Chapter 9 Unemployment and inflation Unemployment and inflation are macroeconomic problems that are often discussed Misery Index adds together the inflation rate and the unemployment rate to give a rough measure of the state of the economy If unemployment rate is higher or lower than expected investors are likely to change their views on the health of the economy o Good news about unemployment causes stock prices to rise Unemployment rates differ for different groups The longer a person is unemployed the greater the hardship Household Survey Current Population Survey to collect data needed to compute unemployment rate Labor force sum of the employed and unemployed workers in the economy o Employed work during the week before the survey or if were temporarily away from their jobs because ill on vacation strike etc o Unemployed did not work in the previous week but were available for work and had actively looked for work at some time during previous four weeks Unemployment rate the percentage of the labor force that is unemployed o Number of unemployed x 100 Labor force Discouraged workers people who are available for work but have not looked for a job during the previous four weeks because they believe no jobs are available Labor force participation rate measures the percentage of the working age population in the labor force o Labor force x 100 Working age population Employment population ratio measures the percentage of the working age population that is employed o Employment Working age population x 100 Problems with measuring the unemployment rate Not a perfect measure of the current state of joblessness in the economy Counts discourage works as unemployed Counts people as employed who are working part time Causes for the unemployment rate to be overstated o Household survey does not verify the responses of people included in the survey o Some people who claim to be unemployed and actively look for work may not be actively looking o Individuals who are actually employed are counted as unemployed Tends in the Labor Force Participation Important because it determines the amount of labor that will be available to the economy from a given population Higher the labor force participation rate o The more labor that will be available o The higher a country levels of GDP and GDP per person The Establishment Survey Payroll survey Measure total employment in the economy Provides information on the total number of persons whoa re employed and Advantage of being determined by actual payrolls rather than by unverified on company payroll answers Household survey provides information on the number of person s unemployed and in the labor force where as this information is not available in the establishment survey Economists and policymakers rely on government economic data such as the employment data from the establishment survey to understand the current state of the economy The US economy creates and destroys millions of jobs every year o Not surprising because we are in a market system where new firms are constantly being started existing firms are expanding contracting and going out of business o When the BLS announces each month the increase or decreases in the number of persons employed and unemployed they are net figures Change in the number of persons employed total number of jobs created the number of job eliminated Types of Unemployment Frictional unemployment o Short term unemployment that arises from the process of matching workers with jobs o Job search takes time always be some workers who are frictionally unemployed because they are between jobs and in the process of searching for new ones o Seasonal employment unemployment due to factors such as weather variations in tourism and other calendar related events o Some frictional unemployment actually increases economic efficiency Occurs because workers and firms take the necessary time to ensure a good match between the attributes of workers and the characteristics of jobs Structural unemployment o Unemployment that arises from a persistent mismatch between the skills and attributes of workers and the requirements of jobs o Last for long periods because workers need time to learn new skills Cyclical unemployment Full Employment o Unemployment caused by a business cycle recession o The unemployment rate will not be zero because of frictional and structural unemployment o Natural rate of unemployment normal level of unemployment or full employment rate of unemployment frictional unemployment structural unemployment Government policies and the unemployment rate Help reduce level of frictional unemployment by pursing policies that help speed up the process of matching unemployed workers with unfilled jobs Help reduce structural unemployment by implementing polices that aid worker retraining These policies increase unemployment rate by increasing time workers devote to searching for job or by keeping wages above their market level Unemployment insurance payments Social insurance programs Minimum wage laws Labor unions Efficiency wages a higher than market wage that a firm pays to increase worker productivity unemployment is zero o Why economies experience some unemployment even when cyclical Measuring inflation Price level a measure of the average prices of goods and services in the economy Inflation rate the percentage increase in the price level from on year to the next Consumer price index an average of the prices of goods and services purchased by the typical urban family of four o Changes in this index come closest to measuring changes in the cost of living as experience by the typical household o CPI Ratio of the dollar amount necessary to buy the market basket of goods in that year Dollar amount necessary to buy the market basket of goods in the base year x 100 o Most widely used measure of inflation o Businesses use it to help set the prices of their products and the wages and salaries of their employees o Four biases that cause changes in the CPI to overstate the true inflation rate Substitution bias Increase in quality bias New product bias Outlet bias Producer price index an average of the prices received by producers of goods and services at all stages of the production process o Intermediate goods and raw materials o If prices of these goods rise the cost to firms of producing finals goods and services will rise May lead firms to increase the prices of goods and services Changes in the PPI can give an early warning of