1. Economic Fluctuations, Unemployment, and Inflation
Macro Chapter 8
Economic Fluctuations, Unemployment, and Inflation

2. “Prosperity is when the prices of things that you sell are rising; inflation is when the prices of things that you buy are rising. Recession is when other people are unemployed; depression is when you are unemployed.”
Anonymous quote

3. 5 Learning Goals Characterize fluctuations in economic growth.
Relate fluctuations in GDP to employment and the demand for labor.
Classify unemployment into three categories.
Distinguish the difference between full employment and the natural rate of unemployment and correlate both to potential GDP.
Determine inflation’s effect on the economy.

4. Swings in the Economic Pendulum

5. Instability in the Growth of Real GDP
Annual Rate of Growth in Real GDP (long-run growth rate approximately 3%)
Although real GDP in the United States has grown at an average rate of approximately 3%, the growth has been characterized by economic ups-and-downs. Note: periods of recession are indicated with shading. 8% 6% 4% 2% 0%
-2%
-4%
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: Economic Report of the President, various issues.

6. The Hypothetical Business Cycle
4/14/2017
The Hypothetical Business Cycle
Real GDP
Business
peak
Trend line
Business
peak
Recessionary
trough
Expansion
Contraction
Recessionary
trough
Time
The four phases of the business cycle are expansion, peak, contraction, and recessionary trough.

7. Key Points: The business cycle varies and is unpredictable
The average annual growth rate is 3%

8. Economic Fluctuations and the Labor Market

9. Q8.1 A person not working is considered unemployed.
True
False

10. This section describes the categories of people
Total population divided into two categories:
(1) Under age 16 & institutionalized people
(2) Over age 16
Over age 16 divided into two categories:
(1) Not in labor force – students, retirees, disabled
(2) In labor force
In labor force divided into two categories:
(1) Employed
(2) Unemployed, but want to be employed

11. Definition of unemployed:
A person not currently employed but (1) actively seeking a job, or (2) waiting to begin or return to a job
See BLS FAQs (BLS_FAQS.pdf)

12. U.S. Population, Employment, and Unemployment
4/14/2017
U.S. Population, Employment,
and Unemployment
Civilian population
16 and over
Not in the
labor force
Household workers
Students
Retirees
Disabled
Civilian
labor force
Employed
Employees
Self-employed
workers
Unemployed
New entrants
Reentrants
Lost last job
Quit last job
Laid off
Labor Force Participation Rate =
Civilian labor force
Civilian population (16+)
Employment / Population Ratio =
Number employed
Civilian population (16+)
Rate of Unemployment =
Number unemployed
Civilian labor force

13. See Current Population Survey (CPS_Aug_2012.pdf)

14. Q8.2 Mary is a homemaker. Last week, she was busy with her normal household chores. She is
a member of the civilian labor force who is employed.
a member of the civilian labor force who is unemployed.
a member of the civilian labor force who is underemployed.
a discouraged worker who is not a member of the labor force.
not a member of the labor force.

15. Two calculations to know
Labor force participation rate = (employed + unemployed) / civilian pop. over age 16
Unemployment rate = unemployed / (employed + unemployed) OR unemployed / labor force

16. Q8.3 Which of the following would be officially classified as unemployed?
a school administrator who has been working as a substitute teacher one day per week while looking for a full-time job in administration
a mathematician who returned to graduate school after failing to find a job the last four months
a 60-year-old former steel worker who would like to work but has given up actively seeking employment
a laid-off construction worker waiting to return to a previous job

19. Please see article “15 Statistics about the jobs market
Please see article “15 Statistics about the jobs market.pdf” (the data are a little old, but still informative)

20. The unemployment rate climbed to 8. 3% in February, 2009
The unemployment rate climbed to 8.3% in February, It’s stayed over 8% since (that’s 43 months).
The unemployment rate climbed to 9.4% in May, It stayed over 9% until September, 2011 (except for March, 2011 at 8.9%). That’s 28 out of 29 months.
The previous longest streak above 8% was 27 months, from 1981 to 1984.

21. Three Types of Unemployment

22. 3 general reasons why people are unemployed:
(1) Frictional – imperfect information
(2) Structural – workers don’t possess desired skills
(3) Cyclical – result of business cycle

23. Watch Video: Stossel-unemployment and labor mobility

24. Employment Fluctuations- The Historical Record

25. Example of workers moving to a new industry: Watch video- Treycycle employs NASA engineers

26. Q8.4 Which of the following is a positive effect of job search and the unemployment that often accompanies it?
It keeps wages and income levels low.
It permits individuals to better match their skills and preferences with the requirements of a job.
It reduces the wage gap between high skill workers and those with few skills.
It creates political pressure for an increase in the minimum wage, which will reduce the rate of unemployment in the long run.

27. Some unemployment is unavoidable and arguably desirable
Natural rate of unemployment: “normal” frictional and structural unemployment
The natural rate occurs when the economy is operating at a sustainable rate
Full employment is when the natural rate of unemployment exists
Natural rate equals about 5%

28. Q8.5 Full employment is the situation in which the economy operates at an unemployment rate equal to the sum of
structural and frictional unemployment.
cyclical and frictional unemployment.
structural and cyclical unemployment.
structural, frictional, and cyclical unemployment.

29. Actual and Potential GDP

30. Potential output is the economy’s maximum sustainable output; occurs when the natural rate of unemployment exists; occurs when full employment exists
Potential output is perhaps best thought of as the 3% growth rate discussed earlier
Actual output can be greater than or less than potential; again, think about the actual growth rate

31. Trend line = maximum sustainable rate Business Cycle = actual output
Real GDP
Business
peak
Trend line
Business
peak
Recessionary
trough
Expansion
Contraction
Recessionary
trough
Time
Trend line = maximum sustainable rate
Business Cycle = actual output

32. Actual & Potential GDP, 1960-2011
Real GDP (billions of 2000 $)
14,000
Potential GDP
Actual GDP
12,000
recession
Here we illustrate both actual GDP and potential GDP.
Note the gap (shaded area) between actual and potential GDP during periods of recession.
recession
2001 recession
10,000
1970 recession
8,000
1960 recession
6,000
1980 recession
1982 recession
4,000
recession
2,000
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2011

33. Another way to think about these:
When you read the BEA report about quarterly GDP, if the reported (actual) growth rate is near 3%, then the economy is at it’s potential output.
At 3% actual growth, the unemployment rate will likely be around 5% (i.e. full employment is 95%)
The economy can never eliminate frictional and structural unemployment for an extended period.

34. Q8.6 Actual GDP will be below potential GDP
when the economy is at full employment.
during an economic boom.
when resources are fully utilized.
during a recession.

35. The Effects of Inflation

36. Actual & Potential GDP, 1960-2011
average inflation rate = 1.6 %
Between 1956 and 1965, the general price level increased at an average annual rate of only 1.6%.
In contrast, the inflation rate averaged 9.2% from 1973 to 1981, reaching double-digits during several years.
Since 1982, the average rate of inflation has been lower (2.9% from ) and more stable.
average inflation rate = 9.2 %
15%
average inflation rate = 2.9 %
10% 5% 0%
-5%
1956
1960
1965
1970
1975
1985
1990
1995
2000
2005
2011
2011

37. See BLS CPI release (CPI_August_2012.pdf)

38. Q8. 7 Suppose you received a 3 percent increase in your nominal wage
Q8.7 Suppose you received a 3 percent increase in your nominal wage. Over the year, inflation ran about 6 percent. Which of the following is true?
Your real wage fell.
Your nominal wage fell.
Both your nominal and real wages decreased.
Although your nominal wage fell, your real wage increased.
Both nominal and real wages increased.

39. Inflation is a persistent increase in the general level of prices

40. Case Study: Zimbabwe
In February, 2008 a loaf of bread was 200,000 Zimbabwe dollars
In August, 2008, that same loaf of bread was 1.6 trillion dollars
That’s 11.2 million percent!

41. Watch Video: Ducktales-inflation (just for fun)

42. Why is inflation “bad”?
It reduces investment: long-term projects are more risky
It distorts information delivered by prices: relative prices are skewed because some prices adjust more quickly than others
It results in less productive use of resources: people will spend more time trying to combat the effects of inflation rather than engaging in productive activity

43. Question Answers 8.1 = 2 8.2 = 5 8.3 = 4 8.4 = 2 8.5 = 1 8.6 = 4
8.7 = 1