Chapter 8: Unemployment and Inflation

I. Two Main Economic Ills

• Too much unemployment

• Too much inflation

• Not enough economic growth

II. Fiscal and Monetary Policy

• Two types of policy tools:

  • Fiscal: Government spending and taxation

  • Monetary: Federal Reserve controls money supply and interest rates

III. Federal Reserve Role

• Acts as a planner, not reactionary

• Anticipates where the economy is heading to adjust interest rates and money supply

• Jerome Powell (Fed Chair) focuses on:

  • Economic Growth: 2.3% expansion in Q4 2024, possibly slowing due to uncertainty

  • Labor Market: Unemployment rose slightly to 4.1%; job creation slowing but stable

  • Inflation: Decreased significantly toward 2% goal since 2022

  • Public Sentiment: Survey-based perceptions of economic health worsening

IV. Measuring Unemployment

• Unemployment Rate = (Unemployed ÷ Labor Force) × 100

• Labor Force: Employed + actively seeking employment

• Labor Force Participation Rate (LFP) = (Labor Force ÷ Working-age Population) × 100

Key Terms:

• Discouraged Workers: Not actively job-seeking; not counted as unemployed

• Marginally Attached Workers: Looked for work in the past year, not in last 4 weeks

• Underemployed Workers: Working part-time but want full-time work

V. Six Measures of Unemployment

VI. Types of Unemployment

1. Frictional: Time spent searching for a job

   • New graduates, job switchers

2. Structural: Job mismatch or outdated skills

   • Tech changes, outsourcing, efficiency wages

3. Cyclical: Caused by downturns in the business cycle

   • Rises during recessions, falls in expansions

Natural Rate of Unemployment = Frictional + Structural
Actual Unemployment = Natural + Cyclical

VII. Labor Force Participation Rate (LFP)

• Measures how many people 16+ are working or looking for work

• Important for assessing economic productivity

Recent Trends:

• Pre-COVID (Feb 2020): 63.3%

• Pandemic Drop (April 2020): 60.1%

• Post-Pandemic: Gradual recovery

• Prime-age adults (25–54): ~83% in 2023

VIII. Impacts of Labor Force Participation

• Lower LFP → Slower GDP Growth

• Less tax revenue → Budget challenges

• Labor shortages → Potential inflation

IX. Policy Responses to Labor Market Challenges

• Expand childcare access to support parents

• Job training programs for upskilling

• Flexible retirement for older workers

• Encourage greater workforce participation from underrepresented groups

X. Other Important Notes

• Unemployment and GDP usually move in opposite directions

• Jobless Recovery: GDP rises, unemployment still high

• Gender Differences: Historically, men face slightly higher unemployment than women

• Unemployment fluctuates monthly due to people entering/exiting jobs