Unemployment and Inflation by gjjur4356


									Unemployment and
 Chapter 8
Why are economists concerned about
unemployment and inflation?

The costs to the economy are large.
Costs of unemployment

1.   Lost production

2.   Increased income inequality
Anatomy of Canadian
1.   Large variations across ages groups and
     across provinces.
2.   Large flows in and out of unemployment
     each month.
3.   Unemployment rate is mostly comprised on
     those unemployed for a long period of time.
The unemployment pool

 The number of unemployed people at any
 point in time.
How does unemployment occur?
There are three ways to move out of the
unemployment pool. What are they?
Changes in unemployment usually lag behind
changes in output.

What are some of the variations in
unemployment across groups and provinces?
Unemployment rate, by province
       January 2010
Newfoundland & Labrador   14.9
PEI                       7.9
Nova Scotia               9.8
New Brunswick             9.3
Quebec                    8.0
Ontario                   9.2
Manitoba                  5.4
Saskatchewan              4.7
Alberta                   6.6
BC                        8.1
Three types of unemployment

1.   Frictional

2.   Structural

3.   Cyclical
Full employment

 The rate of unemployment associated with the
 natural rate of unemployment (u*) at which
 cyclical unemployment is zero.
 What determines u*?

1.   Organization of the labour force

2.   Demographics of the labour force

3.   Availability of unemployment benefits
What is hysteresis?

  The phenomenon that when unemployment is
  high, it tends to remain high and fall very
What causes hysteresis?

1.   Unemployed become accustomed to not

2.   Discouraged workers.

3.   Employers hesitate to hire those who have
     been unemployed for a lengthy period.
Does EI influence u*?

1.   EI benefits allow for a longer job search

2.   Reporting effects

3.   Employment stability
The costs of unemployment

   Economic

   Non-economic
Economic costs

   Loss of output

   Okun’s law postulates that a 1% deviation in
    u from u* will result in a 2% deviation in Y
    from Y*.

   Distributional impact
Non-economic costs

   Depression, loss of self-esteem

   Higher incidence of heart attacks, suicide,
    mental health

   Increased racial tensions
Costs of inflation

   Costs of anticipated inflation are small.

   Costs of unanticipated inflation are very small
    but may affect wealth distribution.
Anticipated inflation

   Price level increases at a rate forecasted by all
    economic agents
Unanticipated inflation

   Price level increases at a pace that has been
    incorrectly forecasted by economic agents.
2 minor costs of anticipated
1.   Shoe-leather costs

2.   Menu costs
Cost of unanticipated inflation

  Wealth redistribution from creditors to
Indexation of inflation

   Indexation ties the terms of contracts to
2 types of contracts affected by

1.   Long-term loan contracts

2.   Wage contracts

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