Economics principles tools and applications 9th by sullivan sheffrin perez chapter 06

All Rights Reserved6.1 Define these concepts: the labor force, the labor force participation rate, and the unemployment rate.. labor force = employed + unemployed • Unemployment rate Th

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NINTH EDITION

Chapter 6

Unemployment and Inflation

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6.1 Define these concepts: the labor force, the labor force participation rate, and the unemployment rate.

6.2 Distinguish between cyclical, structural, and frictional unemployment.

6.3 Describe the costs of unemployment.

6.4 Discuss how the Consumer Price Index is calculated.

6.5 Explain the difference between inflation and the price level

6.6 Summarize the costs of anticipated and unanticipated inflation.

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How Is Unemployment Defined and Measured?

• Labor force

The total number of workers, both the employed and the unemployed

labor force = employed + unemployed

• Unemployment rate

The percentage of the labor force that is unemployed

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6.1 EXAMINING UNEMPLOYMENT (3 of 9)

• Labor force participation rate

The percentage of the population over 16 years of age that is in the labor force

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How Is Unemployment Defined and

Measured?

Approximately 63 percent of the civilian population is in the labor

force The unemployment rate in January 2015 was 5.7 percent

SOURCE: Bureau of Labor Statistics, U.S Department of Labor,

2015

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Among the developed countries, unemployment rates vary substantially

SOURCE: The Economist , February 14, 2015.

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Labor Force Participation by women

• In 1948, the labor force participation rate for women 20 years and older was 32 percent

• By 1970, it had grown to 43 percent, and by 1997 it had reached 60 percent This trend reflected remarkable changes in our economy and society as women dramatically increased their presence in the workforce

• Since 1997, the figure has remained virtually constant at 60 percent.

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Alternative Measures of Unemployment and

Why They Are Important

• Discouraged workers

Workers who left the labor force because they could not find jobs

Including discouraged workers, marginally attached workers, and

individuals working part time for economic reasons substantially

increases measured unemployment in 2015 from 8.98 million to

17.99 million

SOURCE: Bureau of Labor Statistics, U.S Department of Labor,

2015

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Who Are the Unemployed?

The incidence of unemployment differs sharply among

demographic groups

•

SOURCE: Bureau of Labor Statistics, U.S Department of

Labor, 2015

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APPLICATION 1

DECLINING LABOR FORCE PARTICIPATION

APPLYING THE CONCEPTS #1: What factors account for the decline in the labor force participation rate in the last decade?

• Since reaching a peak of 67.3 percent in 1999, the labor force participation rate has fallen to 64.0 percent by end of 2011 What can account for this decline?

• Two factors have been prominently discussed by economists The past decade experienced two recessions and low economic growth by historical standards Perhaps a large number of individuals just decided that job prospects were too poor and left the labor force during this decade An alternative explanation focuses

on the baby boomers—the generation born after 1946 As this large generation ages, a significant number of the baby boomers will naturally retire and leave the labor force

• A recent study by the Federal Bank of Chicago suggested both factors were operative Based on some statistical models, they estimated that about one-half of the decline in labor force participation was due to a longer run trend of increased retirements from the baby boomers The rest could be explained by other factors, including sluggish economic growth Of course, sluggish growth might prompt even more baby boomers to retire, so these factors might not be fully independent

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Who Are the Unemployed?

• Seasonal unemployment

The component of unemployment attributed to seasonal factors

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• Natural rate of unemployment

The level of unemployment at which there is no cyclical unemployment It consists of only frictional and structural unemployment

• Full employment

The level of unemployment that occurs when the unemployment rate is at the natural rate

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APPLICATION 2

LESS UNEMPLOYMENT INSURANCE, MORE EMPLOYMENT?

APPLYING THE CONCEPTS #2: Did reductions in unemployment insurance lead to more rapid growth in employment in 2014?

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• Unemployment insurance

Payments unemployed people receive from the government

SOURCE: Bureau of Labor Statistics, U.S Department of Labor, 2015.

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APPLICATION 3

SOCIAL NORMS, UNEMPLOYMENT, AND PERCEIVED HAPPINESS

APPLYING THE CONCEPTS #3: Are you less upset about being unemployed if unemployment is common in your peer group?

Individuals do not like to become unemployed A seven year British study showed that:

• Well-being declines when we become unemployed

• If employed, having peers lose their job also decreases happiness

• Interestingly, losing one’s job causes less of a decrease in well-being if peers were also unemployed

• In other words, misery loves company

Why is this significant?

• The more unhappy an unemployed person is, the more aggressive they are about finding another job

• If your peer group is unemployed, you may be less aggressive about trying to find another job

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What matters to people is the real value of money or income—its purchasing power—not the face value of money or income

• Consumer Price Index

A price index that measures the cost of a fixed basket of goods chosen to represent the consumption pattern of a typical consumer

The CPI index for a given year, say year K, is defined as

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6.4 THE CONSUMER PRICE INDEX AND THE COST OF LIVING (2 of 3)

The CPI versus the Chain Index for GDP

Rent and food and beverages make up 44 percent of the CPI basket

The remainder consists of other goods and services

SOURCE: Bureau of Labor Statistics, U.S Department of Labor, 2006.

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• Cost-of-living adjustments (COLAs)

Automatic increases in wages or other payments that are tied to the CPI

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APPLICATION 4

THE INTRODUCTION OF CELL PHONES AND THE BIAS IN THE CPI

APPLYING THE CONCEPTS #4: How large is the bias in the CPI due to not immediately incorporating new goods?

• Cell phones were introduced in 1983, but not included in the CPI until 1998

• According to Jerry Hausman of MIT, this resulted in an upward bias of the telecommunication component of the CPI of 0.8 to 1.9 percent

• The reported increase in telecommunication prices during this period might have actually been a decrease of 8 percent

• Room air conditioners also took 15 years to be included

• Since new products are constantly being introduced, the bias in the CPI can be large

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• Inflation rate

The percentage rate of change in the price level

Inflation rate = percentage rate of change of a price index

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6.5 INFLATION (2 of 5)

Historical U.S Inflation Rates

After remaining relatively flat for 60 years, the price level began to steadily increase after World War II

The price of a postage stamp in 1940 and 2014 illustrates the change in the overall price level that occurred

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6.5 INFLATION (4 of 5)

Inflation reached its highest peaks in the postwar era during the decade of the 1970s when the economy was hit with several increases in oil prices

In recent years, the inflation rate has been relatively low

SOURCE: U.S Department of Commerce, 2015.

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The Perils of Deflation

• Deflation

Negative inflation or falling prices of goods and services

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6.6 THE COSTS OF INFLATION (1 of 2)

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KEY TERMS

Anticipated inflation Labor force

Consumer Price Index (CPI) Labor force participation rate Cost-of-living adjustments (COLAs) Menu costs

Cyclical unemployment Natural rate of unemployment Deflation Seasonal unemployment Discouraged workers Shoe-leather costs

Frictional unemployment Structural unemployment Full employment Unanticipated inflation Hyperinflation Unemployment insurance

Inflation rate Unemployment rate

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