1 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics CHAPTER OUTLINE 7 Unemployment, Inflation, and Long-Run Growth Unemployment Measuring Unemployment Components of the Unemployment Rate The Costs of Unemployment Inflation The Consumer Price Index The Costs of Inflation Long-Run Growth Output and Productivity Growth Looking Ahead

2 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics Real GDP (billions of chained 2005 dollars)13, , , , ,593.2 Population(thousands)304, , , , ,914.0 Labor Force(thousands)154, , , , ,965.8 Employment(thousands)145, , , , ,469.0

3 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics employed Any person 16 years old or older (1) who works for pay, either for someone else or in his or her own business for 1 or more hours per week, (2) who works without pay for 15 or more hours per week in a family enterprise, or (3) who has a job but has been temporarily absent with or without pay. unemployed A person 16 years old or older who is not working, is available for work, and has made specific efforts to find work during the previous 4 weeks. Unemployment Measuring Unemployment

4 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics not in the labor force A person who is not looking for work because he or she does not want a job or has given up looking. labor force The number of people employed plus the number of unemployed. labor force = employed + unemployed population = labor force + not in labor force Unemployment Measuring Unemployment

5 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics Unemployment Measuring Unemployment unemployment rate The ratio of the number of people unemployed to the total number of people in the labor force. labor force participation rate The ratio of the labor force to the total population 16 years old or older.

6 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics TABLE 7.1 Employed, Unemployed, and the Labor Force, 1950–2009 (1)(2)(3)(4)(5)(6) Population 16 Years Old or Over (Millions) Labor Force (Millions) Employed (Millions) Unemployed (Millions) Labor Force Participation Rate (Percentage Points) Unemployment Rate (Percentage Points) Note: Figures are civilian only (military excluded). Unemployment Measuring Unemployment

7 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics TABLE 7.2 Unemployment Rates by Demographic Group, 1982 and 2010 YearsNovember 1982June 2010 Total White Men Women Both sexes16– African American Men Women Both sexes16– Unemployment Components of the Unemployment Rate Unemployment Rates for Different Demographic Groups

8 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics TABLE 7.3 Regional Differences in Unemployment, 1975, 1982, 1991, 2003 and U.S. avg Cal Fla Ill Mass Mich N.J N.Y N.C Ohio Tex Unemployment Components of the Unemployment Rate Unemployment Rates in States and Regions

9 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics discouraged-worker effect The decline in the measured unemployment rate that results when people who want to work but cannot find jobs grow discouraged and stop looking, thus dropping out of the ranks of the unemployed and the labor force. Unemployment Components of the Unemployment Rate Discouraged-Worker Effects

10 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics As women began joining the labor force in greater numbers in the 1970s and 1980s, their wages relative to men’s wages actually fell. Most economists attribute this decline to the fact that less experienced women were entering the labor force, pointing out the importance of correcting for factors such as experience and education when we analyze labor markets. E C O N O M I C S I N P R A C T I C E A Quiet Revolution: Women Join the Labor Force: table 7.1 LF participationWomenMarried women %29% %62%

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12 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics TABLE 7.4 Average Duration of Unemployment, 1970–2009 Weeks Unemployment Components of the Unemployment Rate The Duration of Unemployment: the average length of time an unemployed work is out of work

13 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics When we consider the various costs of unemployment, it is useful to categorize unemployment into three types: Frictional unemployment Structural unemployment Cyclical unemployment Unemployment The Costs of Unemployment Some Unemployment Is Inevitable

14 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics frictional unemployment The portion of unemployment that is due to the normal turnover in the labor market; used to denote short-run job/skill matching problems. structural unemployment The portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries. Unemployment The Costs of Unemployment Frictional, Structural, and Cyclical Unemployment natural rate of unemployment The unemployment rate that occurs as a normal part of the functioning of the economy. Sometimes taken as the sum of frictional unemployment rate and structural unemployment rate. cyclical unemployment Unemployment that is above frictional plus structural unemployment.

15 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics The costs of unemployment are neither evenly distributed across the population nor easily quantified. The social consequences of the Depression of the 1930s are perhaps the hardest to comprehend. Few emerged from this period unscathed. At the bottom were the poor and the fully unemployed, about 25 percent of the labor force. Even those who kept their jobs found themselves working part-time. Many people lost all or part of their savings as the stock market crashed and thousands of banks failed. And number of social and personal ills ( suicide, drug abuse, anxiety…) Unemployment The Costs of Unemployment Social Consequences

16 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics consumer price index (CPI) A price index computed each month by the Bureau of Labor Statistics using a bundle that is meant to represent the “market basket” purchased monthly by the typical urban consumer. Inflation The Consumer Price Index

17 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics The CPI market basket shows how a typical consumer divides his or her money among various goods and services. Most of a consumer’s money goes toward housing, transportation, and food and beverages. ▲ FIGURE 7.1 The CPI Market Basket Inflation The Consumer Price Index

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19 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics TABLE 7.5 The CPI, 1950–2009 Percentage Change in CPICPI Percentage Change in CPICPI Percentage Change in CPICPI  Inflation The Consumer Price Index

20 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics producer price indexes (PPIs) Measures of prices that producers receive for products at all stages in the production process. The indexes are calculated separately for various stages in the production process. The three main categories are finished goods, intermediate materials, and crude materials, although there are subcategories within each of these categories. Inflation The Consumer Price Index

21 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics During inflations, most prices—including input prices like wages—tend to rise together, and input prices determine both the incomes of workers and the incomes of owners of capital and land. So inflation by itself does not necessarily reduce ones purchasing power. Inflation The Costs of Inflation

22 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics In the last few years many state governments in the United States have begun to see the costs associated with retiring state workers escalate as the number of retirees has grown. For many of these public- sector retirees, pensions have been tied to the cost of living. E C O N O M I C S I N P R A C T I C E The Politics of Cost-of-Living Adjustments No Cost-of-Living Increase for State Retirees in July The Baltimore Sun

23 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics real interest rate The difference between the interest rate on a loan and the inflation rate. Inflation The Costs of Inflation Inflation May Change the Distribution of Income

24 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics There may be costs associated even with anticipated inflation. One is the administrative cost associated with simply keeping up. Economists have debated the seriousness of the costs of inflation for decades. No matter what the real economic cost of inflation, people do not like it. Inflation The Costs of Inflation Administrative Costs and Inefficiencies Public Enemy Number One?

25 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics output growth The growth rate of the output of the entire economy. per-capita output growth The growth rate of output per person in the economy. productivity growth The growth rate of output per worker. Long-Run Growth

26 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics Productivity grew much faster in the 1950s and 1960s than since. ▲ FIGURE 7.2 Output per Worker Hour (Productivity), 1952 I–2010 I Long-Run Growth Output and Productivity Growth

27 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics Capital per worker grew until about 1980 and then leveled off somewhat. ▲ FIGURE 7.3 Capital per Worker, 1952 I–2010 I Long-Run Growth Output and Productivity Growth

28 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics Looking Ahead This ends our introduction to the basic concepts and problems of macroeconomics. The first chapter of this part introduced the field; the second chapter discussed the measurement of national product and national income; and this chapter discussed unemployment, inflation, and long-run growth. We are now ready to begin the analysis of how the macroeconomy works.

29 of 28 © 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II Concepts and Problems in Macroeconomics consumer price index (CPI) cyclical unemployment discouraged-worker effect employed frictional unemployment labor force labor force participation rate natural rate of unemployment not in the labor force output growth per-capita output growth producer price indexes (PPIs) productivity growth real interest rate structural unemployment unemployed unemployment rate 1.labor force = employed + unemployed 2. population = labor force + not in labor force R E V I E W T E R M S A N D C O N C E P T S