Unemployment & Inflation

Two Great Evils of Macroeconomics

High Unemployment & Inflation

Who is not part of the labor force?

Retirees, Disabled people, Children, Those in school fulltime, Stay-At-Home Parents/Caregivers

Labor Force

People who are currently working + People who would like to be working.

Labor Force Participation Rate

(Labor Force/Population Age 16+) x 100

Unemployment Rate

(Number of Unemployed Workers/Labor Force) x 100

How is Data for Unemployment Collected?

It’s collected by the US Census Bureau using the current population survey (CPS).

How does the CPS work?

It’s a monthly survey of 60,000 randomly selected American households. It determines that someone is unemployed if:

1. They don’t have a job. 
2. They have actively looked for work in the prior four weeks. 
3. They are currently available for work.

What calculates this level of unemployment?

Bureau of Labor Statistics (BLS)

What is the relationship between growth and unemployment?

Generally strong, negative relationship.

Why can the unemployment rate overstate the true level of of unemployment?

The job process takes weeks for a person.

Marginally Attached Workers

May not have looked for a job in the past four weeks but would like one.

Discouraged Workers

Would like a job, but can’t since they think their prospects aren’t good.

Underemployed Workers

Part-time workers that would like to work full-time.

U-3

Total unemployed, as a percent of the civilian labor force (this is the definition used for the official unemployment rate).

U-6

Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.

Frictional Unemployment

Unemployment due to the time workers spend in finding a job.

Structural Unemployment

More people are seeking jobs in a particular labor market than there are jobs available at the current wage rate, even when the economy is at the peak of the business cycle.

Causes of Structural Unemployment

Occurs when the wage rate is above the equilibrium wage rate.


Causes :

1. Minimum Wages

2. Unions

3. Efficiency Wages

4. Side Effects of Gov. Policies

5. Mismatches between Employees & Employers

Minimum Wage

Government-Mandated price floor on how much someone can make. A binding minimum wage leads to a persistent surplus in the labor market. A high minimum wage leads to unemployment. 

Unions

An association of workers that bargains collectively with employers over wages, benefits, and working conditions

Efficiency Wages

Wages that employers set above the equilibrium wage rate as an incentive for their workers to perform better.

Side Effect of Gov. Policies

Benefits to laid-off workers lead to higher unemployment.

Mismatches between Employers and Employees.

It takes time for workers and firms to adjust to economic changes, which leads to a mismatch on what both parties are looking for.

Cyclical Unemployment

Is the deviation of the actual rate of unemployment from the natural rate due to downturns in the business cycle

Natural Unemployment

Frictional + Structural Unemployment

Actual Unemployment

Natural + Cyclical Unemployment

Inflation

Rise in the overall price level (Same amount of $$ buys less goods)

Deflation

Fall in the overall price level (Same amount of $$ buys more goods) 

Inflation Rate

((Price Index Y2-Price Index Y1)/Price Index Y1) x 100

Real Wage

(Nominal Wage/Price Index) x 100

Why Worry About Inflation?

If nominal incomes >= rate of inflation, we become poorer. 

Interest Rate

The return a lender receives for allowing borrowers the use of their savings for one year, calculated as a percentage of the amount borrowed

Nominal Interest Rate

Interest Rate in $$ Terms

Real Interest Rate

Nominal Interest Rate - Rate of Inflation

Winners?

Borrowers, as if the inflation rate is higher than expected, borrowers gain and pay back with funds with lesser value.

Losers?

Lenders, as they’ll receive the paid-back funds with lower value due to inflation.