Unemployment, Inflation, NAIRU
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Transcript of Unemployment, Inflation, NAIRU
Unemployment, Inflation, Unemployment, Inflation, NAIRUNAIRU
UnemploymentUnemployment
Civilian labor force: worked 1 hour Civilian labor force: worked 1 hour for pay in last week unless for pay in last week unless sick/vacation/strikesick/vacation/strike Not military, not students, not retired, Not military, not students, not retired,
not not discourageddiscouraged workers workers # unemployed / civilian labor force x # unemployed / civilian labor force x
100= unemployment rate100= unemployment rate
Types of UnemploymentTypes of Unemployment
Frictional: looking for better job (good thing)Frictional: looking for better job (good thing) Seasonal: it’s rainingSeasonal: it’s raining Structural: skills no longer usefulStructural: skills no longer useful
New tech, new resources, loss of old resources, New tech, new resources, loss of old resources, changes in demand, globalization, lack of educationchanges in demand, globalization, lack of education
““creative destruction”creative destruction”
Cyclical: changes in biz cycleCyclical: changes in biz cycle unemployment unemployment
Underemployed: overqualified or part-time Underemployed: overqualified or part-time when want full-timewhen want full-time
Full/Natural Rate UnemploymentFull/Natural Rate Unemployment
Impossible (undesirable) 0% Impossible (undesirable) 0% unemploymentunemployment
Elimination of cyclical Elimination of cyclical unemploymentunemployment full full employment/natural rateemployment/natural rate
Potential outputPotential output
Economic Costs UnemploymentEconomic Costs Unemployment
Okun’s Law: every 1% actual U > Okun’s Law: every 1% actual U > natural ratenatural rate GDP gap (actual less GDP gap (actual less than potential) of 2%than potential) of 2%
Unequal burdens: occupation, age, Unequal burdens: occupation, age, race, gender, education, durationrace, gender, education, duration
Noneconomic costs: depression, Noneconomic costs: depression, political impactspolitical impacts
InflationInflation
Rising price level (average)Rising price level (average) Consumer Price Index: “prices of a Consumer Price Index: “prices of a
market basket of some 300 market basket of some 300 consumer goods and services consumer goods and services purchased by a typical urban purchased by a typical urban consumer”consumer” Hasn’t been updated in 30+ years; Hasn’t been updated in 30+ years;
undercounts housing + medicalundercounts housing + medical Producer Price IndexProducer Price Index
Reduces purchasing powerReduces purchasing power
TypesTypes
InflationInflation HyperinflationHyperinflation DeflationDeflation DisinflationDisinflation
CausesCauses
1) Demand-pull (AD up): “too much 1) Demand-pull (AD up): “too much spending chasing too few goods”spending chasing too few goods” Wage-price spiralWage-price spiral
2) Cost-push (AS down): increase cost 2) Cost-push (AS down): increase cost productionproduction Problem: which is it? DP indefinite, CP self-Problem: which is it? DP indefinite, CP self-
limiting (limiting ( recession recession eventually costs back eventually costs back downdown recovery) recovery)
Stagflation: stagnation + inflationStagflation: stagnation + inflation 3) Quantity theory: too many dollar bills 3) Quantity theory: too many dollar bills
(more later)(more later)
Redistribution EffectsRedistribution Effects Anticipated inflation: less importantAnticipated inflation: less important offset w/ offset w/
interest rates or wage raiseinterest rates or wage raise Unanticipated is problemUnanticipated is problem 1) Fixed-nominal-income receivers (fixed income)1) Fixed-nominal-income receivers (fixed income)
COLA: Cost Of Living AdjustmentCOLA: Cost Of Living Adjustment 2) Savers/holders of currency (inflation tax)2) Savers/holders of currency (inflation tax) 3) Debtors vs. Creditors3) Debtors vs. Creditors
Including GovIncluding Gov really want to control inflation? really want to control inflation? 4) Economy: risk + uncertainty4) Economy: risk + uncertainty inefficient use inefficient use
resourcesresources 5) Investment: a) expected rate of return – 5) Investment: a) expected rate of return –
inflation rate = real return; b) inflation premium: inflation rate = real return; b) inflation premium: interest rates risesinterest rates rises more expensive borrow to more expensive borrow to investinvest less investment less investment less capital less capital less less growthgrowth
Relationship U and I?Relationship U and I?
NAIRU: Non-Accelerating Inflation NAIRU: Non-Accelerating Inflation Rate of UnemploymentRate of UnemploymentEssentially = natural rate of Essentially = natural rate of
unemploymentunemployment Level of U at which I won’t changeLevel of U at which I won’t change
∆∆I = (NAIRU - Unemployment I = (NAIRU - Unemployment Rate)/Sacrifice RatioRate)/Sacrifice Ratio
Say NAIRU = 5 and U is at 7%Say NAIRU = 5 and U is at 7%
So: 5-7/2= -1So: 5-7/2= -1 Inflation falls 5% Inflation falls 5% 4 4
Shifts in NAIRUShifts in NAIRU
Policies/trends that increase Policies/trends that increase movement workers from one job to movement workers from one job to anotheranother lower NAIRU lower NAIRU
Trends that make wages downwardly Trends that make wages downwardly flexible (union decline, globalization, flexible (union decline, globalization, etc.)etc.) lower NAIRU lower NAIRU
Phillips CurvePhillips Curve
U Rate
Inflation Rate
Neo-ClassicalNeo-Classical
Rational ExpectationsRational Expectations no trade-off no trade-off U and I in long-run, just choice of U and I in long-run, just choice of what level of inflationwhat level of inflation
Inflation Rate
PClr = Natural-rate U
PCsrUR