Unemployment and Inflation

What are the five categories that people fit into when it comes to um/employment?

1. Employed

2. Unemployed

3. Not available for work

4. Not looking for work

5. Discouraged workers

Which two terms from the five that are considered “labor force”?

1. Employed

2. Unemployed

What is considered employed?

someone who has had a job during the week before the survey and it is considered part-time or full-time.

What is considered unemployed?

someone who did not work last week when the survey was taken and someone who is looked for a job during the last month.

What is considered a discouraged worker?

someone who is available for work and did not look for a job during the last month.

How can we measure unemployment? And what are their formulas?

1. Unemployment Rate

unemployed/labor force x 100

2. Labor Force Participation Rate

Labor force/working age population x 100

3. Employment-population ratio

Employed/working age population x 100

What are the problems with unemployment and how is it understated and overstated?

Understates —>

• ignores discouraged workers

• underemployed

Overstates —>

• people could be lying (such as saying that they are looking for a job but actually they are not)

• does not count underground economy

What are trends in LFPR (women)?

• cultural changes

• discrimination laws

• fewer children

What are trends in LFPR (men)?

• Retire earlier

• Stay in school longer

• Easier to receive transfer payment

What does it mean that when we say ”200,000 jobs were created last month”? and why?

It really means —>

• 5.6 million jobs were created

• 5.4 million jobs were destroyed

WHY you may ask,

#1. Some businesses expand, some contract

#2. Consumer tastes change

#3. Technology makes some jobs obsolete and some new jobs necessary

What are the three types of unemployment?

1. Frictional

2. Structural

3. Cyclical

Define Frictional Unemployment

It is someone who is stuck between jobs such as searching for a new job

• includes seasonal unemployment

• Typically short-term

Structural Unemployment

Is a mismatch between skills and job requirements—> basically when a job does not exist anymore due to skills, for example, the collapse of video rental stores like Blockbuster.

• skills become obsolete

1. Technological progress

2. Change in consumer taste

3. Government induced mismatch

4. Discrimination

• can be long term

Cyclical Unemployment

This goes down when there is a change with the business cycle such as:

• Recession: cyclical unemployment increases

• Expansion: cyclical unemployment decreases

Define price level

it is the measure of average prices of goods and services in the economy.

Define inflation rate

How do we measure price levels and what are they?

1. GDP deflator

2. Consumer Price Index (CPI)

3. Producer Price Index (PPI)

Define GDP deflator

It measures the average price of all final goods and services produced domestically.

Define Consumer Price Index (CPI)

It measures the average price of a fixed “market basket” of goods bought by typical urban consumers (family of four).

Personal Consumption Index (PPI)

It measures the price consumers actually pay for goods and services consumed by firms.

Define nominal wage

it is the current wages in current dollars

Define real wage

It is the current wages in base year dollars

Define interest

The cost of borrowing funds

What is Nominal IR?

it is the stated interest rate

What is Real IR

It is the interest rate that accounts for inflation

Define the fisher equation and what is the formula?

We can use the fisher equation for low inflation and interest, we can approximate the real interestrate.

The formula:

Real IR = Nominal IR - inflation rate

r = i - π

What are some misconceptions about inflation?

• inflation isn’t always bad thing

• Prices go up by 3%, but incomes go up by 3%

• Sign of a healthy economy: money is “moving”

• If you know your dollar will be worth less tomorrow, you want to send it today instead of boarding it