MacroEcomonics principles, application, and tools 7th edition by sullivan chapter 06

EXAMINING UNEMPLOYMENT cont’d 6.1 How Is Unemployment Defined and Measured?. labor force 100 population 16 years and older labor force participation rate = ×...  FIGURE 6.1 Unemploymen

C H A P T E R 6

Unemployment and

Inflation

and Inflation

P R E P A R E D B Y

In February 2010, the Bureau of Labor Statistics (BLS) announced

that the unemployment rate was 9.7 percent.

6

More Disability, Less Unemployment?

Are you less upset from being unemployed if unemployment is common in your peer group?

Social Norms, Unemployment, and Perceived Happiness

How large is the bias in the CPI due to not immediately incorporating new goods?

The Introduction of Cell Phones and the Bias in the CPI

3

4

A P P L Y I N G T H E C O N C E P T S

How Is Unemployment Defined and Measured?

C H A P T E R 6

Unemployment and

Inflation

● labor force participation rate

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

EXAMINING UNEMPLOYMENT (cont’d) 6.1

How Is Unemployment Defined and Measured?

labor force

100 population 16 years and older

labor force participation rate = ×

Unemployment and

How Is Unemployment Defined and Measured?

 FIGURE 6.1 Unemployment Data, February 2010

Approximately 65 percent of the civilian population is in the labor

C H A P T E R 6

Unemployment and

How Is Unemployment Defined and Measured?

 FIGURE 6.2 Unemployment Rates in Developed Countries

Among the developed countries, unemployment rates vary substantially.

• Women may simply have run out of available time.

• Even with new technology, housework and childcare do take time

Conclusion: Because women provide more household services than men, it is understandable why their labor force participation may have reached a peak

AFTER GROWING SHARPLY, WOMEN’S LABOR FORCE

PARTICIPATION HAS LEVELED OFF APPLYING THE CONCEPTS #1: What do the recent data show about trends in the percentage of women who are

working?

A P P L I C A T I O N 1

C H A P T E R 6

Unemployment and

Alternative Measures of Unemployment and Why They Are Important

● discouraged workers

Workers who left the labor

force because they could not

Including discouraged workers,

marginally attached workers,

and individuals working part

time for economic reasons

substantially increases

measured unemployment in

2010 from 14.87 million to

26.18 million

Unemployment and

Who Are the Unemployed?

FIGURE 6.4 Selected U.S Unemployment Statistics, Unemployment Rates for February 2010

The incidence of unemployment differs sharply among demographic groups.

C H A P T E R 6

Unemployment and

Inflation

•The federal Disability Insurance program provides income to nonelderly

workers who are deemed unable to engage in substantial employment

•Economists David Autor and Mark Duggan studied the impact of this

program on labor force participation

•They found that the changes in the rules administering the program, the

increased generosity of the benefits of the program for low-skilled

workers, and the increase in the value of health care services all

contributed to an increase in participation in this program

•Since these workers, a portion of whom would have been unemployed,

were no longer in the labor force, the economists estimated that the effect

of the Disability Insurance program was to lower the measured

unemployment rate by 0.5 percent, a very large effect

MORE DISABILITY, LESS UNEMPLOYMENT?

APPLYING THE CONCEPTS #2: Does more liberal

disability insurance decrease measured

unemployment?

A P P L I C A T I O N 2

Unemployment and

Who Are the Unemployed?

● seasonal unemployment

The component of unemployment attributed to seasonal factors

C H A P T E R 6

Unemployment and

Types of Unemployment: Cyclical, Frictional, and Structural

● structural unemployment

Unemployment that occurs when there is a mismatch of skills and jobs.

Unemployment and

(cont’d)

6.2

The Natural Rate of Unemployment

● natural rate of unemployment

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

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.

SOCIAL NORMS, UNEMPLOYMENT, AND PERCEIVED

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

A P P L I C A T I O N 3

● Consumer Price Index

A price index that measures the cost

of a fixed basket of goods chosen to represent the consumption pattern of

Unemployment and

FIGURE 6.5

Components of the

Consumer Price Index (CPI)

Rent and food and beverages

make up 44 percent of the CPI

basket The remainder consists

of other goods and services

The CPI versus the Chain Index for GDP

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

•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

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?

A P P L I C A T I O N 4

Unemployment and

Historical U.S Inflation Rates

 FIGURE 6.6

Price Index for U.S GDP, 1875–2009

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 2009 illustrates the change in the overall price level that

C H A P T E R 6

Unemployment and

Historical U.S Inflation Rates

Unemployment and

Historical U.S Inflation Rates  FIGURE 6.7

U.S Inflation Rate, 1950–2009, Based on Chain-Weighted Price Index

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.

C H A P T E R 6

Unemployment and

The Perils of Deflation

● deflation

Negative inflation or falling prices

of goods and services

● shoe-leather costs

Costs of inflation that arise from trying

to reduce holdings of cash.

anticipated inflation

Consumer Price Index (CPI)

cost-of-living adjustments (COLAs)

natural rate of unemployment seasonal unemployment

shoe-leather costs structural unemployment unanticipated inflation unemployment insurance unemployment rate

K E Y T E R M S