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UNEMPLOYMENT AND INFLATION “There is a short run trade-off between reducing inflation and reducing unemployment.” -Me, on the second day of class
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UNEMPLOYMENT
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FLAWS IN THE CALCULATION OF UNEMPLOYMENT The unemployment rate (as of Oct. 2 2015, according the Bureau of Labor Statistics) is: 5.1% This figure may understate the joblessness problem, because: 1.Part-time workers are counted as fully employed (so are not in the 5.1%) 2.“Discouraged workers” want a job but have given up looking (so are not actively seeking, so not considered part of the labor force) This figure may overstate the joblessness problem, because: 1.The “phantom unemployed” are part of the 5.1%. This includes those who claim to be actively seeking but do not actually want a job.
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TYPES OF UNEMPLOYMENT 1.Frictional Unemployment: those between jobs or between school and job. The job opening is out there, but job seeker and employer haven’t found each other yet. (Also known as “search unemployment” or “wait unemployment”) What recent developments might help reduce this type of unemployment? 2.Structural Unemployment: those whose skills do not match the available jobs. Again, job openings exist, but in this case there is a skills mismatch. How can this type of unemployment be reduced? (Sometimes “geographic unemployment” and “seasonal unemployment” are included here.) 3.Cyclical Unemployment: caused by a downturn in the business cycle (a recession). No job openings are available.
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THE NRU Frictional and Structural are considered inevitable (and even part of a healthy economy). Because Frictional and Structural are unavoidable, “full employment” does NOT mean a 0% unemployment rate. Instead, an economy is considered at “full employment” if only Frictional and Structural are present (so Cyclical = 0%). Frictional + Structural = The “Natural Rate of Unemployment” (the NRU) AKA the “Full Employment Level of Unemployment” In most developed economies, = 3-5%
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THE COSTS OF UNEMPLOYMENT Human costs: Of course, some humans must cope with not having a job. Economic costs: foregone output When not at NRU (so some cyclical unemployment): actual GDP < potential GDP (a “GDP gap”) Producing at a point inside of the economy’s PPC Okun’s Law: For every 1% cyclical unemployment, a 2% GDP gap.
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A SAMPLE PROBLEM Suppose: NRU = 4% Frictional unemployment= 3% Actual unemployment = 9% How much is: Frictional + Structural? Structural? Cyclical? GDP gap?
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INFLATION: SOME DEFINITIONS
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HURT AND HELPED BY INFLATION Hurt: Savers Those on Fixed Incomes (with no COLA, or that must wait to re-negotiate wage contracts) Lenders/Creditors So, lenders will apply the “Fisher Equation” Helped: Borrowers/Debtors
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NOMINAL WAGES/INCOME VS. REAL WAGES/INCOME
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