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Unemployment, Inflation, NAIRU

Unemployment, Inflation, NAIRU. Unemployment. Civilian labor force: worked 1 hour for pay in last week unless sick/vacation/strike Not military, not students, not retired, not discouraged workers # unemployed / civilian labor force x 100= unemployment rate. Types of Unemployment.

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Unemployment, Inflation, NAIRU

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  1. Unemployment, Inflation, NAIRU

  2. Unemployment • Civilian labor force: worked 1 hour for pay in last week unless sick/vacation/strike • Not military, not students, not retired, not discouraged workers • # unemployed / civilian labor force x 100= unemployment rate

  3. Types of Unemployment • Frictional: looking for better job (good thing) • Seasonal: it’s raining • Structural: skills no longer useful • New tech, new resources, loss of old resources, changes in demand, globalization, lack of education • Cyclical: changes in biz cycle unemployment • Underemployed: overqualified or part-time when want full-time

  4. Full/Natural Rate Unemployment • Impossible (undesirable) 0% unemployment • Elimination of cyclical unemployment full employment/natural rate •  Potential output

  5. Economic Costs Unemployment • Okun’s Law: every 1% actual U > natural rate GDP gap (actual less than potential) of 2% • Unequal burdens: occupation, age, race, gender, education, duration • Noneconomic costs: depression, political impacts

  6. Inflation • Rising price level (average) • Consumer Price Index: “prices of a market basket of some 300 consumer goods and services purchased by a typical urban consumer” • Hasn’t been updated in 30+ years; undercounts housing + medical • Producer Price Index • Reduces purchasing power

  7. Types • Inflation • Hyperinflation • Deflation • Disinflation

  8. Causes • 1) Demand-pull (AD up): “too much spending chasing too few goods” • Wage-price spiral • 2) Cost-push (AS down): increase cost production • Problem: which is it? DP indefinite, CP self-limiting ( recession eventually costs back down recovery) • 3) Quantity theory: too many dollar bills (more later)

  9. Redistribution Effects • Anticipated inflation: less important offset w/ interest rates or wage raise • Unanticipated is problem • 1) Fixed-nominal-income receivers (fixed income) • COLA: Cost Of Living Adjustment • 2) Savers/holders of currency (inflation tax) • 3) Debtors vs. Creditors • Including Gov really want to control inflation? • 4) Economy: risk + uncertainty inefficient use resources • 5) Investment: a) expected rate of return – inflation rate = real return; b) inflation premium: interest rates rises more expensive borrow to invest less investment less capital less growth

  10. Relationship U and I? • NAIRU: Non-Accelerating Inflation Rate of Unemployment Essentially = natural rate of unemployment • Level of U at which I won’t change ∆I = (NAIRU - Unemployment Rate)/Sacrifice Ratio Say NAIRU = 5 and U is at 7% So: 5-7/2= -1 Inflation falls 5% 4

  11. Shifts in NAIRU • Policies/trends that increase movement workers from one job to another lower NAIRU • Trends that make wages downwardly flexible (union decline, globalization, etc.) lower NAIRU

  12. Phillips Curve Inflation Rate U Rate

  13. Neo-Classical • Rational Expectations no trade-off U and I in long-run, just choice of what level of inflation PClr = Natural-rate U Inflation Rate PCsr UR

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