Chapter 8: Unemployment and Inflation

What are the two main economic ills identified in the lecture?

Too much unemployment and too much inflation.

What is Fiscal Policy?

Government spending and taxation.

What does the Federal Reserve control?

Money supply and interest rates.

What is the purpose of the Federal Reserve's planning?

To anticipate where the economy is heading in order to adjust interest rates and money supply.

What was the unemployment rate mentioned in the lecture?

4.1%.

What is the formula for calculating the Unemployment Rate?

(Unemployed ÷ Labor Force) × 100.

Who are Discouraged Workers?

Individuals not actively job-seeking and not counted as unemployed.

What are Marginally Attached Workers?

• Looked for work in the past year, not in last 4 weeks

What are Underemployed Workers?

Working part time but want to work full time

What does U3 refer to in unemployment measures?

The official unemployment rate as reported by the government.

What types of unemployment are identified?

Frictional, Structural, and Cyclical.

Definitions for types of unemployement

1. Frictional: Time spent searching for a job

   • New graduates, job switchers

2. Structural: Job mismatch or outdated skills

   • Tech changes, outsourcing, efficiency wages

3. Cyclical: Caused by downturns in the business cycle

   • Rises during recessions, falls in expansions

What is the Natural Rate of Unemployment?

The sum of Frictional and Structural unemployment.

What is the actual rate of unemployement?

Natural + Cyclical

What is the Labor Force Participation Rate (LFP)?

A measure of how many people 16+ are working or looking for work.

How did the Labor Force Participation Rate change during and after COVID?

It dropped from 63.3% pre-COVID (Feb 2020) to 60.1% (April 2020) and began gradual recovery post-pandemic.

What impact does lower Labor Force Participation have on the economy?

Slower GDP growth, less tax revenue leading to budget challenges, and potential inflation from labor shortages.

What are some policy responses to labor market challenges?

Expand childcare access, job training programs, flexible retirement, and encourage workforce participation from underrepresented groups.

What is a Jobless Recovery?

A situation where GDP rises while unemployment remains high.

Jerome Powell (Fed Chair) focuses on:

• Economic Growth: 2.3% expansion in Q4 2024, possibly slowing due to uncertainty

  • Labor Market: Unemployment rose slightly to 4.1%; job creation slowing but stable

  • Inflation: Decreased significantly toward 2% goal since 2022

  • Public Sentiment: Survey-based perceptions of economic health worsening

Other Important Notes

• Unemployment and GDP usually move in opposite directions

• Jobless Recovery: GDP rises, unemployment still high

• Gender Differences: Historically, men face slightly higher unemployment than women

• Unemployment fluctuates monthly due to people entering/exiting jobs