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# Economics R. Glenn Hubbard, Anthony Patrick O�Brien, 2e by M0Cl9l

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```									  Measuring the Unemployment Rate
and the Labor Force Participation Rate
The Household Survey
Labor force The sum of employed and unemployed workers
in the economy.

Employed can be in any job -- part-time, underemployed

Unemployment rate The percentage of the labor force
that is unemployed: not working and looking.

Discouraged workers: Available for work but haven’t
looked for a job (for the past four weeks) because they
believe no jobs are available for them.
The Employment Status of the Civilian
Working-Age Population, April 2007
• Unemployment   rate: the percentage of the labor force
that is unemployed … not working and looking.
Number of unemployed
100  Unemployment rate
Labor force
= 6.8 / 152.6 = 4.5% (April 2007)

• Laborforce participation rate: the percentage of the
working-age civilian population in the labor force.

Labor force
100  Labor force participation rate
Working-age population
= 152.6 / 231.3 = 66.0% (April 2007)
Trends in Labor Force Participation

FIGURE 8-2
Trends in the Labor Force
Men and Women Since 1948
How Long Are People Usually Unemployed?

LENGTH OF TIME UNEMPLOYED   PERCENTAGE OF TOTAL UNEMPLOYED

Less than 5 weeks                     35.6%

5 to 14 weeks                         31.3

15 to 26 weeks                        15.7

27 weeks or more                      17.5
The Establishment Survey: Another Measure of Employment
Household and
Establishment Survey Data
for March and April 2007

HOUSEHOLD SURVEY                            ESTABLISHMENT SURVEY

MARCH       APRIL       CHANGE     MARCH          APRIL    CHANGE

EMPLOYED               146,254,000 145,786,000 −468,000    137,596,000   137,684,000 +88,000

UNEMPLOYED               6,724,000   6,801,000   +77,000

LABOR FORCE            152,979,000 152,587,000 −392,000

UNEMPLOYMENT RATE         4.4%         4.5%        +0.1%

Establishment survey excludes self-employed persons
Measuring the Unemployment Rate
and the Labor Force Participation Rate
Job Creation and Job Destruction Over Time
Establishments Creating and Eliminating Jobs, April–June 2006

NUMBER OF      NUMBER OF
ESTABLISHMENTS     JOBS

ESTABLISHMENTS CREATING JOBS

Existing establishments               1,558,000       6,286,000

New establishments                     360,000        1,475,000

ESTABLISHMENTS ELIMINATING JOBS

Existing establishments               1,543,000       5,937,000

Closing establishments                 341,000        1,358,000
Unemployment Rates for Demographic Groups

Unemployment Rates in the United States
by Demographic Group, April 2007
Types of Unemployment
Frictional Unemployment and Job Search
Short-term unemployment that arises from matching workers
with jobs.

Structural Unemployment
Unemployment because of persistent mismatch between
worker skills and characteristics and job requirements.
•Declining industries and regions / Expanding industries and regions

Cyclical Unemployment
Unemployment caused by a business cycle recession.

At “full employment” there still is frictional and structural
unemployment.
Full Employment and “Natural” Rate of Unemployment
Natural rate of unemployment
A normal rate of unemployment, consisting of frictional plus
structural unemployment.
Explaining Unemployment
Government Policies and the Unemployment Rate
International Comparisons

Average Unemployment
Rates in the United States,
Europe, 1997–2006
Explaining Unemployment

Unemployment Insurance and Other Payments to the
Unemployed
Minimum Wage Laws
Seniority / Probation Periods
Labor Unions / Work Rules

Efficiency Wages: higher-than-market wage that a firm
pays to increase worker productivity  wait unemployment.
•Reduce hiring costs, turnover, monitoring costs, shirking
•Increase morale
Unemployment
• Suppose homemakers were counted as in the labor force and
employed. What would be the impact on
• The unemployment rate?
• The labor force participation rate?
• Suppose the federal government enacted a law that required
men between the ages of 25 to 54 who are not disabled or in
school to be in the labor force (working or looking) or pay a big
fine. What would happen to measured GDP? Would these
men have higher incomes? Would they be better off?
• What’s the likely impact of the following on the unemployment
rate?
• Length of time worker are eligible for unemployment
benefits increases.
• The minimum wage is abolished.
• Most US workers join labor unions.
• Most companies list job openings on the internet.
Measuring Inflation
Price level (= P) A measure of the average
prices of goods and services in the economy.
Inflation rate (= π) The percentage increase
in the price level from one year to the next.

Π = 100 x (Pt - Pt-1 ) / Pt-1

Price Indices of Note
•GDP Deflator
•Consumer Price Index
•Core CPI: CPI excluding energy and food
•Producer Price Index
Measuring Inflation
The Consumer Price Index

The CPI Market
December 2006
The Consumer Price Index
Consumer price index (CPI) An average of the prices of the
goods and services purchased by the typical urban family of four.

BASE YEAR (1999)            2008                 2009

EXPENDITURE
S                EXPENDITU
(ON BASE-             RES (ON
QUANT-           EXPEND-            YEAR               BASE-YEAR
PRODUCT      ITY   PRICE      ITURES   PRICE QUANTITIES)   PRICE   QUANTITIES)

Eye exams     1      \$50       \$50     \$100      \$100       \$85       \$85

Pizzas       20       10       200       15          300     14       280

Books        20       25      500.00     25          500   27.50      550

Total                         \$750               \$900                \$915
The Consumer Price Index

APPLIED TO 2008        APPLIED TO 2009

Expenditur es in the current year       \$900                 \$915 
CPI = Expenditur es in the base year  100           100  120           100  122
 \$750                 \$750 

2008 - 2009 Inflation Rate = Π = 100 x (P2009 - P2008 ) / P2008

 122  120 
Π=                           100  1.7%
   120     
Is the CPI Accurate?

• Substitution bias.

• Increase in quality bias.

• New product bias.

• Outlet bias.

CPI inflation overstates the increase in the “Cost of Living”
Using Price Indexes to Adjust for the Effects of Inflation
Value in constant 1983\$ = Value in 2006\$ x [CPI in 1983/CPI in 2006]
= Value in \$2006\$ x [100/CPI in 2006]

Calculating Real Average Hourly Earnings (Real Wage)

NOMINAL AVERAGE                       CPI
YEAR                  HOURLY EARNINGS                (1982-1984 = 100)

2004                        \$15.69                        188.9
2005                         16.13                        195.3
2006                         16.76                        201.6

REAL AVERAGE
NOMINAL AVERAGE               CPI           HOURLY EARNINGS
YEAR    HOURLY EARNINGS        (1982-1984 = 100)   (1982-1984 DOLLARS)
2004         \$15.69                  188.9               \$8.31
2005          16.13                  195.3                8.26
2006          16.76                  201.6                8.31
Real versus Nominal Interest Rates
Nominal interest rate The stated interest rate on a loan.
Real interest rate The nominal interest rate minus the
inflation rate.

Real interest rate = Nominal interest rate − Inflation rate

Deflation A decline in the price level.
Real versus Nominal Interest Rates

FIGURE 8-7
Nominal and Real Interest
Rates, 1970–2006
Does Inflation Impose Costs on the Economy?

The Problem with Anticipated Inflation

Menu costs The costs to firms of changing prices.

Price Uncertainty  fear  Stagnation

The Problem with Unanticipated Inflation
Inflation Affects the Distribution of Income
– Arbitrary redistribution
• Debtors gain / Creditors lose  disincentive to save
• Pensioners lose
Key Terms

Consumer price index (CPI)       Natural rate of unemployment
Cyclical unemployment            Nominal interest rate
Deflation                        Price level
Discouraged workers              Producer price index (PPI)
Efficiency wage                  Real interest rate
Frictional unemployment          Structural unemployment
Inflation rate                   Unemployment rate
Labor force
Labor force participation rate