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Macro Wk8: Unemployment and Inflation

Introduction to Macroeconomic Problems

  • Unemployment and Inflation: Key issues in the economy, particularly during and after the COVID-19 pandemic.

  • Current Statistics (Feb 2025): Unemployment at 4.0%, inflation at 2.4%.

  • Purpose of Study: Understand unemployment, its measurement, factors affecting it, and policies for reduction.

Defining Unemployment

  • Economic Definition: Unemployment includes individuals who:

    1. Want to work

    2. Are able to work

    3. Are without work

  • Exclusions: Retirees, stay-at-home parents not seeking work are classified as outside the labour force.

Classifications of Unemployment

  • Australian Bureau of Statistics (ABS) Survey: Conducts regular surveys (0.45% of households) to classify adults (15+ years) into categories:

    • Employed: Worked at least one hour in the past week.

    • Unemployed: Willing and able to work, actively looking but without a job.

    • Not in Labour Force: Not seeking work (e.g. students, retirees).

Measuring Unemployment

  • Key Statistics:

    • Labour Force: Total adults willing and able to work (employed + unemployed).

    • Unemployment Rate (UR): Percentage of labour force that is unemployed. Formula:
      UR = \left( \frac{\text{Unemployed}}{\text{Labour Force}} \right) \times 100

    • Participation Rate (PR): Percentage of adult population in the labour force. Formula:
      PR = \left( \frac{\text{Labour Force}}{\text{Adult Population}} \right) \times 100

Example Data (February 2025)

  • Employed: 14,513,200

  • Unemployed: 612,600

  • Not in Labour Force: 7,517,613

  • Labour Force: 15,125,800

  • Adult Population: 22,643,413

    • Calculation:

    • Labour Force = Employed + Unemployed
      15,125,800 = 14,513,200 + 612,600

    • Unemployment Rate =
      UR = \left( \frac{612,600}{15,125,800} \right) \times 100 \approx 4.1 \%

    • Participation Rate =
      PR = \left( \frac{15,125,800}{22,643,413} \right) \times 100 \approx 66.8 \%

True Unemployment vs. Official Unemployment

  • Underestimation Factors:

    • Underemployment: Individuals working fewer hours than desired (e.g., 1 hour); their unmet working hours are not counted as unemployment.

    • Discouraged Workers: Those who have stopped looking for jobs; considered involuntary unemployed or outside the labour force.

  • Estimate: True unemployment can be 2 to 3 times higher than official statistics.

Types and Causes of Unemployment

  1. Frictional Unemployment (UF):

    • Time taken for workers to find new jobs.

    • Example: Recent graduates seeking employment.

  2. Structural Unemployment (US):

    • Mismatches in skills and job availability due to economic shifts.

    • Example: Transitioning from mining to construction in Australia (2014-2016).

  3. Demand Deficient Unemployment (UDD):

    • Occurs when there are insufficient jobs due to low economic demand.

    • Common in recessions and depressions.

  4. Wage-Induced Unemployment (UWI):

    • Results from wages being set above market equilibrium levels.

    • Caused by unions or government regulations (e.g., minimum wage laws).

Total Unemployment

  • Total Unemployment (UT): Comprehensive total of all unemployment types present in an economy at any given time:
    UT = UF + US + UDD + UWI

  • Occurrence: UF and US are generally always present; UDD and UWI fluctuate based on economic conditions.

Full Employment (FE)

  • Concept: Even at full employment, some unemployment is natural (frictional and structural).

  • Natural Rate of Unemployment (UN): Fluctuates based on economic conditions but indicates that jobs are available but unfilled due to search time or mismatch.

Inflation Overview

  • Definition: Inflation is an increase in the overall price level in an economy; deflation is the reverse.

  • Inflation Indicators: Consumer Price Index (CPI), GDP deflator.

  • Hyperinflation: Extremely high rates of inflation.

Types of Inflation

  1. Demand-Pull Inflation (DP):

    • When aggregate demand exceeds supply capabilities, leading to price increases especially near full employment due to high competition for labor.

  2. Cost-Push Inflation (CP):

    • Originates from rising costs of production; high wage demands or profit pressures lead to increased prices.

    • Historical example: 1970s oil price shocks.

Conclusion**

  • Economic Impact of Unemployment and Inflation:

    • High unemployment leads to production inefficiencies and societal challenges.

    • High inflation generates uncertainty, complicating economic planning.

    • Desired State: Low unemployment combined with stable, low inflation for optimal economic health.