Chapter 13 Section 1 Unemployment

1. Chapter 13 Section 1 Unemployment • Frictional Unemployment-Occurs b/c of the time required to match qualified job seekers w/ available openings. • Structural unemployment-Occurs b/c job seekers do not have the skills demanded. • Cyclical unemployment-Occurs b/c of the jobs lost during the recession phase of the business cycle. • Seasonal unemployment-Occurs b/c of seasonal changes in labor demand during the year. • Full employment-Occurs when there is no cyclical unemployment; relatively low unemployment.

2. continued • Problems w/ official Unemployment Estimates. • Discouraged workers, in effect, dropped out of the labor force, so they are not counted as unemployed. • B/c official unemployment rate ignores discouraged workers, it may underestimate unemployment in the economy. • Underemployment-Workers are overqualified for their jobs or work fewer hours than they would prefer. • PhD of English would work for a bookstore. Underemployed.

3. The Cost and Measure of Unemployment • The lost output together w/ the economic and psychological damage to unemployed workers and their families represents the true cost of unemployment. • Unemployment Rate-Measurement of unemployment begins w/ the U.S. noninstitutional adult population, which consists of all those 16 years of age, and older, except people military, in prisons, or in mental in the hospitals. • Labor force-consists of those in the adult population who are either working or looking for work. • Those w/ no job who are looking for work are counted as unemployed.

4. continued • Unemployment rate equals the number unemployed-that is, people w/o jobs who are looking for work-divided by the number in the labor force. • Unemployment rate= Number unemployed Number in the labor force

5. Labor Force Participation Rate • Therefore equals the number in the labor force divided by the adult population. • Changes in Unemployment Rate-1900 indicate periods of recession and depression. • Great Depression • Unemployment for Various Groups.

6. Unemployment Benefits • Two workers in the labor force, becomes unemployed, another is likely to still have a job that may provide health insurance and other benefits. • Unemployment benefits- Cash transfers to unemployed workers who actively seek work and who meet other qualifications. • Unemployment Benefits and Work Incentives- unemployment benefits reduce the opportunity cost of remaining unemployed, they also may reduce the incentive to find work.

7. Chapter 13 Section 2 Inflation • Inflation- An increase in the economy’s general price level. • Inflation reduces the value of money and is usually measured on an annual basis. • Annual Inflation rate is the percentage increase in the general price level from on year to the next.

8. Types of Inflation • Hyper inflation-Extremely high inflation, such as the experience in Brazil. • Disinflation-A reduction in the rate of inflation. • Deflation-A decrease in the general price level.

9. Two Sources of Inflation • Demand-pull inflation- Inflation resulting from a right ward shift of the aggregate demand curve. • A rightward shift of the aggregate demand curve pulls up the price level. • Cost-push inflation-inflation resulting from a leftward shift of the aggregate supply curve.

10. Consumer Price Index • CPI measures the cost of the market basket of consumer goods and services over time. • The price level is measured by an index relative to the base period of 1982 to 1984.

11. Impact of Inflation • Consumer price index has increased by an average of 3.9 percent per year. • Inflation reduces the value of the dollar and takes away confidence in the value of the dollar over the longer term. • Expected Versus Unexpected Inflation- • Unexpected inflation creates more problems for the economy than does expected inflation.

12. Continued • The Transaction Costs of Unexpected Inflation • Inflation and Interest Rates • Interest- is the cost of borrowing and the reward for savings. • Nominal interest rate-The interest rate expressed in current dollars as a percentage of the amount loaned, the interest rate on the loan agreement. • Real interest rate-The interest rate expressed in dollars of constant purchasing power as a percentage of the amount loaned; the nominal interest rate minus the inflation rate

13. continued • Real interest = Nominal interest rate – Inflation rate

14. Chapter 13 section 3 • The Great Depression and Before • Laissez-faire-The doctrine that the government should not intervene in a market economy beyond the minimum required to maintain peace and property rights. • From the Great Depression to the Early 1970s • Stimulating Aggregate Demand • Demand-Side Economics-Macroeconomics policy that focuses on shifting the aggregate demand curve as a way of promoting full employment and price stability.

15. continued • Employment Act of 1946, which imposed a clear responsibility on the federal government to foster “maximum employment, production, and purchasing power.” • Required the president to report annually on the state of the economy and to appoint a Council of Economic Advisers. • Council of Economic Advisers- is a three-member panel of economist, w/a professional staff, to provide the president w/ economic advice.

16. Keynesian Economics • Golden age of Keynesian economics - 1960s, low unemployment & healthy growth, modest inflation. • Recession 1970s 74-75 and 79-80. Confidence demand-side policies was shaken.

17. The Great Stagflation 1973-1980.

18. Reduction in Aggregate Supply. • Stagflation of the 1970s, or a contraction, in the economy’s aggregate output combined w/ inflation, or a rise, in the economy’s price level. • Stagflation Repeats in 1980. • Since 1980 • Supply-Side Economics-Macroeconomics policy that focus on a rightward shift of the aggregate supply curve through tax cuts or other changes that increase production incentives.

19. Giant Federal Deficits • Annual deficits accumulated of prior deficits. • Measured relative to GDP, the federal debt nearly doubled.

20. Chapter 13 Section 4 Poverty and the Economy Poverty and Jobs-poverty rate is much higher among families w/ no workers. Poverty and Unemployment Unmarried Motherhood and Poverty

21. Unplanned Result of Income Assistance Why work? An increase in earnings reduces benefits from cash assistance, Medicaid, food, stamps, housing assistance, energy assistance, and other poverty programs. In some cases total welfare benefits are cut by $1 or more as earned income increases by $1. B/c welfare benefits decline w/ earnings, this reduces the incentive to find work. The high tax rate on each additional dollar earned discourages employment and self-sufficiency.

22. continued • Long-term Dependency • Cycle of Poverty-Children in welfare families may end up on welfare themselves when they grow up. • Welfare Reform-An overhaul of the welfare system in 1996 that impose a lifetime welfare limit of five years per recipient and other conditions.