Unit 9

BLS employment situation

Bureau of labour statistics. monthly survey of both households and establishments. It summarises how many jobs were added or lost, how many people were unemployed and any changes in wages and hours worked
- indicator of labour market strength

Employed

Currently working for pay for at least 1 hour in the last month

Unemployed

Out of work and actively seeking employment

Unemployment rate

Percentage of labour force that is unemployed and actively seeking employment

Labour force

Number of employed workers + the numbers of unemployed workers

Not in the labour force

Some groups are not in the labour force:
- full time students
- retired workers
- independently wealthy
- stay at home parents
- Institutionalised

Labour force participation rate

Tells us how many are in the labour force out of the working population

Employment population ratio

Employed workers as a percentage of the total working age population
Working age population (WAP) - 16 and above

3 types of unemployment

1. frictional unemployment

2. structural unemployment

3. cyclical unemployment

Frictional unemployment

Searching for a job when workers are looking for new jobs will always have this.
E.g. fired, between jobs, seasonal job ended, new entrants into job market.

Structural unemployment

Skills mismatched. Caused by structural changes in the economy (more AI, higher use of automation, higher labour cost, outsourcing)) causes a mismatch of workers and available jobs.
E.g. AI = jobs go away 
Plant relocates overseas/to the south

Cyclical unemployment

Economy is down, GDP is falling/decreasing and unemployment caused by downturns in the business cycle.
For example not enough work, workers laid off.
Natural rate of unemployment - unemployment rate when there is no cyclical unemployment

Full employment level of real GDP

Also known as potential GDP. level of real GDP when we are at the natural rate of unemployment.

Some causes of unemployment which may not have been considered

1. minimum wages - when minimum wages are set above the equilibrium wage rate, it can cause unemployment

2. unions -higher wages paid to increase productivity, leading to fewer hires.

3. efficiency wages - Firms choose to pay a wage above the equilibrium wage rate. to attract a better “quality”

Why do prices matter

when prices rise the amount of goods and services we can buy falls. that is because our purchasing power declines. it cots us more to buy the same amount of things as before. so unless our income rises we are effectively poorer

Purchasing power

What we are able to buy with out money. when prices rises purchasing power declines

Inflation

A general rise in overall prices in the economy

Annual inflation rate

The stated inflation rate. annual percentage change in the price level

Month over month inflation rate

The percentage change in the price index from the previous month

the consumer price index (CPI)

A price index that measures the average price of a market basket of products purchased by a typical urban family of 4
What’s in the basket: food, clothing, shelter, energy, transportation

Biases in the consumer price index

1. substitution bias - CPI overstates inflation because it assumes consumers buy a fixed basket. when prices change we shift to cheaper alternatives. e.g. strawberry prices rise we shift over to blueberries

2. new product bias - CPI doesn’t immediately account for new goods that improve consumer choice. e.g. new technology (smartphones) took time to be in the basket

3. quality change bias - CPI may overstate inflation because it doesn’t fully adjust for improvements in quality. e.g. car more expensive but better quality

Disinflation

Inflation rate is positive but lower. prices are still rising but at a slower rate

Personal consumption expenditures (PCE deflator)

An index of the household purchases from our expenditure method equation. ( Y= C+I+G+NX) this is the FEDS main inflation measure

Core inflation

Food energy prices tend to be volatile and price changes are often due to supply side issues

Core PCE

Measures the change in prices for goods and service consumed by households excluding food + energy to focus on underlying inflation trends

Core PCI

CPI less food and energy inflation trends without short term fluctuations in food + energy prices

Producer price index (PPI)

The prices producers pay at all stages of production. can be used as an early indicator of future price changes

Real wages

Wages that are adjusted for inflation. Wages in terms of the goods and services you can buy with it.

Problems caused by inflation

1. Shoe letter costs - When prices keep increasing/rising, people need more money to buy stuff. People spend time and effort managing money when inflation is high.

2. menu costs - An actual cost involved for businesses when they have to increase prices frequently

3. relative price distortions - Inflation makes it harder to compare prices and harder to tell which goods are relatively more or less expensive.

   e.g. if coffee got more expensive relative to tea, you can’t tell if it’s a change or coffee just adjusted prices faster than tea

4. tax distortions - Capital gains tax – tax paid on gains from selling an asset. Is tax in nominal dollars and not adjusted for inflation.

5. confusion and inconvenience - People have trouble comparing prices over time

• Understanding real versus nominal

• Interpreting contracts and/or wages

6. Arbitrary redistribution of wealth - Between borrowers and lenders when actual inflation differs from expected inflation