1. Economic Challenges
Chapter 13

2. Unemployment
Chapter 13, Section 1

3. Unemployment Economists characterize unemployment in four categories
Frictional
Seasonal
Structural
Cyclical

4. Frictional Unemployment
Unemployment that occurs when people take time to find a job
Switching jobs
Just finished school
Left labor force and trying to return

5. Seasonal Unemployment
Unemployment that occurs due to seasons
Growing seasons
Construction
Vacation or resort industries

6. Structural Unemployment
Workers skills do not match the jobs available
5 causes of structural unemployment
Development of new technology
Discovery of new resources
Changes in consumer demand
Globalization
Lack of education

7. Cyclical Unemployment
Unemployment that changes with business cycles
People lose jobs with decrease in production

8. Measuring Employment
Unemployment is an important indicator in the economy
BLS (Bureau of Labor Statistics) polls the population and reports on unemployment
This computes the unemployment rate
Represents the % of people unemployed

9. Determining Unemployment Rate
Divides the total number unemployed by the labor force
Monthly rates are seasonally adjusted

10. Full Employment
Although it seems desirable, full employment is not a characteristic of a strong economy
Full employment will lead to some inefficiency
A strong economy exhibits an unemployment rate of 4-6 percent
Economies will always experience cyclical unemployment

11. Underemployment and Discouraged Workers
In various cases, people may have a job but be overqualified for that position. This is underemployment.
Discouraged Workers are those who have stopped looking for a job
They do not appear in the unemployment rate

12. Unemployment that is too low??
Very low unemployment can lead:
to unneeded positions
High competition by companies to find workers
Higher wages
Higher prices (inflation)

13. Review
1. Unemployment that occurs when workers’ skills do not match the jobs that are available is known as
(a) frictional unemployment.
(b) structural unemployment.
(c) seasonal unemployment.
(d) cyclical unemployment.
2. The unemployment rate
(a) is the percentage of the labor force that is unemployed.
(b) is the number of people who are unemployed.
(c) includes only discouraged workers.
(d) is the percentage of the labor force that is underemployed.

14. Inflation
Chapter 13, Section 2

15. Inflation
Inflation is the term used to describe a general increase in prices
It does not always mean that things have become more expensive. If wages increase with inflation, the change in prices is not felt.
Purchasing Power is the power to purchase goods and services. If prices increases and wages do not, one loses purchasing power

16. Price Indexes
Price indexes are measurements that show the average price of a collection of goods
Consumer Price Index (CPI)
best known price index
Calculated monthly and focuses on consumer goods
Uses the market basket
The market basket is a collection of representative goods

17. Market Basket Updated every 10 years
Include products in categories (pg 339)
Food and drink
Housing
Apparel
Transportation
Medical care
Entertainment
Education
Other services

18. Inflation Rate
Inflation rate measures the percent in price changes over time
Calculation:
CPI for year A minus CPI for year B / CPI for year B x 100

19. Types of Inflation
Creeping inflation...low inflation rate (1-3% per year) for a long period of time.
not harmful to the economy
Chronic Inflation...steady accelerating inflation over a period of time
Hard on an economy (things are unpredictable)
Hyper Inflation...out of control inflation ( %)
Extremely hard on the economy

20. Causes of Inflation Many factors can cause a rise in prices.
Quantity Theory...too much money causes inflation
Demand-Pull Theory...there is higher demand and prices rise
Cost-Push Theory...cost of production goes up so prices rise (wage increases caused by low unemployment, raw materials)

21. Wage-Price Spiral
Occurs when higher wages cause higher prices and higher prices cause higher wages

22. Effects of Inflation
High inflation can cause many problems for an economy. With high inflation, it is hard to predict the future
Purchasing Power...the dollar loses value and one cannot buy as much

23. Effects of Inflation
Income...if prices increase but wages do not, one’s disposable income decreases (troublesome for those on a fixed income)
Interest Rates...if inflation increase faster than interest rates, my savings and investments may lose money

24. Recent Trends Prices have steadily increased for the past thirty years
There was a short period of deflation (falling prices) in the late 90’s

25. Review
1. Inflation is
(a) the process by which rising wages cause higher prices.
(b) the price increase of a typical group of goods.
(c) a general increase in prices.
(d) the ability to purchase goods and services.
2. Chronic inflation occurs when the inflation rate
(a) drops to zero.
(b) remains low for a long time.
(c) grows out of control.
(d) rises steadily over an extended period.

26. Poverty
Chapter 13, Section 3

27. Poverty
Poverty Threshold...income level that is too low to support a family
Poverty rate...percentage of households below the poverty line

28. Causes of Poverty Lack of Education Location
Racial and Gender Discrimination
Economic Shifts...layoffs etc...last hired, first fired
Family Structure...single parent families etc...

29. Income distribution
Median income for US...$43,318, yet millions live in poverty
This is due to uneven income distribution
20% of US households make 50% of the income (80% of the wealth)
Lorenz Curve represents the distribution of income in US economy

30. Antipoverty Policies
Enterprise zones...companies are encouraged to locate in areas and received incentives to do so
Employment Assistance...
programs to place workers
Minimum wage

31. Antipoverty Policies Welfare Reform
Personal Responsibility and Work Opportunity Reconciliation Act
Aimed at reducing reliance on welfare assistance
Set a 5 year limit on benefits
Sent responsibility to the states
Block grants...money to the states for distribution rather than directly to the people
Workfare...exchange of work for assistance

32. Review
1. An income level below which income is insufficient to support a family or household is known as the
(a) income gap.
(b) poverty rate.
(c) poverty threshold.
(d) income inequality.
2. The Personal Responsibility and Work Opportunity Act of 1996
(a) provides lump sums of money to poor families.
(b) provides federal payments to poor families to supplement state payments.
(c) set a 5-year limit on receipt of benefits.
(d) provides direct cash payments to poor families.