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Unemployment and Inflation

VIEWS: 74 PAGES: 70

									 Unemployment and Inflation



EVERYONE’S NIGHTMARE
      Chapter 6
    Unemployment and Inflation
   The two key concepts
    of Macroeconomics
    – Either can destabilize
      the economy.
    – When BOTH happen
      together – REALLY,
      REALLY BAD.
          STAGFLATION
              Unemployment
   People who are
    looking for work but
    have no jobs.
    – ACTIVELY
      LOOKING is critical
      to the definition.
Definitions for Unemployment
   Labor Force = Employed + unemployed

   Unemployment Rate = number of
    unemployed / total labor force

   Labor Force Participation Rate = labor
    force / population 16 and over
    Definitions of Unemployment
 Discouraged Workers
   – People who left the
     labor force because
     they could not find
     jobs.
 Underemployed
   – Workers holding part-
     time work, but prefer
     full-time work OR
     hold jobs that are far
     below their
     capabilities.
         The reasons for
         unemployment
 Frictional
  Unemployment
 Structural
  Unemployment
 Seasonal
  Unemployment
 Cyclical
  Unemployment
Cyclical Unemployment
              When GDP fluctuates
               demand in the
               economy is not
               sufficient to provide
               jobs for all those who
               seek work.
               – Recession
               – Depression
    Frictional Unemployment
 People in between
  jobs.
 Short period of time
  while changing jobs.
 3% - 4% frictional
  employment is
  considered normal.
Structural Unemployment
             When changes in
              market supply or
              demand conditions
              affect major industries
              or regions.
             The part of
              unemployment that
              results from the
              mismatch of skills and
              jobs.
Causes of Structural
  Unemployment
             Decline in demand for a
              product
             Increased foreign
              competition
             Automation of production
             Increased raw material
              costs
             Lack of labor mobility
              between occupations or
              regions.
         Seasonal Unemployment
    Not included in your book – but in most
               other Econ texts
   Most seasonal
    unemployment is
    tends to occur in
    certain industries.
     –   Hotel and catering
     –   Tourism
     –   Fruit picking
     –   Christmas
     Suspicious Unemployment
             Statistics
   Natural Rate of
    Unemployment
    – Level of unemployment at
      which there is no cyclical
      unemployment.
   Full Employment
    – Level of employment that
      occurs when the
      unemployment rate is at
      the “natural rate.”
              QOD:
 Why  do we need
 unemployment to
 make the
 economy
 healthy?
           The Natural Rate of
             Unemployment
   Depending on whom
    you talk to …

   4% to 5% is
    considered the natural
    rate.
    – Consists of only
      structural and frictional
      unemployment.
Historic Unemployment Rates
 1933 during the Great
  Depression – 25%
 1998 – Unemployment
  fell to 3.9%
         3.9% Unemployment
   Why wouldn’t this be
    good for the
    economy???
                 Wage Inflation
   How do employers attract
    or keep employees if there
    is not enough workers?
    – Higher Wages
    – More Benefits


    – 1999, Amigos was paying
       $9 per hour and
       McDonalds offered $500
       signing bonuses.
      Why would that be bad?
 Costs go up (labor), so
  prices have to be
  upped to cover labor.
 Higher prices make
  workers demand more
  money.
 Cost   – Push
    Inflation
      BTW: Current Data on
     Unemployment for the US
   According to the
    Bureau of Labor
    Statistics
    (www.bls.gov)
    – Unemployment Rate
      in February: 4.8%

      Average Hourly
      Earnings are up $ .05
      in February.
           Unemployment Data
   Previously: 303,000 new
    jobless claims were filed.

   On March 16, new
    numbers will be posted.
    – See www.usatoday.com /
       money and click on
       economic calendar for the
       latest posting.
                Review
 How do economists measure the
  unemployed?
 Previously unemployed individuals who
  have stopped looking for work are called
  ____ workers.
 What are the types of unemployment?
 The natural rate of unemployment consists
  solely of _______ and ____ unemployment.
 The Consumer Price Index
   and the Cost of Living



The INFLATION Indicators
         What do you think?
 1976: Starting salary
  for an economics
  professor was $15,000
 2001: Starting salary
  for an econ prof was
  $55,000.
 Considering the
  REALITY PRICIPLE,
  who had a better life?
              Reality Principle
   What matters to
    people is the real value
    of money – its
    PURCHASING
    POWER – not the
    nominal or face value
    of money.
                           CPI:
 Consumer Price Index
 A price index that
  measures the cost of a
  fixed basket of goods
  chosen to represent the
  consumption pattern
  of individuals.
    – Tracks the cost of
      living over time.
       What is in the “market
             basket”?
 Food and Beverages
 Housing
 Apparel
 Transportation
 Medical Care
 Recreation
 Education
 Other goods and services
          Food and Beverages

   Breakfast Cereal
   Milk
   Chicken
   Wine
   Coffee
   Service meals
   Snacks
                 Housing
 Rent for primary
  residences
 Owners equivalent
  rent
 Fuel Oil (home
  heating)
 Bedroom furniture
                 Apparel
 Men’s shirts and
  sweaters
 Women’s dresses
 Jewelry
            Transportation
 New cars
 Airline fares
 Gasoline
 Car insurance
                Medical Care
   Prescription drugs
   Medical supplies
   Doctor services
   Eyeglasses
   Eyeglass services
   Hospital care
                 Recreation
   Television
   Pets
   Pet products
   Sports equipment
   Admissions
             Education and
             Communication
   College Tuition
   Postage
   Telephone Services
   Computer Software
   Computer accessories
    Other Goods and Services
 Tobacco and smoking
  products
 Haircuts
 Other personal
  services
 Funeral Expenses
                      BTW
 CPI for 2006:
 UP .7% so far for the
  year.

 How does that
  compare with our
  wages?
 Statistics from bls.gov
CPI
     Used by both
      government and the
      private sector to
      measure changes in
      prices facing
      consumers.

     SEE PAGE 122 to
      calculate CPI
      CPI versus Chained GDP
   CPI measures goods
    produced in prior years
    (older cars) as well as
    imported goods.
   Chained GDP does not
    measure either of these.
    ONLY new goods and
    those produced in the
    country.
          CPI v. Chained GDP
   Because consumers
    will cut back on goods
    that cost more – the
    CPI will tend to
    overstate true changes
    in cost of living.
    – If chicken goes up in
      price, we switch to
      hamburger.
             CPI Problems
 Does not “cut back”
  on higher priced goods
  like consumers do.
 Would still count the
  same share of chicken
  as it did before the
  price index.
      What Economists THINK
   CPI may be
    overestimated by .5%
    to 1.5% each year.

   BIG argument
    among the econ
    community.
   Cost of Living Adjustments
Automatic increases in
  wages or other
  payments that are tied
  to a price index.
For Future Reference on
  contract negotiations:
  Called COLA.
                 COLA and CPI
   As CPI goes up, our
    wages or Social
    Security makes
    adjustments to keep up
    with the cost of living.
    – SEE PAGE 124 THE
      CPI AND SOCIAL
      SECURITY
               INFLATION!!!
   Inflation Rate:
    – The percentage rate
      of change of the
      price level of the
      economy.
    Calculating Inflation Rates
 Inflation Rate = percentage rate of change
  of a price index.
 See page 124 for more on how to calculate!
              Looking Ahead
   Two “Schools” of
    Macroeconomics
    – Classical Economics
    – Keynsian Economics
            Classical Economics
   A school of economic
    thought that provides
    insights into the economy
    when it operates at or near
    full employment.
    – Popular thought so far in
      2006.
    – Picture of David Ricardo
      (Travis’ favorite economist)
           Darwin meets Economics
         Keynsian Economics
   A school of economic
    thought that provides
    insights into the
    economy when it
    operates away from
    full employment.
    – Economic fluctuations,
      business cycles, sharp
      changes in the
      economy.
    THIS Concludes what the book has
      on unemployment and inflation




I THINK you need and deserve more
        info on inflation!
So what is so wrong if everyone who
      wants a job has a job?
      THE ANSWER????

INFLATION
 – The trade-off with
  more employment.
     What is the CPI pattern in
               2005?
   CPI measures the
    dollar’s worth.
    – Check out the website
    http://minneapolisfed.org/
       Research/data/us/calc/i
       ndex.cfm

    TRY THE professor’s
      salary from the
      beginning with this
      site!
            Types of Inflation
   Demand-Pull Inflation
   Cost-Push Inflation
   Monetary Inflation
   Stagflation
   Hyperinflation
         Demand-Pull Inflation
   When the demand for
    goods and services
    exceeds the production
    capacity.
    – Prices rising because
      of shortages.
Cost-Push Inflation
             Inflation can arise from
              changes in the costs of
              production of goods and
              services.
              – Increase in the price of raw
                materials
              – Increase in the price of
                labor
              – Increase in the cost of
                capital.
Cost-Push v. Demand Pull
               They push and pull
                prices up.
                – Labor contracts
                  containing COLA
                  clauses.
                    Cost-Of-Living

                     Adjustments.
             Monetary Inflation
   Inflation caused by
    excessive growth in
    the money supply.
    – Value of money
      decreases if it isn’t that
      “rare.”
    Rule for Monetary Inflation:
            VELOCITY
   Quantity Equation
    – MxV=TxP
    – Money supply times
      the velocity at which it
      changes hands equals
      the number of
      transactions times the
      average level of prices.
                MxV=TxP
   Direct relationship
    between the money
    supply and the price
    level.
 What happens when the
quantity equation is “off”?
               Hyperinflation
               Money supply
                increases much, much
                faster than an
                economy’s output of
                goods and services.
                  – THINK RUSSIA in
                   1990s.
     Phillips Curve: The
    relationship between
 unemployment and inflation.
INVERSE relationship.
  Unemployment goes
  UP, then inflation goes
  DOWN.
     Stagflation: When things
     REALLY go wrong on the
          Phillips Curve
   Inflation and
    unemployment were at
    higher levels.
    – Combination of
      stagnation and
      inflation.
    – Both were increasing.
       1970s: What caused
          Stagflation?
 Spending on the
  Vietnam War PLUS
  spending on domestic
  social programs.
 Inflationary
  expectations
 Rise in energy costs
  caused by OPEC
 Monopolistic pricing
 What is wrong with Inflation?
 Inflation reduces
  REAL INCOME of
  those whose incomes
  do not rise as fast as
  the price level.
 Hurts:
    – People holding assets
      in MONEY
    – Lenders
Special Note: Phillips Curve
       International
– Europe 1970s had higher
  inflation and
  unemployment.
– Worse because:
       Labor union practices
       Tax structures
       Government economic
        policies
Consequences of
 Unemployment
           Real Output Effects
            – Each 1% of unemployment
              results in a reduction of
              $100-billion in output.
            – Lower real investment
              means less growth and
              reduced future output.
Consequences of Unemployment
   Income Effects
      Loss of income and
       benefits (Health
       insurance)
      Loss of income to
       others because of
       reduced purchasing
       power
      Reduced tax income
       and increased outlays
       of government.
Consequences of
 Unemployment
           Social Effects
            – Health Problems
            – Increased suicides
            – Break up of families
            – Increased child abuse
            – Increased crime
Consequences of INFLATION
   Income Effects:
    – Reduced purchasing
      power of the dollar
    – Reduced real income
      for fixed income
      receivers
    – Reduced real wealth of
      savings
    Income Effects of Inflation
            (cont.)
 Benefits those whose
  incomes rise faster
  than the inflation rate.
 Benefits owners of
  real assets (real estate,
  precious metals
  (kinda!))
 Benefits debtors
How Inflation effects Real
         Output
              Inflation initially
               stimulates output
              Near full employment,
               there arise bottlenecks in
               supplies
              Costs begin rising faster
               than prices
              Interest rates accelerate,
               discouraging new
               investment.

								
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