1. Labor force The sum of employed and unemployed workers in the economy. Employed can be in any job -- part-time, underemployed Unemployment rate The percentage of the labor force that is unemployed: not working and looking. Measuring the Unemployment Rate and the Labor Force Participation Rate The Household Survey Discouraged workers: Available for work but haven’t looked for a job (for the past four weeks) because they believe no jobs are available for them.

2. The Employment Status of the Civilian Working-Age Population, April 2007

3. Unemployment rate: the percentage of the labor force that is unemployed … not working and looking. Labor force participation rate: the percentage of the working-age civilian population in the labor force. = 6.8 / 152.6 = 4.5% (April 2007) = 152.6 / 231.3 = 66.0% (April 2007)

4. FIGURE 8-2 Trends in the Labor Force Participation Rates of Adult Men and Women Since 1948 Trends in Labor Force Participation

5. LENGTH OF TIME UNEMPLOYEDPERCENTAGE OF TOTAL UNEMPLOYED Less than 5 weeks35.6% 5 to 14 weeks31.3 15 to 26 weeks15.7 27 weeks or more17.5 How Long Are People Usually Unemployed?

6. Household and Establishment Survey Data for March and April 2007 HOUSEHOLD SURVEYESTABLISHMENT SURVEY MARCHAPRILCHANGE MARCHAPRILCHANGE EMPLOYED 146,254,000145,786,000−468,000137,596,000137,684,000+88,000 UNEMPLOYED 6,724,0006,801,000+77,000 LABOR FORCE 152,979,000152,587,000−392,000 UNEMPLOYMENT RATE 4.4%4.5%+0.1% The Establishment Survey: Another Measure of Employment Establishment survey excludes self-employed persons

7. Establishments Creating and Eliminating Jobs, April–June 2006 NUMBER OF ESTABLISHMENTS NUMBER OF JOBS ESTABLISHMENTS CREATING JOBS Existing establishments1,558,0006,286,000 New establishments360,0001,475,000 ESTABLISHMENTS ELIMINATING JOBS Existing establishments1,543,0005,937,000 Closing establishments341,0001,358,000 Measuring the Unemployment Rate and the Labor Force Participation Rate Job Creation and Job Destruction Over Time

8. Unemployment Rates in the United States by Demographic Group, April 2007 Unemployment Rates for Demographic Groups

9. Frictional Unemployment and Job Search Short-term unemployment that arises from matching workers with jobs. Types of Unemployment Unemployment because of persistent mismatch between worker skills and characteristics and job requirements. Declining industries and regions / Expanding industries and regions Unemployment caused by a business cycle recession. Cyclical Unemployment Structural Unemployment At “full employment” there still is frictional and structural unemployment.

10. Full Employment and “Natural” Rate of Unemployment Natural rate of unemployment A normal rate of unemployment, consisting of frictional plus structural unemployment.

11. Average Unemployment Rates in the United States, Canada, Japan, and Europe, 1997–2006 International Comparisons Government Policies and the Unemployment Rate Explaining Unemployment

12. Unemployment Insurance and Other Payments to the Unemployed Explaining Unemployment Minimum Wage Laws Labor Unions / Work Rules Seniority / Probation Periods Efficiency Wages : higher-than-market wage that a firm pays to increase worker productivity  wait unemployment. Reduce hiring costs, turnover, monitoring costs, shirking Increase morale

13. Unemployment Suppose homemakers were counted as in the labor force and employed. What would be the impact on The unemployment rate? The labor force participation rate? Suppose the federal government enacted a law that required men between the ages of 25 to 54 who are not disabled or in school to be in the labor force (working or looking) or pay a big fine. What would happen to measured GDP? Would these men have higher incomes? Would they be better off? What’s the likely impact of the following on the unemployment rate? Length of time worker are eligible for unemployment benefits increases. The minimum wage is abolished. Most US workers join labor unions. Most companies list job openings on the internet.

14. Measuring Inflation Price level (= P) A measure of the average prices of goods and services in the economy. Inflation rate (= π) The percentage increase in the price level from one year to the next. Π = 100 x (P t - P t-1 ) / P t-1 Price Indices of Note GDP Deflator Consumer Price Index Core CPI: CPI excluding energy and food Producer Price Index

15. Measuring Inflation The Consumer Price Index The CPI Market Basket, December 2006

16. Consumer price index (CPI) An average of the prices of the goods and services purchased by the typical urban family of four. The Consumer Price Index BASE YEAR (1999)20082009 PRODUCT QUANT- ITY PRICE EXPEND- ITURESPRICE EXPENDITURE S (ON BASE- YEAR QUANTITIES)PRICE EXPENDITU RES (ON BASE-YEAR QUANTITIES) Eye exams 1$50 $100 $85 Pizzas20102001530014280 Books2025500.002550027.50550 Total$750$900$915

17. The Consumer Price Index APPLIED TO 2008APPLIED TO 2009 CPI = 2008 - 2009 Inflation Rate = Π = 100 x (P 2009 - P 2008 ) / P 2008 Π =

18. Is the CPI Accurate? Substitution bias. Increase in quality bias. Outlet bias. New product bias. CPI inflation overstates the increase in the “Cost of Living”

19. Using Price Indexes to Adjust for the Effects of Inflation YEAR NOMINAL AVERAGE HOURLY EARNINGS CPI (1982-1984 = 100) 2004$15.69188.9 200516.13195.3 200616.76201.6 Value in constant 1983$ = Value in 2006$ x [CPI in 1983/CPI in 2006] = Value in $2006$ x [100/CPI in 2006] Calculating Real Average Hourly Earnings (Real Wage) YEAR NOMINAL AVERAGE HOURLY EARNINGS CPI (1982-1984 = 100) REAL AVERAGE HOURLY EARNINGS (1982-1984 DOLLARS) 2004$15.69188.9$8.31 2005 16.13195.3 8.26 2006 16.76201.6 8.31

20. Real versus Nominal Interest Rates 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.

21. Real versus Nominal Interest Rates FIGURE 8-7 Nominal and Real Interest Rates, 1970–2006

22. Does Inflation Impose Costs on the Economy? Inflation Affects the Distribution of Income –Arbitrary redistribution Debtors gain / Creditors lose  disincentive to save Pensioners lose The Problem with Anticipated Inflation Menu costs The costs to firms of changing prices. The Problem with Unanticipated Inflation Price Uncertainty  fear  Stagnation

23. 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 K e y T e r m s