1. © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. Fernando & Yvonn Quijano Prepared by: Chapter 8 Unemployment and Inflation

2. Chapter 8: Unemployment and Inflation © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 2 of 36 Labor force The sum of employed and unemployed workers in the economy. Unemployment rate The percentage of the labor force that is unemployed. Measuring the Unemployment Rate and the Labor Force Participation Rate Learning Objective 8.1 The Household Survey Discouraged workers People who are available for work but have not looked for a job during the previous four weeks because they believe no jobs are available for them.

3. Chapter 8: Unemployment and Inflation © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 3 of 36 Learning Objective 8.1 FIGURE 8-1 The Employment Status of the Civilian Working-Age Population, April 2007 Measuring the Unemployment Rate and the Labor Force Participation Rate The Household Survey

4. Chapter 8: Unemployment and Inflation © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 4 of 36 Learning Objective 8.1 The unemployment rate measures the percentage of the labor force that is unemployed. Measuring the Unemployment Rate and the Labor Force Participation Rate The Household Survey The labor force participation rate measures the percentage of the working-age population in the labor force.

5. Chapter 8: Unemployment and Inflation © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 5 of 36 Learning Objective 8.1 Measuring the Unemployment Rate and the Labor Force Participation Rate Problems with Measuring the Unemployment Rate Although the BLS reports the unemployment rate measured to the tenth of a percentage point, it is not a perfect measure of the current state of joblessness in the economy. The unemployment rate provides some useful information about the employment situation in the country, but it is far from an exact measure of joblessness in the economy.

6. Chapter 8: Unemployment and Inflation © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 6 of 36 Learning Objective 8.1 FIGURE 8-2 Trends in the Labor Force Participation Rates of Adult Men and Women Since 1948 Measuring the Unemployment Rate and the Labor Force Participation Rate Trends in Labor Force Participation

7. Chapter 8: Unemployment and Inflation © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 7 of 36 Learning Objective 8.1 What Explains the Increase in “Kramers”? Making the Connection Why do more men seem to be adopting Kramer’s lifestyle?

8. Chapter 8: Unemployment and Inflation © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 8 of 36 Learning Objective 8.1 FIGURE 8-3 Unemployment Rates in the United States by Demographic Group, April 2007 Measuring the Unemployment Rate and the Labor Force Participation Rate Unemployment Rates for Demographic Groups

9. Chapter 8: Unemployment and Inflation © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 9 of 36 Learning Objective 8.1 Table 8-1 Duration of Unemployment LENGTH OF TIME UNEMPLOYEDPERCENTAGE OF TOTAL UNEMPLOYED Less than 5 weeks35.6% 5 to 14 weeks31.3 15 to 26 weeks15.7 27 weeks or more17.5 Measuring the Unemployment Rate and the Labor Force Participation Rate How Long Are People Usually Unemployed?

10. Chapter 8: Unemployment and Inflation © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 10 of 36 Learning Objective 8.1 Table 8-2 Household and Establishment Survey Data for March and April 2007 HOUSEHOLD SURVEYESTABLISHMENT SURVEY MARCHAPRILCHANGE MARCHAPRILCHANGE EMPLOYED 146,254,000145,786,000−468,000137,596,000137,684,000+88,000 UNEMPLOYED 6,724,0006,801,000+77,000 LABOR FORCE 152,979,000152,587,000−392,000 UNEMPLOYMENT RATE 4.4%4.5%+0.1% Measuring the Unemployment Rate and the Labor Force Participation Rate The Establishment Survey: Another Measure of Employment

11. Chapter 8: Unemployment and Inflation © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 11 of 36 Types of Unemployment Learning Objective 8.2 FIGURE 8-4 The Annual Unemployment Rate in the United States, 1950–2006

12. Chapter 8: Unemployment and Inflation © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 12 of 36 Learning Objective 8.2 Frictional Unemployment and Job Search Frictional unemployment Short-term unemployment that arises from the process of matching workers with jobs. Types of Unemployment Structural unemployment Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of jobs. Cyclical unemployment Unemployment caused by a business cycle recession. Cyclical Unemployment Structural Unemployment

13. Chapter 8: Unemployment and Inflation © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 13 of 36 Learning Objective 8.2 Natural rate of unemployment The normal rate of unemployment, consisting of frictional unemployment plus structural unemployment. Full Employment Types of Unemployment

14. Chapter 8: Unemployment and Inflation © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 14 of 36 Learning Objective 8.3 Unemployment Insurance and Other Payments to the Unemployed Government Policies and the Unemployment Rate Explaining Unemployment In the United States and most other industrial countries, the unemployed are eligible for unemployment insurance payments from the government. In the United States, these payments are equal to about half the average wage. Unemployment insurance helps the unemployed maintain their income and spending, which lessens the personal hardship of being unemployed and also helps reduce the severity of recessions.

15. Chapter 8: Unemployment and Inflation © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 15 of 36 Learning Objective 8.3 Minimum Wage Laws Government Policies and the Unemployment Rate Explaining Unemployment In 1938, the federal government enacted a national minimum wage law. If the minimum wage is set above the market wage determined by the demand and supply of labor, the quantity of labor supplied will be greater than the quantity of labor demanded. Economists agree that the current minimum wage is above the market wage for some workers, but they disagree on the amount of unemployment that has resulted.

16. Chapter 8: Unemployment and Inflation © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 16 of 36 Learning Objective 8.3 Efficiency Wages Efficiency wage A higher-than- market wage that a firm pays to increase worker productivity. Labor Unions Explaining Unemployment Labor unions are organizations of workers that bargain with employers for higher wages and better working conditions for their members.

17. Chapter 8: Unemployment and Inflation © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 17 of 36 Learning Objective 8.3 Why Does Costco Pay Its Workers So Much More Than Wal-Mart Does? Making the Connection Costco’s relatively high wages and health benefits reduce employee turnover and raise morale and productivity.

18. Chapter 8: Unemployment and Inflation © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 18 of 36 Measuring Inflation Learning Objective 8.4 The Consumer Price Index FIGURE 8-6 The CPI Market Basket, December 2006

19. Chapter 8: Unemployment and Inflation © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 19 of 36 Measuring Inflation Learning Objective 8.4 Consumer price index (CPI) An average of the prices of the goods and services purchased by the typical urban family of four. The Consumer Price Index BASE YEAR (1999)20082009 PRODUCT QUANTIT YPRICEEXPENDITURESPRICE EXPENDITURES (ON BASE-YEAR QUANTITIES)PRICE EXPENDITURE S (ON BASE- YEAR QUANTITIES) Eye examinations 1$50.00 $100.00 $85.00 Pizzas2010.00200.0015.00300.0014.00280.00 Books2025.00500.0025.00500.0027.50550.00 Total$750.00$900.00$915.00

20. Chapter 8: Unemployment and Inflation © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 20 of 36 Real versus Nominal Interest Rates Learning Objective 8.6 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.

21. Chapter 8: Unemployment and Inflation © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 21 of 36 Real versus Nominal Interest Rates Learning Objective 8.6 FIGURE 8-7 Nominal and Real Interest Rates, 1970–2006