Ch. 6: MONITORING CYCLES,
JOBS, AND THE PRICE LEVEL
• The business cycle
• Measures of labor market activity
• Unemployment
–Sources
–Duration
–Groups affected most
• Measuring the price level & inflation rate.
• Business cycle
– periodic but irregular up-and-down movement
in production and jobs.
• NBER defines phases and turning points
– Recession
• significant decline in activity spread across the
economy,
• lasts more than a few months
• visible in industrial production, employment, real
income, and wholesale-retail trade.
• begins just after the economy reaches a peak of
activity
• ends as the economy reaches its trough.
– Expansion occurs between trough and peak
The Business Cycle
• Business Cycle Dates
– The percentage change in real GDP over
each cycle between 1928 and 2003.
Jobs and Wages
• Current Population Survey
– The U.S. Census Bureau conducts monthly
surveys to determine the status of the labor
force in the United States.
– Approximately 60,000 households interviewed
monthly.
– Four months in, eight months out, four months
in.
Population
Working Age Population
(over 16,
Noninstitutionalized)
Labor Force
Young,
Institutionalized
Out of labor force
Employed
Unemployed
Jobs and Wages
• To be considered unemployed, a person
must be:
–without work and have made specific efforts to
find a job within the past four weeks, or
–waiting to be called back to a job from which he
or she was laid off, or
–waiting to start a new job within 30 days.
Jobs and Wages
– The
population
labor force
categories for
2003.
Jobs and Wages
unemployed
unemployment rate 
labor force
employment  population ratio 
# employed
working age population
labor force
labor force participat ion rate 
working age population
Trends in Employment Measures
Cyclical behavior of
employment statistics.
• Are each of the following, pro- or countercyclical?
– Unemployment rate
– LFPR
• Effect of discouraged workers
– Employment-population ratio
Trends in employment statistics
• The LFPR
– increased from 59% in the 1960s to 67% in the
1990s.
– for men has declined, but for women has
increased.
– fell for older workers since the 1950s, but has
recently begun to rise.
• The employment-population ratio
– increased from 55% in the early 1960s to 67%
in 2000.
– declined for men and increased for women.
Jobs and Wages
• Aggregate Hours
– the total number of hours worked by all
workers during a year.
– increased since 1960 but less rapidly than the
total number of workers because the average
workweek has shortened.
Jobs and Wages
Jobs and Wages
• Real Wage Rate
– the quantity of goods and services that can be
purchased with an hour’s work.
– the money wage rate divided by the price
level (more later)
• Three measures
– Hourly earnings in manufacturing
– Total wages and salaries per hour
– Total wages, salaries, & supplements per
hour
Unemployment and Full
Employment
• Is duration of
unemployment
pro- or countercyclical?
• As duration
increases, is
“pain” more or less
concentrated?
Unemployment and Full
Employment
Unemployment and Full Employment
• Types of Unemployment
– Frictional
– Structural
– Cyclical
Unemployment and Full Employment
• Full Employment
– no cyclical unemployment
– when all unemployment is frictional or
structural.
• Natural rate of unemployment.
– unemployment rate at full employment
– estimated to have been around 6 percent on
average in U.S.
– Higher in 1970s, lower in 1990s
• Baby boom
• Women
Unemployment and Full Employment
• Potential GDP
– Quantity of real GDP produced at full
employment.
– corresponds to the capacity of the economy to
produce output on a sustained basis;
– Actual GDP fluctuates around potential GDP
with the business cycle.
– If unemployment is below natural rate, will
actual GDP be above or below potential?
The Consumer Price Index
– The price level is the “average” level of prices
and is measured by using a price index.
– CPI measures the average level of the prices
of goods and services consumed by an urban
family.
– The GDP deflator is another price index,
reflecting the average price of all goods and
services produced.
The Consumer Price Index
• Constructing the CPI involves three stages:
– Selecting the CPI basket
– Conducting a monthly price survey
– Using the prices and the basket to calculate the CPI
cost of bundle in year t
CPIt 
100
cost of bundle in base year
The Consumer Price Index
– The CPI
basket.
The Consumer Price Index
– The CPI basket is based on a Consumer
Expenditure Survey.
– The current CPI based on a 1993-95 survey,
although the reference base period is still
1982-84.
– Every month, BLS employees check the
prices of 80,000 goods and services in 30
metropolitan areas.
– The CPI is calculated using the prices and the
contents of the basket.
The Consumer Price Index
Item
Quantity
10
Price in
1984
$1.00
Price in
2005
$.50
Oranges
Apples
5
$2.00
$3.00
If 1984 is base year,
1984 CPI ___________
2005 CPI __________
If 2005 is base year,
1984 CPI ___________
2005 CPI __________
The Consumer Price Index
• The inflation rate
• % change in price level between years.
•
= (CPI now – CPI last year) / CPI last
year
•
= (CPI now / CPI last year) - 1
• Avg. annual inflation rate over past t years
= (CPI now / CPI t years ago)1/t -1
Adjusting for changes in price level
Nominal Value t
Real Value t 
100
Price Index t
•In base year, how do nominal and real wages
compare?
•Suppose that between 2005 and 2006 nominal
wages rise from $10 to $11 and the CPI rises from
140 to 150
•What was the inflation rate?
•Growth in nominal wages?
•Growth in real wages?
Inflation Questions
Using BLS data on average prices, answer
the following
• Inflation rate between 2004 and 2005.
• Average annual rate of inflation between
1990 and 2005.
• If a person earned $10 per hour in 1990,
how much would they have to earn in
2005 to have the same real wage?
The Bias in the CPI
• A Congressional Advisory Commission
estimated that the CPI overstates inflation by 1.1
percentage points a year.
• Sources of bias:
– New commodities
– Quality improvements
– Commodity substitution
bias
– Outlet substitution bias.
•Why is the bias costly?
•Government spending/taxes.
•Social Security proposal
•Private Contracts