Presentation on theme: "Chapter 5: Monitoring Jobs and Inflation"— Presentation transcript:
1 Chapter 5: Monitoring Jobs and Inflation The labor marketMeasurement of unemployment, labor force participation, employment-population ratio.Shortcomings of unemployment rate as measure of labor market performanceStatistics describing U.S. labor marketPricesWhy inflation is a problemMeasuring the price level: the consumer price indexShortcomings of CPI
2 Unemployment Why is unemployment a problem? Measuring unemployment Lost production and incomeLost human capitalMeasuring unemploymentThe Current Population SurveyMonthly surveyApproximately 60,000 householdsUsed to monitor employment, hours wagesPrimary source of data for unemployment rates
3 Labor Force Measures: 4th quarter, 2009 U.S. population: millionCivilian Non-institutionalized Working age (16+) population: m.In Labor Force153.5 m.Employed138.1Unemployed15.4Out of labor force83.2 m.Not in Civilian Non-Institutionalized Population71.8 m.
4 Labor market definitions Civilian Non-institutionalized Working Age PopulationExcludes military and institutionalizedWorking age is 16+UnemployedWithout work but has made specific efforts to find a job within the previous four weeksWaiting to be called back to a job from which he or she has been laid offWaiting to start a new job within 30 days
9 Which is more cyclical – participation rate or employment ratio? Why?
10 Unemployment as a measure of labor utilization. Imperfect measure becauseExcludes some underutilizedUnderemployede.g. part-time workers who want full-time workDiscouraged workersPeople who want jobs but quit searching due to lack of job opportunitiesSome unemployment is “natural”Even when economy is operating at capacity, there are new entrants who must search for jobsIn 2008, more than 3 million new workers entered the labor force and more than 2.5 million workers retired in U.S. economy.
11 Sources of Unemployment People become unemployed if theyLose their jobs and search for another job.Leave their jobs and search for another job.Enter or reenter the labor force to search for a job.People end a spell of unemployment if theyAre hired or recalled.Withdraw from the labor force.
12 All are counter-cyclical, but job losers is most sensitive to business cycle.
13 Types of Unemployment Frictional Structural Cyclical unemployment that arises from normal labor market turnover (entry, re-entry, etc.)Affected by UI generosity, demographicsStructuralunemployment created by changes in technology and foreign competition that change the skills needed to perform jobs or the locations of jobsCyclicalFluctuating unemployment over the business cycleTemporary loss of jobs associated with a recession
14 Natural Rate of Unemployment The unemployment rate when the economyis at “full employment”has only frictional and structural unemployment, no cyclical unemploymentNatural unemployment rate in 1980s was thought to be around 6%; thought to be around 5% in 1990s and 2000s.Decline in natural rate due to changing demographicsBaby boomEntry of women into labor market
15 Real GDP and Unemployment Potential GDP is the quantity of real GDP producedwhen the economy is at full employmentWhen the unemployment rate equals the natural rateOutput Gap = Real GDP – Potential GDP
17 InflationPrice levelaverage of the prices that people pay for all the goods and services that they buy.Inflation ratepercentage change in the price level between time periods.Inflationoccurs when the price level is rising persistently.Deflationoccurs when inflation is negative and prices are falling persistently
18 Why inflation is a problem Redistributes income and wealthBorrowers and lendersEmployers and workersTaxes that are not indexed for inflationDiverts resources from productionInflation forecasting becomes more importantNegotiate shorter contracts more frequentlyMay lead to “barter” if inflation rises to sufficiently high levels (hyperinflation)
19 Measuring the price level and inflation Consumer Price Index (CPI)measures the average of the prices paid by urban consumers for a “fixed” basket of consumer goods and services.defined to equal 100 for the reference or base period.Using as the base year,the CPI in December 2009 was 216prices in December 2009 were 116 percent higher than in
20 Constructing the CPI Selecting the basket Based on Consumer Expenditure Survey ofBasket contains 80,000 goods
21 Constructing the CPI The monthly price survey Calculating the CPI Every month, BLS employees check the prices of 80,000 goods in 30 metropolitan areasCalculating the CPIFind the cost of the CPI basket at base-period prices.Find the cost of the CPI basket at current-period prices.CPI in t = Cost of bundle at current prices in t X Cost of bundle at base year prices
22 Base year = 2008CPI in 2008 = (70/70)*100=100(CPI in base year always equals 100CPI in 2009 = (70/50)*100=140Inflation rate between 2008 & 09percentage change in CPI( )/100 = 40%
25 Biases in CPIThe CPI might overstate the true inflation for four reasons:New goods biasQuality change biasCommodity substitution biasOutlet substitution bias
26 Consequences of bias in CPI Increases government spending too quicklySocial Security, Disability, etc.Approximately 1/3 of federal spending tied to CPICauses tax revenue to rise too slowlyIncome tax code is tied to CPICreates downward bias in estimate of real earnings growthDistorts private contracts tied to CPIUnion COLA’s
27 Other price indexes CPI for different types of consumers Urban consumersUrban workersDifferent regions, states, metro areasCPI for specific commodity groupsCore CPIExcludes food and energyGDP deflator (covered earlier)Covers prices of all goods & services produced, not just what consumers purchase.
28 Adjusting for Inflation: Nominal vs. Real Variables Real Variable in t = Nominal Variable in t X Price Index in tPrice index could be CPI or GDP deflatore.g. If Nominal Wage in 2010 is $20 and CPI is 200, Real Wage in 2010 isReal variableAdjusts nominal values to reflect prices in base year.