labor force participation
rate of women has been
steadily increasing for
several decades.
87 %
83%
78 % 76 %
70 %
57.5 % 57.7 %
46 %
•During the same period the
rate of men has been falling.
33 %
38 %
1948 1960 1975 1990 2012 1948 1960 1975 1990 2012
–––––– Women ––––––
––––––– Men –––––––
Source: www.bls.gov.
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First page
Labor Force Participation Rate and
Employment-Population Ratio: 1980-2013
•Both the labor force
participation rate and the
employment-population
ratio trended upward from
1980-2000, but have been
declining since.
•Both figures fell sharply
during the 2008-2009
recession. Each has had a
weak rebound during the
recovery phase of this
business cycle. In 2013,
both were still below their
2007 levels.
15th
edition
Gwartney-Stroup
Sobel-Macpherson
Labor Force Participation Rate
68 %
66 %
64 %
62 %
Employment-Population Ratio
60 %
58 %
56 %
1980
1985
1990
1995
2000
2005
20102013
Sources: Willem Van Zandweghe, “Interpreting the Recent Decline in Labor Force Participation,”
Federal Reserve Bank of Kansas Economic Review (Quarter 1, 2012): 5-34; and Daniel Aaronson,
Jonathan Davis, and Loujia Hu, “Explaining the Decline in the U.S. Labor Force Participation Rate,”
Chicago Fed Letter, no. 296, (March 2012):1-4.
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First page
Composition of the Unemployed
by Reason in 2013 (April)
15th
edition
Gwartney-Stroup
Sobel-Macpherson
Breakdown of Unemployed 2013 (April)
•There are various reasons why
persons were unemployed in
April of 2013.
Job leavers
7.4%
New
entrants
10.9%
•Nearly one-half (44.8%) of the
unemployed were dismissed
from their previous jobs.
•More than a third (37.8%) of
the unemployed were either
new entrants or reentrants into
the labor force.
Reentrants
26.9%
44.8%
Dismissed
from
Previous
Job
10%
On
Layoff
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First page
The Unemployment Rate
By Age and Gender: April 2013
15th
edition
Gwartney-Stroup
Sobel-Macpherson
Civilian Rates of Unemployment (April 2013)
•In 2013, the unemployment
rate for men was 7.7%,
compared to only 7.3% for
women.
•The observed differential
between male and female
workers was higher with
younger workers.
•The unemployment rate itself
was also much higher for those
under the age of 25 than for
those over the age of 25.
26.2%
22.1%
14.0%
12.3%
6.3%
16-19 20-24 25+
–– Men aged ––
7.7% 7.5% 7.3%
5.9%
All Both All
16-19 20-24 25+
men
women –– Women aged ––
Source: www.bls.gov.
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First page
15th
Questions for Thought:
edition
Gwartney-Stroup
Sobel-Macpherson
1. Classify the following as employed, unemployed, or not in labor force:
a) person who is not working but applied for a job at Target last week
b) person working part-time and searching diligently for a full-time job
c) auto worker vacationing in Florida during a layoff at a General
Motors plant who expects to be recalled in a couple of weeks
d) 17-year-old who works 6 hours per week as a throwing newspapers
e) homemaker working 70 hours a week preparing meals and
performing other household services
f) college student who spends between 50 and 60 hours per week
attending classes and studying
g) a retired Social Security recipient
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First page
15th
Questions for Thought:
edition
Gwartney-Stroup
Sobel-Macpherson
2. The following are for the U.S. in 2011 (in millions)
Population
311.3
Civilian pop. (age 16 and over) 239.1
Employed
139.7
Unemployed
13.7
a) Calculate the unemployment rate
b) Calculate the labor force participation rate
c) Calculate the employment / population ratio
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First page
Three Types of Unemployment
15th
edition
Gwartney-Stroup
Sobel-Macpherson
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First page
15th
Three Types of Unemployment
edition
Gwartney-Stroup
Sobel-Macpherson
• Frictional Unemployment:
• Caused by imperfect information.
• Occurs because:
• employers are not aware of all available workers
and their qualifications, and,
• available workers are not fully aware of all the jobs
being offered by employers.
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15th
Three Types of Unemployment
edition
Gwartney-Stroup
Sobel-Macpherson
• Structural Unemployment:
• Reflects an imperfect match of employee skills
to skill requirements of the available jobs.
• Also reflects structural and demographic
characteristics of the labor market.
• Cyclical Unemployment:
• Reflects business cycle conditions
• When there is a general downturn in business activity,
cyclical unemployment increases.
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First page
Employment Fluctuations:
The Historical Record
15th
edition
Gwartney-Stroup
Sobel-Macpherson
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First page
Unemployment and Output Are
Linked Over the Business Cycle
15th
edition
Gwartney-Stroup
Sobel-Macpherson
•The unemployment rate from
1960-2013 is illustrated here.
•As expected, unemployment
rose rapidly during each of the
eight recessions (the shaded
years indicate periods of
recession).
•In contrast, after each recession
ended, the unemployment rate
began to decline as the
economy moved into an
expansionary phase of the
business cycle.
•Note that the actual rate of
unemployment was greater
than the natural rate during and
immediately following each
recession.
Unemployment Rate (U.S) 1960 - 2013
Actual rate
of unemployment
12%
10%
8%
6%
4%
Natural rate
of unemployment
2%
0%
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2013
Sources : http://www.bls.gov/ and,
Robert J. Gordon, Macroeconomics (Boston: Addison-Wesley, 2012).
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First page
15th
The Concept of Full Employment
edition
Gwartney-Stroup
Sobel-Macpherson
• Full Employment:
Level of employment resulting when the rate of
unemployment is normal, considering both frictional and
structural factors.
• Full employment is closely related to the concept of
the natural rate of unemployment.
• Natural Rate of Unemployment:
Level of unemployment that reflects “job shopping” in an
economy of imperfect information and dynamic change.
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First page
The Concept of the
Natural Rate of Employment
15th
edition
Gwartney-Stroup
Sobel-Macpherson
• The natural rate of unemployment is:
• neither a temporary high nor temporary low.
• a rate that is both achievable and sustainable.
• the level of unemployment accompanying an
economy’s “maximum sustainable rate of output.”
• Both demographic factors (e.g. young workers as a share
of the labor force) and public policy (e.g. the level of
unemployment benefits) influence the natural rate of
unemployment.
• Actual rate of unemployment generally rises above
natural rate during a recession and falls below the
natural rate during a boom.
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First page
Actual and Potential GDP
15th
edition
Gwartney-Stroup
Sobel-Macpherson
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15th
Actual and Potential GDP
edition
Gwartney-Stroup
Sobel-Macpherson
• Potential output:
Maximum sustainable output level consistent with the
economy’s resource base, given its institutional
arrangements.
• Actual and potential output will be equal when the
economy is at full employment.
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First page
15th
edition
Actual and Potential GDP, 1960-2013
Gwartney-Stroup
Sobel-Macpherson
Real GDP
(billions of 2005 $)
16,000
14,000
•Here we illustrate both
actual GDP & potential GDP.
•Note the gap between actual
and potential GDP during
periods of recession.
Actual
GDP
12,000
1990-91
recession
10,000
8,000
6,000
1970
recession
1960
recession
2008-10
recession
1982
recession
4,000
1974-75
recession
2,000
1960
2001
recession
Potential
GDP
1965
1970
1975
1980
1980
recession
1985 1990
1995
2000 2005
2013
Source: http://www.bls.gov
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First page
15th
Questions for Thought:
edition
Gwartney-Stroup
Sobel-Macpherson
1. During a recession, which of the following will be true?
a. Actual rate of unemployment will be lower than the
natural rate.
b. Actual GDP will be lower than potential GDP.
c. Actual employment will exceed what is considered as
full employment.
2. How will increased usage of the Internet by employers and
employees influence the job search process? Will it tend to
increase or decrease the natural rate of unemployment?
3. (True or false) When full employment is present the rate
of unemployment will be zero.
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15th
Questions for Thought:
edition
Gwartney-Stroup
Sobel-Macpherson
4. What is the relationship between full employment and
the natural rate of unemployment? Why might the
natural rate change?
5. Frictional unemployment is a result of:
(a) not enough jobs for everyone to be employed
(b) unemployed workers’ skills not matching those needed
for available jobs
(c) a decline in the demand for labor, such as during a
recession
(d) imperfect information & temporary periods of
unemployment while workers change jobs
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First page
The Effects of Inflation
15th
edition
Gwartney-Stroup
Sobel-Macpherson
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15th
Inflation
edition
Gwartney-Stroup
Sobel-Macpherson
• Inflation is a change in the general level of prices as
measured by a price index such as the GDP deflator or
the consumer price index.
• Inflation is generally measured at an annual rate.
• When inflation is high, the year-to-year changes in the
inflation rate are nearly always highly variable, making
them difficult to predict.
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15th
edition
The Inflation Rate, 1956-2013
•Between 1956 and 1965, the
general price level increased
at an average annual rate of
only 1.6%.
•In contrast, the inflation rate
averaged 9.2% from 1973 to
1981, reaching double-digits
during several years.
•Since 1982, the average rate
of inflation has been lower
(2.9% from 1983-2013) and
more stable.
Gwartney-Stroup
Sobel-Macpherson
1956-1965 average
inflation rate = 1.6 %
15%
10%
1973-1981 average
inflation rate = 9.2 %
1983-2013 average
inflation rate = 2.9 %
5%
0%
-5%
1956 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
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2013
First page
Inflation Rates
Across Economies: 2006-2012
15th
edition
Gwartney-Stroup
Sobel-Macpherson
•The rate of inflation varies
widely among countries.
•For Canada, Germany,
Switzerland, and the U.S. the
annual inflation rates for the
2006-12 period were below 4%
-and- variations (year to year)
were no more than 1 or 2%.
•In contrast, both the annual
inflation rate and the change
between years was much
greater for Bolivia, Iceland,
Russia, and Venezuela.
•High rates of inflation are
almost always associated with
substantial year-to-year swings
in the inflation rate.
Annual Inflation Rates
Low Inflation (%) 2006 2007 2008 2009 2010 2011 2012
Canada
2.0 2.1 2.4 0.3 1.8 2.9 1.5
Germany
1.8
2.3
2.6
0.3
1.1
2.1
2.0
Switzerland
1.1
0.7
2.4
-0.5
0.7
0.2 -0.7
United States 3.2
2.9
3.8
-0.4
1.6
3.2
2.1
High Inflation (%)
Bolivia
6.6
4.8
7.8
5.6
6.1
5.8
3.3
Iceland
6.7
5.1 12.7 12.0
5.4
4.0
5.2
Russia
9.7
9.0 14.1 11.7
6.9
8.4
5.0
Venezuela
13.7 18.7 31.4 28.6 29.1 27.2 21.1
Source: International Monetary Fund; http://www.IMF.org
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First page
15th
Unanticipated and Anticipated Inflation
edition
Gwartney-Stroup
Sobel-Macpherson
• There are two different kinds of inflation:
• Unanticipated inflation:
An increase in the price level that comes as a surprise,
at least for most individuals.
• Anticipated inflation:
A widely expected change in the price level.
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First page
15th
Effects of Inflation
edition
Gwartney-Stroup
Sobel-Macpherson
• High and variable rates of inflation are harmful for
several reasons:
• Because unanticipated inflation alters the outcomes
of long-term projects like the purchase of a machine
or operation of a business, it will both increase the
risks and retard the level of such productive activities.
• Inflation distorts the information delivered by prices.
• People will respond to high and variable rates of
inflation by spending less time producing and more
time trying to protect their wealth and income from
the uncertainty created by inflation.
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First page
15th
What Causes Inflation?
edition
Gwartney-Stroup
Sobel-Macpherson
• Nearly all economists believe that rapid expansion in the
money supply is the primary cause of inflation.
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15th
Questions for Thought:
edition
Gwartney-Stroup
Sobel-Macpherson
1. Suppose that the CPI was 150 at the end of last year and
157.5 at the end of this year. What was the inflation rate
during the year?
2. If decision makers anticipate an inflation rate of 3% at the
start of a year and prices rise by 7% during the year, this is an
example of
a. anticipated inflation.
b. an inflation rate higher than the anticipated.
c. an inflation rate lower than the anticipated.
3. (True or false) When the inflation rate is high and variable,
decision makers will generally be able to anticipate year-toyear changes in inflation quite accurately.
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15th
Questions for Thought:
edition
Gwartney-Stroup
Sobel-Macpherson
4. How would an unanticipated jump in inflation impact the
wealth of:
a. Joe, who has a 30-yr home mortgage at a fixed interest rate
b. The McCoy's, who hold most of their wealth in long-term
fixed yield bonds
c. Hanna, a retiree drawing a pension of a fixed dollar amount
d. Jose, a heavily indebted small-business owner.
e. Mike, the owner of an apartment complex with substantial
debt at a fixed interest rate
f. Tina, a worker whose wages are determined by a 3-year
union contract ratified three months ago
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First page
15th
Questions for Thought:
edition
Gwartney-Stroup
Sobel-Macpherson
5. What impact will high and variable rates of inflation
have on the economy? How will they influence the risk
accompanying long-term contracts and related business
decisions?
6. Compared to the United States, labor markets in France,
Italy, and Spain are characterized by more generous
unemployment benefits. Other things constant, how will
this influence the unemployment rate in in these
countries compared to that in the U.S.? Explain.
Check your answers to see if your response is correct..
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End of
Chapter 8
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