Lecture 5: UNEMPLOYMENT AND INFLATION. Unemployment and Inflation The two key concepts of...
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Transcript of Lecture 5: UNEMPLOYMENT AND INFLATION. Unemployment and Inflation The two key concepts of...
Lecture 5: UNEMPLOYMENT AND INFLATION
Unemployment and Inflation
The two key concepts of Macroeconomics Either can destabilize the economy.
When BOTH happen together – REALLY, REALLY BAD.
STAGFLATION
Unemployment
People who are looking for work but have no jobs.
ACTIVELY LOOKING is critical to the definition.
Definitions for Unemployment Labor Force = Employed + unemployed
Unemployment Rate = number of unemployed / total labor force
Labor Force Participation Rate = labor force / population 16 and over
Definitions of Unemployment
Discouraged Workers People who left the labor force
because they could not find jobs. Underemployed
Workers holding part-time work, but prefer full-time work OR hold jobs that are far below their capabilities.
The reasons for unemployment
Frictional Unemployment
Structural Unemployment
Seasonal Unemployment
Cyclical Unemployment
Cyclical Unemployment
When GDP fluctuates, demand in the economy is not sufficient to provide jobs for all those who seek work.– Recession– Depression
Frictional Unemployment
People in between jobs.
Short period of time while changing jobs.
3% - 4% frictional employment is considered normal.
Structural Unemployment
When changes in market supply or demand conditions affect major industries or regions.
The part of unemployment that results from the mismatch of skills and jobs.
Causes of Structural Unemployment
Decline in demand for a product
Increased foreign competition
Automation of production
Increased raw material costs
Lack of labor mobility between occupations or regions.
Seasonal Unemployment
Most seasonal unemployment tends to occur in certain industries. – Hotel and catering – Tourism – Fruit picking – Christmas
Unemployment Statistics
Natural Rate of Unemployment Level of unemployment at which there
is no cyclical unemployment.
Full Employment Level of employment that occurs
when the unemployment rate is at the “natural rate.”
The Natural Rate of Unemployment
Depending on whom you talk to …
4% to 5% is considered the natural rate. Consists of only structural and
frictional unemployment.
Historic Unemployment Rates
1933 during the Great Depression – 25%
1998 – Unemployment fell to 3.9%
October 2009 – 10.2% - highest in 26 years!
March 2010 – 9.7%
3.9% Unemployment
Why wouldn’t this be good for the economy?
Wage Inflation
How do employers attract or keep employees if there is not enough workers? Higher Wages More Benefits
1999, Amigos was paying $9 per hour and McDonalds offered $500 signing bonuses.
Why would that be bad?
Costs go up (labour), so prices have to rise to cover labour.
Higher prices make workers demand more money.
Cost – Push Inflation
Current Data on Unemployment for the US
According to the Bureau of Labour Statistics (www.bls.gov)
Currently wages are stagnant to negative.
Unemployment Data
Previously: 303,000 new jobless claims were filed in March 2009.
Currently: 448000 in the week ending April 24, 2010
168000 people reported getting jobs in March 2010
Comparison of key countries December 09
BRIC Country Unemployment
Brazil – 9.7% (est.)
Russia – 6.4% (est.)
India – 6.8% (DOWN)
China – 4.0%
BTW:
Top 3 of unemployment: Nauru Liberia Zimbabwe
Countries with the lowest unemployment -
Countries with the lowest unemployment Andorra Monaco Qatar
Review
How do economists measure the unemployed?
Previously unemployed individuals who have stopped looking for work are called ____ workers.
What are the types of unemployment? The natural rate of unemployment
consists solely of frictional and structural unemployment.
THE CONSUMER PRICE INDEX AND THE COST OF LIVING
The INFLATION Indicators
What do you think?
1976: Starting salary for an economics professor was $15,000
2001: Starting salary for an econ. prof. was $55,000.
Considering the REALITY PRINCIPLE, who had a better life?
Reality Principle
What matters to people is the real value of money – its PURCHASING POWER – not the nominal or face value of money.
CPI:
Consumer Price Index
A price index that measures the cost of a fixed basket of goods chosen to represent the consumption pattern of individuals. Tracks the cost of
living over time.
What is in the “market basket”? Food and
Beverages Housing Apparel Transportation Medical Care Recreation Education Other goods and
services
Food and Beverages
Breakfast Cereal Milk Chicken Wine Coffee Service meals Snacks
Housing
Rent for primary residences
Owners equivalent rent
Fuel Oil (home heating)
Bedroom furniture
Apparel
Men’s shirts and sweaters
Women’s dresses Jewellery
Transportation
New cars Airline fares Gasoline Car insurance
Medical Care
Prescription drugs
Medical supplies Doctor services Eyeglasses Eyeglass services Hospital care
Recreation
Television Pets Pet products Sports equipment Admissions
Education and Communication
College Tuition Postage Telephone
Services Computer
Software Computer
accessories
Other Goods and Services
Tobacco and smoking products
Haircuts Other personal
services Funeral Expenses
CPI
Used by both government and the private sector to measure changes in prices facing consumers.
CPI versus GDP
CPI measures goods produced in prior years (older cars) as well as imported goods.
Chained GDP does not measure either of these. ONLY new goods and those produced in the country.
CPI vs GDP
Because consumers will cut back on goods that cost more – the CPI will tend to overstate true changes in cost of living. If chicken goes up
in price, we switch to hamburger.
CPI Problems
Does not “cut back” on higher priced goods like consumers do.
Would still count the same share of chicken as it did before the price index.
What Economists THINK
CPI may be overestimated by 0.5% to 1.5% each year.
BIG argument among the econ community.
Cost of Living Adjustments
Automatic increases in wages or other payments that are tied to a price index.
For Future Reference on contract negotiations: Called COLA.
COLA and CPI
As CPI goes up, our wages or Social Security makes adjustments to keep up with the cost of living.
INFLATION
Inflation Rate: The percentage
rate of change of the price level of the economy.
Calculating Inflation Rates
Inflation Rate = percentage rate of change of a price index.
See page 124 for more on how to calculate!
INFLATIONINFLATION
– The trade-off with more employment.
Types of InflationTypes of Inflation
Demand-Pull Inflation Cost-Push Inflation Monetary Inflation Stagflation Hyperinflation
Demand-Pull InflationDemand-Pull Inflation
When the demand for goods and services exceeds the production capacity.– Prices rising because
of shortages.
Cost-Push InflationCost-Push Inflation
Inflation can arise from changes in the costs of production of goods and services.– Increase in the price of raw
materials– Increase in the price of
labor– Increase in the cost of
capital.
Cost-Push v. Demand Pull Cost-Push v. Demand Pull
They push and pull prices up.– Labour contracts
containing COLA clauses.
Cost-Of-Living
Adjustments.
Monetary InflationMonetary Inflation
Inflation caused by excessive growth in the money supply.– Value of money
decreases if it isn’t that “rare.”
Rule for Monetary Inflation: Rule for Monetary Inflation: VELOCITYVELOCITY
Quantity Equation– M x V = T x P– Money supply times
the velocity at which it changes hands equals the number of transactions times the average level of prices.
M x V = T x PM x V = T x P
Direct relationship between the money supply and the price level.
What happens when the What happens when the quantity equation is quantity equation is ““offoff””??
Hyperinflation Money supply
increases much, much faster than an economy’s output of goods and services.– THINK RUSSIA in
1990s.– Zimbabwe in 2000s– Germany post WWI
Phillips Curve: The Phillips Curve: The relationship between relationship between
unemployment and inflation.unemployment and inflation.INVERSE relationship.
Unemployment goes UP, then inflation goes DOWN.
Stagflation: When things Stagflation: When things REALLY go wrong on the REALLY go wrong on the
Phillips CurvePhillips Curve Inflation and
unemployment were at higher levels.– Combination of
stagnation and inflation.
– Both were increasing.
1970s: What caused 1970s: What caused Stagflation?Stagflation?
Spending on the Vietnam War PLUS spending on domestic social programs.
Inflationary expectations Rise in energy costs caused by OPEC Monopolistic pricing
What is wrong with Inflation?What is wrong with Inflation?
Inflation reduces REAL INCOME of those whose incomes do not rise as fast as the price level.
Hurts:– People holding assets
in MONEY– Lenders
Special Note: Phillips Curve Special Note: Phillips Curve InternationalInternational
– Europe 1970s had higher inflation and unemployment.
– Worse because: Labour union practices Tax structures Government economic
policies
Consequences of Consequences of UnemploymentUnemployment
Real Output Effects– Each 1% of unemployment
results in a reduction of $100-billion in output.
– Lower real investment means less growth and reduced future output.
– OKUN’S LAW!
Consequences of Unemployment
Income EffectsIncome Effects Loss of income and Loss of income and
benefits (Health benefits (Health insurance)insurance)
Loss of income to Loss of income to others because of others because of reduced purchasing reduced purchasing powerpower
Reduced tax income Reduced tax income and increased outlays and increased outlays of government.of government.
Consequences of Consequences of UnemploymentUnemployment
Social Effects– Health Problems– Increased suicides– Break up of families– Increased child abuse– Increased crime
Consequences of INFLATIONConsequences of INFLATION
Income Effects:– Reduced purchasing
power of the dollar– Reduced real income
for fixed income receivers
– Reduced real wealth of savings
Income Effects of Inflation Income Effects of Inflation (cont.)(cont.)
Benefits those whose incomes rise faster than the inflation rate.
Benefits owners of real assets (real estate, precious metals (kinda!))
Benefits debtors
How Inflation effects Real How Inflation effects Real OutputOutput
Inflation initially stimulates output
Near full employment, there arise bottlenecks in supplies
Costs begin rising faster than prices
Interest rates accelerate, discouraging new investment.
Helpful Reading
Economics. Samuelson, & Nordhaus (2005) Ch. 29-30