Unemployment and Inflation L & R & V

Working-Age

Everyone aged 15 or older who is not in the army or institutionalized (prison, nursing home, mental health facility)

Employed

Working-age people who are working. You are employed as long as you work at least one hour during the week for pay of some kind, (self employed count, and temporary absence from your job counts)

Unemployed

Working age people without jobs who are trying to get jobs

1. Part of the working-age population

2. Not currently working

3. Actively searching for work (within the last 4 weeks)

4. Able to accept a job if it were offered

Labour Force

The employed plus the unemployed. The labour force is the part of the working-age population that is available to produce goods and services

Not in the labour force

Those in the working age population who are neither employed nor unemployed. People who are retired, in school, unwell, taking care of a child or family member, or have given up looking for a job

Labour Force Participation rate

The percentage of the working-age population that is either employed or unemployed

Unemployment Rate

The percentage of the labour force that is unemployed, measures proportion of job-seekers who can’t find work

Employment Rate

The percentage of the working-age population that is employed

Key benefits of using both unemployment and employment rate

1. Unemployment rate shows how hard it is to find a job right now

2. Employment rate reveals broader workforce participation trends

3. Employment rate captures people who have given up looking for work

4. Together provide more complete picture of economic health

5. Helps identify hidden unemployment when people exit labour force

Frictional Unemployment

Unemployment due to the time it take for employer to search for workers and for workers to search for jobs (job posting, interviews)

• Contributes to natural rate of unemployment

Structural Unemployment

Unemployment due to labour market institutions (hiring/firing costs, unemployment benefits, minimum wage unions). More people seeking a job in a particular labor market than that there are jobs at the going wage rate

• Contributes to natural rate of unemployment

Cyclical Unemployment

Unemployment due to the business cycle, i.e., temporary booms and recessions in the economy

Natural rate of unemployment

Frictional + Structural. Long run level of unemployment

Labour Market Phillips Curve

Illustrates a negative association between the inflation rate and the unemployment rate

Okun’s Law

Empirical observation that links output gap to cyclical unemployment (difference between actual and natural rate of unemployment)

Okun’s Law Formula

Okun’s Law for Canada

For each percentage point that actual output is less than potential output, the unemployment rate will be around one-third a percentage point higher

eg.

Ouput Gap declines form 0% to -3%

Unemployement rate will likely rise by about (1%) (8% - 9%)

Unemployment Phillips Curve

LRE

High Unemployment =

Below potential = Low unexpected inflation

Low Unemployment =

Above Potential = High Unexpected Inflation

Canada Phillips Curve over the years

1962 - 1968: Tradeoff between inflation and unemployement cler

1968 - 1973s: Curve breaks due to increased inflation expectations (shift in PC)

1973 -1980: Shift due to supply shock driven by large increase in the price of oil OPEC acting as a cartel

1980 - 1988: After high oil prices, BOC implemented a policy of disinflation, came at the cost of high unemployment as predicted by the PC

1988 - 1999: In 1988 BOC targets zero inflation, while successful triggered soaring unemployment, showcased trade off between price stability and jobs

2000 - 2022: Labour reforms and inflation targeting between 1-3% unemployment stayed at around 6-8% until pandemic

R What is the Federal Reserve’s dual mandate

Promote maximum sustainable employment, and price stability

R FOMC

Federal Open Market Committee, main monetary policymaking body

R Why did the Phillips curve flatten

Inflation Targeting