Econ ch10

mismatch between labor demand and supply: falling demand for labor

Minimum wage legislation and labour union activities lead to higher than equilibrium wages and lower quantity of labour demanded

Labour market rigidities lead to an increase in costs of production (supply shifts to the left), causing a fall in Q produced; employers hire fewer workers

Cyclical unemployment

Cost-push inflation

Deflation shown

D

Deflationary spiral

Increasing price level with decreasing unemployment

Phillips curve

Stagflation on phillips curve

Short and long run on phillips

Unemployment

people of working age who are actively looking for a job but are not employed

Underemployment

people of working age with part-time jobs who would rather work full time jobs that make use of their skills or education

Labor force

number of people who are employed plus number of people who are unemployed

Unemployment rate formula

number of unemployed/labor force x100

Official unemployment statistics underestimate true unemployment because…

excludes workers who gave up on looking for a job,

don’t make distinction between full time and part time,

no distinction on type of work,

early retirees,

do not count illegal workers

Economic costs of unemployment

loss of real GDP,

loss of income for unemployed workers,

loss of tax revenue for gov.,

cost to gov. For unemployment benefits,

larger budget deficit,

unequal distribution of income,

unemployed people may have difficulty finding work in the future

Personal and social costs of unemployment

loss of self-esteem, great social problems

Structural unemployment

change in demand for particular types of labor skills, change in geographical location of industries, labor market rigidities

Frictional unemployment

when workers are between jobs. Workers may leave their job because they have been fired, or because they are in search of a better job, or may be waiting to start a new job

Seasonal unemployment

demand for labor in a certain industry changes on a seasonal basis because of variations in needs

Cyclical unemployment

occurs during the downturns of the business cycle, when the economy is in a deflationary gap

Inflation

sustained increase in the general price level

Deflation

sustained decrease in the general price level

The consumer price index (CPI)

measure of the cost of living, or the cost of goods and services purchased by the typical household in an economy, by comparing the price of a basket of goods and services

Price index for specific year formula

value of basket in specific year/value of same basket in base year x100

Problems with CPI

different rates of inflation for different income earners,

different rates of inflation depending on regional or cultural differences,

changes in consumption patterns,

due to consumer substitutions when relative prices changes,

changes in product quality,

changes in consumption patterns from new products,

change in consumption due to new/discounted products

Cost-push inflation

caused by increases in cost of production on supply-side

Costs of inflation

redistribution effects,

savers are worse off,

people who receive incomes or wages that increase less rapidly,

lenders are worse off,

borrowers benefit

Redistribution effects

inflation causing redistribution of income away from certain groups and towards other groups in the economy

Uncertainty

inability to accurately predict what inflation will be in the future means that people cannot predict future changes in purchasing power

Inflation effects on savers

lowers the incentive to save as if the rate of interest does not compete with inflation

International competitiveness

price level of a country increases more rapidly than price levels in other countries it trades with

Inflation effects on economic growth

causes uncertainty in firms which causes investments to fall, in addition a lowering in savings

Inflation effects on resource allocation

When prices rise rapidly, signalling and incentive functions do not work effectively as prices do not increase in same proportion for all products

Hyperinflation

very high rate of inflation defined by price levels increasing by more than 50% per month. Results from significant increase in money supply

Appropriate rate of inflation

around 2-3% per year

Why deflation rarely occurs

wages of workers rarely fall,

large oligopolist firms fear price wars

Costs of deflation

redistribution effects,

increase in real value of debt,

uncertainty, deferred consumption,

high and increasing cyclical unemployment,

risk of deflationary spiral,

risk of bankruptcy,

inefficient resource allocation,

policy ineffectiveness

Deferred consumption

consumers postpone spending

Phillips curve

shows an inverse relationship between unemployment and inflation, lower unemployment generally causes higher inflation and vice versa.

Short-run phillips curve

shows a negative relationship between rate of inflation and the unemployment rate, suggesting short-run policy makers can choose between competing alternatives of low inflation or low unemployment

Long-run phillips curve

vertical at NRU, indicating unemployment is independent of the rate of inflation and policy makers do not have a choice