3. 8 Unemployment and Inflation Prepared by: CHAPTER Fernando Quijano
The problems in the newspaper industry will ultimately leave thousands of people out of work.
Prepared by:
Fernando Quijano

4. 8 Unemployment and Inflation Chapter Outline and Learning Objectives
8.1
Measuring the Unemployment Rate and the Labor Force Participation Rate Define unemployment rate and labor force participation rate and understand how they are computed.
8.2
Types of Unemployment
Identify the three types of unemployment.
8.3
Explaining Unemployment
Explain what factors determine the unemployment rate.
8.4
Measuring Inflation
Define price level and inflation rate and
understand how they are computed.
8.5
Using Price Indexes to Adjust for the Effects of Inflation
Use price indexes to adjust for the effects of inflation.
8.6
Real versus Nominal Interest Rates
Distinguish between the nominal interest rate and the real interest rate.
8.7
Does Inflation Impose Costs on the Economy?
Discuss the problems that inflation causes.
Unemployment and Inflation

5. Measuring the Unemployment Rate and the Labor Force Participation Rate
8.1 LEARNING OBJECTIVE
Define unemployment rate and labor force participation rate and understand how they are computed.
The Household Survey
Labor force The sum of employed and unemployed workers in the economy. Unemployment rate The percentage of the labor force that is unemployed.
Discouraged workers People who are available for work but have not looked for a job during the previous four weeks because they believe no jobs are available for them.

6. Measuring the Unemployment Rate and the Labor Force Participation Rate
8.1 LEARNING OBJECTIVE
Define unemployment rate and labor force participation rate and understand how they are computed.
The Household Survey
FIGURE 8-1
The Employment Status of the Civilian Working-Age Population, July 2009
In July 2009, the working-age population of the United States was million.
The working-age population is divided into those in the labor force (154.5 million) and those not in the labor force (81.4 million).
The labor force is divided into the employed (140.0 million) and the unemployed (14.5 million).
Those not in the labor force are divided into those not available for work (75.0 million) and those available for work but not currently working (6.4 million).
Finally, those available for work but not in the labor force are divided into discouraged workers (0.8 million) and those not currently looking for work for other reasons (5.6 million).

7. Measuring the Unemployment Rate and the Labor Force Participation Rate
8.1 LEARNING OBJECTIVE
Define unemployment rate and labor force participation rate and understand how they are computed.
The Household Survey
• The unemployment rate measures the percentage of the labor force that is unemployed.
• The labor force participation rate measures the percentage of the working-age population in the labor force.

8. 8.1 LEARNING OBJECTIVE
Solved Problem
8-1
Define unemployment rate and labor force participation rate and understand how they are computed.
What Happens if You Include the Military?
In the BLS household survey, people on active military service are not included in the totals for employment, the labor force, or the working-age population. Suppose people in the military were included in these categories.
YOUR TURN: For more practice, do related problem 1.6 at the end of this chapter.

9. Measuring the Unemployment Rate and the Labor Force Participation Rate
8.1 LEARNING OBJECTIVE
Define unemployment rate and labor force participation rate and understand how they are computed.
Problems with Measuring the Unemployment Rate
Although the BLS reports the unemployment rate measured to the tenth of a percentage point, it is not a perfect measure of the current state of joblessness in the economy.
The unemployment rate provides some useful information about the employment situation in the country, but it is far from an exact measure of joblessness in the economy.

10. Measuring the Unemployment Rate and the Labor Force Participation Rate
8.1 LEARNING OBJECTIVE
Define unemployment rate and labor force participation rate and understand how they are computed.
Trends in Labor Force Participation
FIGURE 8-2
Trends in the Labor Force Participation Rates of Adult Men and Women Since 1948
The labor force participation rate of adult men has declined gradually since 1948, but the labor force participation rate of adult women has increased significantly, making the overall labor force participation rate higher today than it was in 1948.

11. 8.1 LEARNING OBJECTIVE
Making the Connection
Why Was Male Unemployment So High During the Recent Recession?
Define unemployment rate and labor force participation rate and understand how they are computed.
Employment in the industries that were hit particularly hard by the recession of 2007–2009—construction, financial services, and manufacturing—is disproportionately male, while employment in industries that fared relatively well during the recession, such as medical services and education, is disproportionately female.
YOUR TURN: Test your understanding by doing related problem 1.8 at the end of this chapter.

12. Measuring the Unemployment Rate and the Labor Force Participation Rate
8.1 LEARNING OBJECTIVE
Define unemployment rate and labor force participation rate and understand how they are computed.
Unemployment Rates for Demographic Groups
FIGURE 8-3
Unemployment Rates in the United States by Demographic Group, July 2009
The unemployment rate of black adults is much higher than that of white adults, and the unemployment rate of black teenagers is much higher than that of white teenagers. The adult unemployment rates apply to persons aged 20 and over who are in the labor force. The teenage unemployment rates apply to persons aged 16 to 19 who are in the labor force.

13. PERCENTAGE OF TOTAL UNEMPLOYED
Measuring the Unemployment Rate and the Labor Force Participation Rate
8.1 LEARNING OBJECTIVE
Define unemployment rate and labor force participation rate and understand how they are computed.
How Long Are People Typically Unemployed?
Table 8-1
Duration of Unemployment
LENGTH OF TIME UNEMPLOYED
PERCENTAGE OF TOTAL UNEMPLOYED
Less than 5 weeks
35.6%
5 to 14 weeks
31.3
15 to 26 weeks
15.7
27 weeks or more
17.5
(a) Duration of unemployment during an economic expansion.
22.0%
24.2
19.9
33.8
(b) Duration of unemployment during an economic recession.

14. Measuring the Unemployment Rate and the Labor Force Participation Rate
8.1 LEARNING OBJECTIVE
Define unemployment rate and labor force participation rate and understand how they are computed.
The Establishment Survey: Another Measure of Employment
Table 8-2
Household and Establishment Survey Data for June and July 2009
HOUSEHOLD SURVEY
ESTABLISHMENT SURVEY
JUNE
JULY
CHANGE
Employed
140,196,000
140,041,000
−155,000
131,735,000
131,488,000
−247,000
Unemployed
14,729,000
14,462,000
−267,000
Labor force
154,926,000
154,504,000
−422,000
Unemployment rate
9.5%
9.4%
−0.1%

15. NUMBER OF ESTABLISHMENTS
Measuring the Unemployment Rate and the Labor Force Participation Rate
8.1 LEARNING OBJECTIVE
Define unemployment rate and labor force participation rate and understand how they are computed.
Job Creation and Job Destruction over Time
Table 8-3
Establishments Creating and Eliminating Jobs, September-December 2008
NUMBER OF ESTABLISHMENTS
NUMBER OF JOBS
ESTABLISHMENTS CREATING JOBS
Existing establishments
1,376,000
5,367,000
New establishments
368,000
1,345,000
ESTABLISHMENTS ELIMINATING JOBS
1,686,000
6,977,000
Closing establishments
405,000
1,490,000

16. Types of Unemployment FIGURE 8-4 8.2 LEARNING OBJECTIVE
Identify the three types of unemployment..
FIGURE 8-4
The Annual Unemployment Rate in the United States, 1950–2008
The unemployment rate rises during recessions and falls during expansion.
Shaded areas indicate recessions.

17. Types of Unemployment Frictional Unemployment and Job Search
8.2 LEARNING OBJECTIVE
Identify the three types of unemployment..
Frictional Unemployment and Job Search
Frictional unemployment Short-term unemployment that arises from the process of matching workers with jobs.
Structural Unemployment
Structural unemployment Unemployment arising from a persistent mismatch between the skills and attributes of workers and the requirements of jobs.
Cyclical Unemployment
Cyclical unemployment Unemployment caused by a business cycle recession.

18. Types of Unemployment Full Employment
8.2 LEARNING OBJECTIVE
Identify the three types of unemployment..
Full Employment
Natural rate of unemployment The normal rate of unemployment, consisting of frictional unemployment plus structural unemployment.

19. Making the Connection How Should We Categorize
8.2 LEARNING OBJECTIVE
How Should We Categorize
the Unemployment at the Seattle
Post-Intelligencer and Other Newspapers?
Identify the three types of unemployment..
Categorizing unemployment as frictional, structural, or cyclical is useful in understanding the sources of unemployment, but it can be difficult to apply these categories in a particular case.
The people who lost their jobs at the Seattle Post-Intelligencer fit into more than one category of unemployment.
YOUR TURN: Test your understanding by doing related problem 2.4 at the end of this chapter.

20. Explaining Unemployment
8.3 LEARNING OBJECTIVE
Explain what factors determine the unemployment rate.
Government Policies and the Unemployment Rate
Unemployment Insurance and Other Payments to the Unemployed
In the United States and most other industrial countries, the unemployed are eligible for unemployment insurance payments from the government.
In the United States, these payments are generally equal to about half the average wage.
Unemployment insurance helps the unemployed maintain their income and spending, which lessens the personal hardship of being unemployed and also helps reduce the severity of recessions.

21. Explaining Unemployment
8.3 LEARNING OBJECTIVE
Explain what factors determine the unemployment rate.
Government Policies and the Unemployment Rate
International Comparisons
FIGURE 8-5
Average Unemployment Rates in the United States, Canada, Japan, and Europe, 1999–2008
The unemployment rate in the United States is usually lower than the unemployment rates in most other high-income countries, other than Japan. This is partly because the United States has tougher requirements for the unemployed to receive government payments. These requirements raise the costs of searching for a better job and lower the unemployment rate.

22. Explaining Unemployment
8.3 LEARNING OBJECTIVE
Explain what factors determine the unemployment rate.
Government Policies and the Unemployment Rate
Minimum Wage Laws
In 1938, the federal government enacted a national minimum wage law.
If the minimum wage is set above the market wage determined by the demand and supply of labor, the quantity of labor supplied will be greater than the quantity of labor demanded.
Economists agree that the current minimum wage is above the market wage for some workers, but they disagree on the amount of unemployment that has resulted.

23. Explaining Unemployment
8.3 LEARNING OBJECTIVE
Explain what factors determine the unemployment rate.
Labor Unions
Labor unions are organizations of workers that bargain with employers for higher wages and better working conditions for their members.
Efficiency Wages
Efficiency wage A higher-than-market wage that a firm pays to increase worker productivity.

24. Making the Connection
8.3 LEARNING OBJECTIVE
Why Does Costco Pay Its Workers So Much More Than Wal-Mart Does?
Explain what factors determine the unemployment rate.
The concept of efficiency wages raises the possibility that firms might find it more profitable to pay higher wages even when it is possible to pay lower wages.
Costco’s relatively high wages and health benefits reduce employee turnover and raise morale and productivity.
YOUR TURN: Test your understanding by doing related problem 3.7 at the end of this chapter.

25. Measuring Inflation
8.4 LEARNING OBJECTIVE
Define price level and inflation rate and understand how they are computed.
Price level A measure of the average prices of goods and services in the economy.
Inflation rate The percentage increase in the price level from one year to the next.

26. Measuring Inflation The Consumer Price Index FIGURE 8-6
8.4 LEARNING OBJECTIVE
Define price level and inflation rate and understand how they are computed.
The Consumer Price Index
FIGURE 8-6
The CPI Market Basket, December 2008
The Bureau of Labor Statistics surveys 30,000 households on their spending habits. The results are used to construct a market basket of goods and services purchased by the typical urban family of four.
The chart shows these goods and services, grouped into eight broad categories. The percentages represent the expenditure shares of the categories within the market basket.
The categories of housing, transportation, and food make up about three-quarters of the market basket.

27. EXPENDITURES (ON BASE-YEAR QUANTITIES)
Measuring Inflation
8.4 LEARNING OBJECTIVE
Define price level and inflation rate and understand how they are computed.
The Consumer Price Index
Consumer price index (CPI) An average of the prices of the goods and services purchased by the typical urban family of four.
BASE YEAR (1999)
2010
2011
PRODUCT
QUANTITY
PRICE
EXPENDITURES
EXPENDITURES (ON BASE-YEAR QUANTITIES)
Eye examinations 1
$50.00
$100.00
$85.00
Pizzas 20
10.00
200.00
15.00
300.00
14.00
280.00
Books
25.00
500.00
27.50
550.00
TOTAL
$750.00
$900.00
$915.00

28. Measuring Inflation The Consumer Price Index CPI =
8.4 LEARNING OBJECTIVE
Define price level and inflation rate and understand how they are computed.
The Consumer Price Index
FORMULA
APPLIED TO 2010
APPLIED TO 2011
CPI =
Don’t Let This Happen to YOU! Don’t Miscalculate the Inflation Rate
YOUR TURN: Test your understanding by doing related problem 4.3 at the end of this chapter.

29. Measuring Inflation Is the CPI Accurate?
8.4 LEARNING OBJECTIVE
Define price level and inflation rate and understand how they are computed.
Is the CPI Accurate?
It is important that the CPI be as accurate as possible, but there are four biases that cause changes in the CPI to overstate the true inflation rate:
• Substitution bias.
• Increase in quality bias.
• New product bias.
• Outlet bias.

30. Measuring Inflation The Producer Price Index
8.4 LEARNING OBJECTIVE
Define price level and inflation rate and understand how they are computed.
The Producer Price Index
Producer price index (PPI) An average of the prices received by producers of goods and services at all stages of the production process.

31. Using Price Indexes to Adjust for the Effects of Inflation
8.5 LEARNING OBJECTIVE
Use price indexes to adjust for the effects of inflation..
For some purposes, we are interested in tracking changes in an economic variable over time rather than in seeing what its value would be in today’s dollars.
In that case, to correct for the effects of inflation, we can divide the nominal variable by a price index and multiply by 100 to obtain a real variable.

32. NOMINAL AVERAGE HOURLY EARNINGS REAL AVERAGE HOURLY EARNINGS
8.5 LEARNING OBJECTIVE
Solved Problem
8-5
Use price indexes to adjust for the effects of inflation..
Calculating Real Average Hourly Earnings
YEAR
NOMINAL AVERAGE HOURLY EARNINGS
CPI
( = 100)
2006
$16.76
201.6
2007
17.43
207.3
2008
18.08
215.3
YEAR
NOMINAL AVERAGE HOURLY EARNINGS
CPI
( = 100)
REAL AVERAGE HOURLY EARNINGS
( DOLLARS)
2006
$16.76
201.6
$8.31
2007
17.43
207.3
8.41
2008
18.08
215.3
8.40
YOUR TURN: For more practice, do related problems 5.3 , 5.4, 5.5 and 5.6 at the end of this chapter.

33. Real versus Nominal Interest Rates
8.6 LEARNING OBJECTIVE
Distinguish between the nominal interest rate and the real interest rate.
Nominal interest rate The stated interest rate on a loan.
Real interest rate The nominal interest rate minus the inflation rate.
Real Interest Rate = Nominal Interest Rate − Inflation Rate
Deflation A decline in the price level.

34. Real versus Nominal Interest Rates
8.6 LEARNING OBJECTIVE
Distinguish between the nominal interest rate and the real interest rate.
FIGURE 8-7
Nominal and Real Interest Rates, 1970–2008
The real interest rate is equal to the nominal interest rate minus the inflation rate.
The real interest rate provides a better measure of the true cost of borrowing and the true return on lending than does the nominal interest rate.
The nominal interest rate in the figure is the interest rate on three-month U.S. Treasury bills. The inflation rate is measured by the percentage change in the CPI from the same quarter during the previous year.

35. Does Inflation Impose Costs on the Economy?
8.7 LEARNING OBJECTIVE
Discuss the problems that inflation causes.
Inflation Affects the Distribution of Income
The extent to which inflation redistributes income depends in part on whether the inflation is anticipated—in which case consumers, workers, and firms can see it coming and can prepare for it— or unanticipated—in which case they do not see it coming and do not prepare for it.
The Problem with Anticipated Inflation
Menu costs The costs to firms of changing prices.
The Problem with Unanticipated Inflation
When the actual inflation rate turns out to be very different from the expected inflation rate, some people gain, and other people lose. This outcome seems unfair to most people because they are either winning or losing only because something unanticipated has happened. This apparently unfair redistribution is a key reason why people dislike unanticipated inflation.

36. Making the Connection What’s So Bad about Falling Prices?
8.7 LEARNING OBJECTIVE
What’s So Bad about Falling Prices?
Discuss the problems that inflation causes.
1929
1930
1931
1932
1933
Nominal interest rate 5%
Change in the consumer price level
-2.3
-9.0
-9.9
-5.1
Real interest rate 5
7.30
14.00
14.90
10.10
YOUR TURN: Test your understanding by doing related problem 7.7 at the end of this chapter.

37. >> Newspaper Layoffs Add to Rising Unemployment in 2009
AN INSIDE LOOK
>>
Newspaper Layoffs Add to Rising Unemployment in 2009
New York Times Does Sale-Leaseback Deal
Unemployment rates vary widely across different sectors of the economy.

38. KEY TERMS
Consumer price index (CPI)
Cyclical unemployment
Deflation
Discouraged workers
Efficiency wage
Frictional unemployment
Inflation rate
Labor force
Labor force participation rate
Menu costs
Natural rate of unemployment
Nominal interest rate
Price level
Producer price index (PPI)
Real interest rate
Structural unemployment
Unemployment rate