Chapter 5: Monitoring jobs and inflation

Variables in the labor market

Ld = Labor demand

Ls = Labor supply

Prices in the labor market

W = Nominal wage

W/P = Real wage

Why is unemployment a problem?

Loss of income, output, human capital

Unemployment tree:

Total population: 

1. Working age

2. Too young to work

Working age:

• Labor force (LF)

• Not in the labor force (NLF)

LF:

• Employed

• Unemployed

Employed:

• Part time

• Full time

Participation rate

= (labor force / working age population) * 100

Unemployment rate

= (# of unemployed / labor force) * 100

Involuntary part time worker rate

= (# part time involuntary workers / labor force) * 100

Employment to population ratio

= (# employed / working age population) * 100

How long are the unemployed without work?

• Short term spells

• Long term spells

What’s the problem with the unemployment rate? What is it not telling us?

1. Discouraged worker

2. Underemployed workers

3. Misreporting (sampling bias)

Types of unemployment (4)

1. Frictional

2. Structural (economy shifts)

3. Cyclical

4. Seasonal

Natural rate of unemployment =

frictional + structural

Natural rate of unemployment, a.k.a.

• Potential GDP

• Full employment level of output

When Ls > Ld, it creates…

unemployment

Hyperinflation

When inflation per month > 50%

CPI formula

CPI = (current Price / base Price) * 100

Inflation using CPI

= (current CPI - past CPI / Past CPI) (100)

4 biases (Fixed basket bias) with CPI

1. Substitution

2. Quality

3. New product

4. Outlet

CPI overestimates inflation by how much

0.6%

CPI measures

Cost of living

Alternatives for CPI

PPI (producer price index) and GDP deflator

CPI vs GDP deflator

CPI:

• Fixed basket

• Imports and govt expenditure

• NO capital goods

• “Laspeyeres index”

GDP deflator:

• Current basket

• NO imports and govt expenditure

• Capital goods (if domestic)

• “Paasche index”

$ across time using CPI

$ today = $ past * (current CPI / past CPI)

Inflation erodes…

Purchasing pwr

How to adjust nominal rate for inflation

Fisher equation, exante and exposte

We want core inflation between…

1-3%