Carlos Andres Rodriguez Herrera 1 25 23 Principles of Macroeconomics ECON 2002 01 Chapter 7 The Macroeconomy Unemployment Inflation and Deflation Introduction In 2009 Congress used general taxpayer funds to extend the length of unemployment benefits from 26 weeks to 52 weeks A number of economists have suggested that this policy change has caused an increase in the number of people unemployed In this chapter you will learn how unemployment is defined as well as how extending unemployment benefits may have contributed to the number of people counted as unemployed Learning Objectives Explain how the U S government calculates the official unemployment rate Discuss the types of unemployment Describe how price indexes are calculated and define the key types of price indexes Distinguish between nominal and real interest rates Evaluate who looses and who gains from inflation Understand key features of business fluctuations Chapter Outline Unemployment The Major Types of Unemployment Full Employment and the Natural Rate of Unemployment Inflation and Deflation Anticipated versus Unanticipated Inflation Changing Inflation and Unemployment Business Fluctuations Unemployment Unemployment Total number of adults aged 16 or older willing and able to work and who are actively looking for work but have not found a job Unemployment creates a cost to the entire economy in terms of lost output often ranging in the billions of dollars Labor Force Individuals aged 16 years or older who either have jobs or who are looking and available jobs the number of employed plus the number of unemployed The unemployment rate is the percentage of the measure labor force that is unemployed Stock The quantity of something measured at a given point in time for example an inventory of goods Flow The Ohio State University 1 A quantity measured over time such as the income you make per year or the number of individuals fired every month Categories of individuals without work Job loser Reentrant Job leaver New entrant Job Loser Reentrant Job Leaver New Entrant An individual whose employment was involuntarily terminated or who was laid off a 40 60 of the unemployed An individual who has worked a full time job before but left the labor force and has now reentered it looking for a job a 20 30 of the unemployed An individual who voluntarily quit a 10 15 of the unemployed An individual who has never worked a full time job for two weeks or longer a 10 15 of the unemployed Duration of unemployment An increase in the duration of unemployment can increase the unemployment rate because workers stay unemployed longer creating a greater number of them at any given time More than a third of job seekers find work within one month Approximately another third find employment within a second month About a sixth are still unemployed after six months Average duration varied between 10 and 20 weeks since the mid 1960s Discouraged Workers Individuals who have stopped looking for a job because they are convinced they will not find a suitable one Labor Force Participation Rate The proportion of non institutionalized working age individuals who are employed or seeking employment The Major Types of Unemployment The Major Types of Unemployment Frictional Structural Cyclical Seasonal Frictional Unemployment Structural Unemployment The continuous flow of individuals from job to job and in and out of employment Results from the fact that workers must search for appropriate job offers This takes time so they remain temporarily unemployed Structural changes in our economy cause some workers to become unemployed for very long periods of time because they cannot find jobs that use their particular skills Carlos Andres Rodriguez Herrera 1 25 23 Unemployment of workers over lengthy intervals resulting from skill mismatches with position requirements of employers and from fewer jobs being offered by employers constrained by governmental business regulations and labor market policies Considerable evidence shows that government labor market policies influence how many jobs businesses wish to created thereby affecting structural unemployment Related to business fluctuations unemployment associated with changes in business conditions Results from business recessions that occur when aggregate total demand is insufficient to create full employment Cyclical Unemployment Seasonal Unemployment Results from the seasonal pattern of work in specific industries Due to seasonal fluctuations in demand or changing weather conditions that affect agriculture construction tourism industries and so on Full Employment and the Natural Rate of Unemployment Full Employment Full employment is a concept that implies some sort of balance or equilibrium in an ever shifting labor market An arbitrary level of unemployment that corresponds to normal friction in the labor market Natural Rate of Unemployment The unemployment rate that is estimated to prevail in the long run macroeconomic equilibrium Should not reflect cyclical unemployment When seasonally adjusted the natural rate should include only frictional and structural unemployment Until the late 2000 s most economists had considered the natural rate of unemployment to be about 5 Since the end of the 2008 2009 recession however the actual unemployment rate has been considerably in excess of 5 It has been suggested that higher structural unemployment arises from two sources The loss of jobs in construction finance and real estate Government regulations that raise the costs of hiring new employees Inflation and Deflation Inflation Deflation Purchasing Power A sustained increase in the average of all prices of goods and services in an economy A sustained decrease in the average of all prices of goods and services in an economy The value of money for buying goods and services Varies with prices and income e g if your money income stays the same but the price of one goods goes up you effective purchasing power falls Nominal Value Price expressed in today s dollars The Ohio State University 3 Real Value Value expressed in purchasing power adjusted for inflation Measuring the Rate of Inflation Market Basket Base Year a Representative bundle of goods and services a The point of reference for comparison of prices in other years Price Index The cost of today s market basket of goods expressed as a percentage of the cost of the same market basket during a base year Real world price indexes Consumer Price Index CPI Producer Price Index PPI