1 / 70

Unemployment and Inflation

Unemployment and Inflation. EVERYONE’S NIGHTMARE Chapter 6. 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.

duante
Download Presentation

Unemployment and Inflation

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Unemployment and Inflation EVERYONE’S NIGHTMARE Chapter 6

  2. Unemployment and Inflation • The two key concepts of Macroeconomics • Either can destabilize the economy. • When BOTH happen together – REALLY, REALLY BAD. • STAGFLATION

  3. Unemployment • People who are looking for work but have no jobs. • ACTIVELY LOOKING is critical to the definition.

  4. 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

  5. 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.

  6. The reasons for unemployment • Frictional Unemployment • Structural Unemployment • Seasonal Unemployment • Cyclical Unemployment

  7. Cyclical Unemployment • When GDP fluctuates demand in the economy is not sufficient to provide jobs for all those who seek work. • Recession • Depression

  8. Frictional Unemployment • People in between jobs. • Short period of time while changing jobs. • 3% - 4% frictional employment is considered normal.

  9. 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.

  10. 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.

  11. Seasonal Unemployment Not included in your book – but in most other Econ texts • Most seasonal unemployment is tends to occur in certain industries. • Hotel and catering • Tourism • Fruit picking • Christmas

  12. Suspicious 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.”

  13. QOD: • Why do we need unemployment to make the economy healthy?

  14. 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.

  15. Historic Unemployment Rates • 1933 during the Great Depression – 25% • 1998 – Unemployment fell to 3.9%

  16. 3.9% Unemployment • Why wouldn’t this be good for the economy???

  17. 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.

  18. Why would that be bad? • Costs go up (labor), so prices have to be upped to cover labor. • Higher prices make workers demand more money. • Cost – Push Inflation

  19. BTW: Current Data on Unemployment for the US • According to the Bureau of Labor Statistics (www.bls.gov) • Unemployment Rate in February: 4.8% Average Hourly Earnings are up $ .05 in February.

  20. Unemployment Data • Previously: 303,000 new jobless claims were filed. • On March 16, new numbers will be posted. • See www.usatoday.com / money and click on economic calendar for the latest posting.

  21. 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 _______ and ____ unemployment.

  22. The Consumer Price Index and the Cost of Living The INFLATION Indicators

  23. 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 PRICIPLE, who had a better life?

  24. Reality Principle • What matters to people is the real value of money – its PURCHASING POWER – not the nominal or face value of money.

  25. 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.

  26. What is in the “market basket”? • Food and Beverages • Housing • Apparel • Transportation • Medical Care • Recreation • Education • Other goods and services

  27. Food and Beverages • Breakfast Cereal • Milk • Chicken • Wine • Coffee • Service meals • Snacks

  28. Housing • Rent for primary residences • Owners equivalent rent • Fuel Oil (home heating) • Bedroom furniture

  29. Apparel • Men’s shirts and sweaters • Women’s dresses • Jewelry

  30. Transportation • New cars • Airline fares • Gasoline • Car insurance

  31. Medical Care • Prescription drugs • Medical supplies • Doctor services • Eyeglasses • Eyeglass services • Hospital care

  32. Recreation • Television • Pets • Pet products • Sports equipment • Admissions

  33. Education and Communication • College Tuition • Postage • Telephone Services • Computer Software • Computer accessories

  34. Other Goods and Services • Tobacco and smoking products • Haircuts • Other personal services • Funeral Expenses

  35. BTW • CPI for 2006: • UP .7% so far for the year. • How does that compare with our wages? • Statistics from bls.gov

  36. CPI • Used by both government and the private sector to measure changes in prices facing consumers. • SEE PAGE 122 to calculate CPI

  37. CPI versus Chained 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.

  38. CPI v. Chained 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.

  39. 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.

  40. What Economists THINK • CPI may be overestimated by .5% to 1.5% each year. • BIG argument among the econ community.

  41. 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.

  42. COLA and CPI • As CPI goes up, our wages or Social Security makes adjustments to keep up with the cost of living. • SEE PAGE 124 THE CPI AND SOCIAL SECURITY

  43. INFLATION!!! • Inflation Rate: • The percentage rate of change of the price level of the economy.

  44. Calculating Inflation Rates • Inflation Rate = percentage rate of change of a price index. • See page 124 for more on how to calculate!

  45. Looking Ahead • Two “Schools” of Macroeconomics • Classical Economics • Keynsian Economics

  46. Classical Economics • A school of economic thought that provides insights into the economy when it operates at or near full employment. • Popular thought so far in 2006. • Picture of David Ricardo (Travis’ favorite economist) • Darwin meets Economics

  47. Keynsian Economics • A school of economic thought that provides insights into the economy when it operates away from full employment. • Economic fluctuations, business cycles, sharp changes in the economy.

  48. THIS Concludes what the book has on unemployment and inflation I THINK you need and deserve more info on inflation!

  49. So what is so wrong if everyone who wants a job has a job?

  50. THE ANSWER???? • INFLATION • The trade-off with more employment.

More Related