CHAPTER 32 Labor Markets, Unemployment and Inflation PowerPoint® Slides by Can Erbil © 2005 Worth Publishers, all rights reserved

2 What you will learn in this chapter: The meaning of the natural rate of unemployment, and why it isn’t zero Why cyclical unemployment changes over the business cycle How factors such as a minimum wage and efficiency wages can lead to structural unemployment The reasons that unemployment can be higher or lower than the natural rate for extended periods The existence of a short-run trade-off between unemployment and inflation, called the short-run Phillips curve, that disappears in the long run Why the NAIRU, the nonaccelerating inflation rate of unemployment, is an important measure for policy-making

3 The Nature of Unemployment Workers who spend time looking for employment are engaged in job search. Frictional unemployment is unemployment due to the time workers spend in job search. Structural unemployment is unemployment that results when there are more people seeking jobs in a labor market than there are jobs available at the current wage.

4 Distribution of the Unemployed by Duration of Unemployment, 2000

5 The Effect of a Minimum Wage on the Labor Market

6 Causes of Structural Unemployment  Minimum wages  Unions  Efficiency wages  Side effects of government policies

7 The Natural Rate of Unemployment  The natural rate of unemployment  Cyclical unemployment

8 The Changing Makeup of the U.S. Labor Force

9 Changes in the Natural Rate of Unemployment  Changes in Labor Force Characteristics  Changes in Labor Market Institutions  Changes in Government Policies  Changes in Productivity

10 The Actual Unemployment Rate Fluctuates Around the Natural Rate

11 These Fluctuations Correspond to the Output Gap

12 Okun’s Law Each additional percentage point of output gap reduces the unemployment rate by less than 1 percentage point. Unemployment rate = Natural rate of unemployment – (0.5 – Output gap)

13 Why Doesn’t the Labor Market Move Quickly to Equilibrium?  Misperceptions  Sticky Wages  Menu Costs

14 Unemployment and Inflation: The Phillips Curve

15 Unemployment and Inflation in the 1960s

16 Expected Inflation and the Short-Run Phillips Curve

17 The NAIRU and the Long-Run Phillips Curve

18 Unemployment and Inflation, 1961–1990

19 The End of Chapter 32 coming attraction: Chapter 33: Inflation, Disinflation, and Deflation

CHAPTER 33 Inflation, Disinflation, and Deflation PowerPoint® Slides by Can Erbil © 2005 Worth Publishers, all rights reserved

21 What you will learn in this chapter: Why efforts to collect an inflation tax by printing money can lead to high rates of inflation How high inflation can spiral into hyperinflation as the public tries to avoid paying the inflation tax The economy-wide costs of inflation and disinflation, and the debate over the optimal rate of inflation Why even moderate levels of inflation can be hard to end Why deflation is a problem for economic policy

22 Money and Prices According to the classical model of the price level, the real quantity of money is always at its long-run equilibrium level.

23 Money Supply Growth and Inflation in Brazil

24 The Inflation Tax and Hyperinflation  The inflation tax is the reduction in the real value of money held by the public caused by inflation, equal to the inflation rate times the money supply, on those who hold money.  The real value of resources captured by the government is reflected by the real inflation tax, the inflation rate times the real money supply.  A vicious circle of a shrinking real money supply and a rising rate of inflation, leads to hyperinflation and a fiscal crisis.

25 Money and Prices in Brazil, 1985–1995

26 The Fisher Effect

27 The Costs of Inflation  Shoe-leather costs  Menu costs  Unit-of-account costs

28 Inflation and Nominal Interest Rates in the U.S.

29 The Great Disinflation of the 1980s

30 Effects of Deflation Effects of Unexpected Deflation: - Debt deflation Effects of Expected Deflation: - Zero bound - Liquidity trap

31 Japan’s Trap

32 The End of Chapter 16 coming attraction: Chapter 17: The Making of Modern Macroeconomics