Unemployment/Inflation Chapter 13

Breakdown of Total U.S. Population by Employment Status Total Population Persons under 16 Persons in the armed forces Persons institutionalized Non-institutional adult civilian population Not in labor forceCivilian labor force EmployedUnemployed

Unemployment Rate Percentage of the civilian labor force that is unemployed Civilian Labor Force – 16 years or older either employed or actively seeking employment Idaho unemployment rate July 2008 – 4.1% - today 6.8% U.S. unemployment rate July 2008 – 5.7% - Today 8.5%

More….. Individuals who are actively looking for a job but work less than 1 hour per week for pay or profit Does not include people who are underemployed, working part time, or have given up the job search Government takes monthly surveys to measure the unemployment rate

Full Employment Even in an economy that is working properly, economists expect some unemployment. An unemployment rate of 3% is considered full employment. However, some people with jobs could be underemployed – they work part-time but want full

One Economic Indicator Economists measure how healthy the economy is at any given time by counting the number of people who are unemployed.

Unemployment Insurance Way of tracking unemployment in U.S. Not public assistance – paid for by your employers – based on type of work done Two qualifications –Personal eligibility – able to work –Monetary requirements – worked last 5 quarters Automated system $28,000 per year would make one eligible for $275/week for 6 months

Types of Unemployment Frictional Seasonal Technological Structural Cyclical

Frictional Unemployment People take time to find a job –Get laid off, take time to find right job –Graduate from high school or college –Looking for a new job –Left job to take care of a parent, coming back

Seasonal Unemployment Unemployment that occurs as a result of harvest schedules or vacations Industries slow down or shut down due to cold weather –Summer Job – Boondocks –Winter Jobs - Bogus

Technological Unemployment Automation makes some workers skills obsolete

Structural Unemployment Worker’s skills do not match the jobs that are available –Need skills to success –Move from farming to manufacturing –Manufacturing to service –Takes time to retrain

Cyclical Unemployment In economic downturns people are laid off because there is a surplus of inventories and no demand

Unemployment can cause uncertainly, political instability, and social problems

Inflation

What is Inflation? An increase in the price level, or the average level of prices The same amount of money buys less Inflation reduces people’s purchasing power (ability to buy goods and services)

How Do We Measure Inflation? Economists use a price index If the price index increases from year to year – we are experiencing inflation CPI (Consumer Price Index) - most commonly used inflation measure –measuring the price of a standard group of goods meant to represent the “market basket” of a typical urban customer –Watching from year to year helps determine the inflation rate (% change in prices over time)

Three Causes of Inflation Quantity theory – too much money in the economy chasing too few goods Demand Pull – Demand-side inflation When demand for goods and services exceeds supply Government increase in spending on war goods causes the price to go up for those goods –Johnson years – Vietnam War and Great Society –Civilian demands outpaced supply pulling prices up

Cost Push Supply-side inflation Inflation occurs when producers raise prices to meet increased costs for labor and raw materials Wage-Price Spiral –Increase in one type of prices can cause other prices to rise to make up for lost profit - oil –Price-wage spiral – lack of competition results in businesses increases prices – causes an increase in wage demand

Affects of Inflation Reducing purchasing power People on fixed incomes, such as social security and investment proceeds, are negatively effected. The greater the inflation rate, interest earned on savings loses value – can buy less with the money you have If you have a long-term contract – can eat up profits over time.

Deflation Opposite of inflation A decline in the price level, or average level of prices A downward change in the CPI indicates deflation PROBLEMS – when prices do not fall at the same time, some firms go out of business or lay off workers

Hyperinflation Inflation that exceeds 50% per month The value of money decreases CAUSES – government needs to pay for government services but does not want to raise taxes, so they print more money People immediately convert money to goods and services because they are worth more

Examples of Hyperinflation U.S. – 1918 – 20.4% - booming economy after WW I Germany – – 3 trillion % inflation - prices doubled every two days – economic crisis helped rise Hitler to power Greece – – prices doubled every 28 hours Hungary – after WWII – prices doubled every 15 hours Yugoslavia – 1994 – prices doubled every 18 hours Zimbabwe – December 2008 – million % inflation per month