BU204 Agenda 2011 Welcome to the Seminar Week 9. Employment & Inflation Final Exam: Questions ?

9 MACROECONOMICS BU204 Employment

week 9 3 of 26 The Historical Record of Unemployment U.S. unemployment has varied from a high of 25% of the labor force in the middle of the Great Depression to a low of just over 1% during World War II. For the past fifty years, unemployment has tended to hover around the 5 – 6% range, although it approached 10% during the recession. In March, 2009 it was over 8%. Today is 10%. Unemployment for college graduates has consistently been extremely low, coming in at 1.5% in the year 2000.

week 9 Unemployment 4 of 26

week 9 5 of 26 Measuring Unemployment Every month the Census Bureau, as part of the Current Population Survey, contacts roughly 60,000 households to determine their economic activity. The sample group is drawn from over 700 geographical areas intended to represent the entire United States. See: The Census Bureau does not directly ask interviewees if they are employed. Rather, it asks a series of questions designed to elicit information that permits the Bureau of Labor Statistics to determine by its own standards their employment status.

week 9 6 of 26 Unemployment Statistics The three major monthly numbers the BLS reports are the size of the labor force, the number of people employed, the number unemployed.

week 9 7 of 26 Underemployment The unemployment rate is the number of people unemployed divided by the labor force. When the Department of Labor announces its results each month, commentators often note that these numbers understate unemployment, since they do not include chronically unemployed workers who have grown so discouraged they have dropped out of the labor force. Some workers are underemployed in that they are forced to take jobs which do not fully use their education, background, or skills. These workers are still counted as employed for the purposes of the BLS reports.

chapter 16 Checkpoint 8 of 26 Unemployment People are counted as employed if they worked for income during the survey week. People are unemployed if they do not have a job, but are available for work and have been actively seeking work in the previous four weeks. The labor force is the sum of the employed and unemployed. The unemployment rate is the unemployed divided by the labor force. Unemployment statistics do not account for underemployed and discouraged workers.

9 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.

10 Distribution of the Unemployed by Duration of Unemployment, 2000

Duration of Unemployment 11

12 The Effect of a Minimum Wage on the Labor Market

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

14 The Natural Rate of Unemployment The natural rate of unemployment Frictional unemployment + structural unemployment Cyclical unemployment The deviation of the actual rate of unemployment from the natural rate Actual Unemployment Frictional unemployment + structural unemployment + cyclical unemployment

Unemployment 15

16 The Actual Unemployment Rate Fluctuates Around the Natural Rate

17 These Fluctuations Correspond to the Output Gap

18 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)

9 MACROECONOMICS BU204 Inflation

20 of 26 The Logic of Hyperinflation  In 1923, Germany’s money was worth so little that children used stacks of banknotes as building blocks or built kites with them.

21 of 26 ►ECONOMICS IN ACTION Zimbabwe’s Inflation  Zimbabwe’s money supply growth was matched by almost simultaneous surges in its inflation rate. Why did Zimbabwe’s government pursue policies that led to runaway inflation?  The reason boils down to political instability, which in turn had its roots in Zimbabwe’s history.  Robert Mugabe, Zimbabwe’s president, tried to solidify his position by seizing farms and turning them over to his political supporters.  But because this seizure disrupted production, the result was to undermine the country’s economy and its tax base. It became impossible for the country’s government to balance its budget either by raising taxes or by cutting spending.

week 9 22 of 26 Inflation Around the middle of each month, the Bureau of Labor Statistics announces the change in retail prices over the previous month. These updates in the Consumer Price Index provide us with our principal measure of inflation.  Note that the price level is the absolute level of a price index, whether this is the Consumer Price Index (retail prices), the Producer Price Index (wholesale prices), or the GDP Deflator (average price of all items in GDP).  The rate of inflation is the annual rate of increase in the price level.

week 9 23 of 26 Definition of Terms Disinflation: A reduction in the rate of inflation. Note that an economy going through disinflation may still be facing inflation, but it will be at a declining rate. Deflation: A decline in overall prices throughout the economy. This is the opposite of inflation. Hyperinflation: An extremely high rate of inflation. At first, this was defined as an inflation rate of at least 50% a month. Today, most economists refer to inflation above 100% a year as hyperinflation. Hungary experienced the highest rate of inflation on record during World War II.

week 9 24 of 26 Measures of Inflation Price Indexes (computed by the Bureau of Labor Statistics)  The Consumer Price Index (CPI) is a measure of the average change in prices paid by urban consumers for a typical market basket of consumer goods and services.

week 9 25 of 26 Measures of Inflation Price Indexes (computed by the Bureau of Labor Statistics)  The Producer Price Index (PPI), originally known as the Wholesale Price Index (WPI), measures the average changes in the prices received by domestic producers for their output.  The GDP Deflator is a measure of the average change in prices of the components in GDP.  The Personal Consumption Expenditures Index (PCE) measures changes in the cost of consumer items in the GDP accounts.

26 Money Supply Growth and Inflation in Brazil

27 The Inflation Tax & The Costs of Inflation 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. Some of the costs of inflation are:  Shoe-leather costs The increased cost of transactions caused by inflation  Menu costs It is the real cost of changing a listed price  Unit-of-account costs Arise from the way inflation makes money a less reliable unit of measurement.

28 Inflation and Nominal Interest Rates in the U.S. The Fisher effect tells us that each percentage point of expected inflation raises the nominal interest rate by 1 percentage point.

29 Unemployment and Inflation: The Phillips Curve