Labor Market, Unemployment, and Price Indexes Summary

Labor Market Indicators

• Working-age population: Individuals aged 15-64, not institutionalized.

• Labor Force: Employed + Unemployed.

• Unemployment Rate: Percentage of the labor force that is unemployed. $\text{Unemployment Rate} = \frac{\text{Number of people unemployed}}{\text{Labor force}} \times 100\%$

• Labor Force Participation Rate: Percentage of the working-age population in the labor force. $\text{Labor Force Participation Rate} = \frac{\text{Labor force}}{\text{Working-age population}} \times 100\%$

Types of Unemployment

• Frictional Unemployment: Due to normal labor turnover, job searching, and creation/destruction of jobs.

• Structural Unemployment: Arises from changes in technology, international competition, or job location.

• Cyclical Unemployment: Fluctuates with the business cycle (increases in recessions, decreases in expansions).

Natural Unemployment

• Occurs when all unemployment is frictional and structural (no cyclical unemployment).

• $\text{Natural Unemployment Rate} = \frac{\text{natural unemployment}}{\text{labor force}} \times 100\%$

• Influenced by: age distribution, pace of structural change, real wage rate, and unemployment benefits.

Cyclical Unemployment and Full Employment

• Full Employment: No cyclical unemployment.

• Unemployment Rate = Natural Unemployment Rate.

• Business cycle trough (depression): Unemployment Rate > Natural Unemployment Rate.

• Business cycle peak: Unemployment Rate < Natural Unemployment Rate.

Cyclical Unemployment and Real GDP

• Potential GDP: Real GDP at full employment.

• No cyclical unemployment: Real GDP = Potential GDP.

• Positive cyclical unemployment: Real GDP < Potential GDP.

• Negative cyclical unemployment: Real GDP > Potential GDP.

Cyclical Unemployment and Output Gap

• $\text{Output Gap} = \text{Real GDP} - \text{Potential GDP}$

• Measures the difference between actual and potential output.

• No output gap: Real GDP equals potential GDP.

• Negative output gap: Real GDP is below potential GDP (GDP recessionary gap).

• Positive output gap: Real GDP is above potential GDP (GDP inflationary gap).

Consumer Price Index (CPI)

• Measures the average price change of a fixed basket of goods and services.

• Base year CPI = 100.

• $\text{Consumer Price Index (CPI)} = \frac{\text{Cost of CPI basket at current year prices}}{\text{Cost of CPI basket at base year prices}} \times 100$

Measuring Inflation and Deflation

• Inflation Rate: Percentage change in the price level from one year to the next.

• $\text{Inflation Rate} = \frac{\text{CPI in current year } - \text{ CPI in previous year}}{\text{CPI in previous year}} \times 100\%$

• Deflation: Price level is falling, and the inflation rate is negative.

GDP Price Index

• Average of current prices of all goods/services in GDP, as a percentage of base-year prices.

• $\text{GDP price index} = \frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100$

• Differences from CPI: GDP price index uses all goods/services in GDP, CPI uses consumption goods/services. GDP price index uses current quantities, CPI uses past Consumer Expenditure Survey data.