1 of 35 chapter: 8 >> Krugman/Wells ©2009  Worth Publishers Unemployment and Inflation

2 of 35 Census Bureau  Samples 60,000 households   The data is analyzed and published by the US Department of Labor  This classifies the public as either Employed, Unemployed or Not in the Work Force

3 of 35 You are EMPLOYED if…  You worked for pay in the past week  You worked without pay in a family business for 15+ hours in the the last week  You have a job, but did not work due to illness, weather, vacations or labor disputes

4 of 35 You are UNEMPLOYED if…  You do not meet the criteria of “employed”  But you MUST have been actively seeking a job in the past month  ***ANYONE not employed or unemployed is considered not in the labor force***

5 of 35 Unemployment Rate  Employment is the number of people currently employed in the economy, either full time or part time.  Unemployment is the number of people who are actively looking for work but aren’t currently employed.  The labor force is equal to the sum of employment and unemployment.

6 of 35 Unemployment Rate  The labor force participation rate is the percentage of the population aged 16 or older that is in the labor force.  The unemployment rate is the percentage of the total number of people in the labor force who are unemployed.

7 of 35 Problems with the Unemployment Rate  Marginally attached workers would like to be employed and have looked for a job in the recent past but are not currently looking for work.  Discouraged workers are nonworking people who are capable of working but have given up looking for a job given the state of the job market.  Underemployment is the number of people who work part time because they cannot find full-time jobs.

8 of 35 Unemployment Rate Alternative Measures of Unemployment, Year 12% Percentage of labor force

9 of 35 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.  ***THESE ARE BOTH NATURAL TYPES OF UNEMPLOYMENT***

10 of 35 Structural Unemployment The Effect of a Minimum Wage on the Labor Market Quantity of Labor W Wage Rate W F E Q D Q E Q S Structural unemployment Minimu m wage

11 of 35 Causes of Structural Unemployment  Minimum wages  Unions - by bargaining for all a firm’s workers collectively (collective bargaining), unions can often win higher wages from employers than the market would have otherwise provided when workers bargained individually.

12 of 35 The Natural Rate of Unemployment  The natural rate of unemployment is the normal unemployment rate around which the actual unemployment rate fluctuates.  Cyclical unemployment is a deviation in the actual rate of unemployment from the natural rate.

13 of 35 The Natural Rate of Unemployment  Natural unemployment = Frictional unemployment + Structural unemployment  Actual unemployment = Natural unemployment + Cyclical unemployment

14 of 35 ►ECONOMICS IN ACTION Structural Unemployment in Eastern Germany  When Germany was reunified, it became clear that workers in East Germany were much less productive than their cousins in the west.  The result has been a persistently large mismatch between the number of workers demanded and the number of those seeking jobs.

15 of 35 Inflation and Deflation  The Level of Prices Doesn’t Matter, but the Rate of Change Does!!  Remember the Inflation Rate Equation:  ((Price Index Year 2 – Price Index Year 1) / Price Index Year 1) X 100  This tells us HOW QUICKLY prices are rising

16 of 35  Real income is income divided by the price level.  “REAL” simply means that it has been adjusted for inflation……Real Income reflects one’s actual purchasing power.  If your Real Income increase at the same rate as inflation, Your purchasing power will not change.

17 of 35 Inflation and Deflation The Price Level versus the Inflation Rate, Year Price Level % Inflation rate

18 of 35 Inflation and Deflation  Unit-of-account costs arise from the way inflation makes money a less reliable unit of measurement.  The idea that contracts and loans ect…are measured in dollar amounts. If the dollar looses Real value in the life of the contract/loan, it changes that agreements Real value  The nominal interest rate is the interest rate expressed in dollar terms.  The real interest rate is the nominal interest rate minus the rate of inflation.  Think of a loan: If Inflation ends up being higher than expected, Borrowers win…..If inflation ends up being lower than expected, Lenders win.