unemployment and inflation

inflation

• defined as: yearly % change in price index

• prices going up in general and wages and salaries catch up with inflation

• we can measure inflation rate by

  • CPI- consumer price index (measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.) demand side, most used to measure inflation

  • PPI- Production price index (measures the average change over time in the selling prices received by domestic producers for their output. ) supply side

  • GDPD- Gross Domestic Product Deflator, (which reflects the change in prices for all domestic final goods and services. )

    • GDP nominal / GDP real X 100

• healthy inflation rate goal is about 2% per year

• hyper inflation: a state where inflation rises uncontrollably, typically exceeding 50% per month, leading to a rapid decrease in the real value of currency and creating economic instability.

unemployment

• when unemployment rate goes down inflation also goes up in most cases, as lower unemployment often leads to increased consumer spending, which can drive up prices.

  • greater demand for labor

    • high labor demand → wages go up → higher production cost → higher prices for foods and services (inflation)

  • greater incomes

    • higher incomes → greater demand for goods and services → higher prices (inflation)

• when unemployment rate goes up inflation tends to decrease since fewer people have disposable income to spend, leading to reduced overall demand for goods and services.

• employment: total number of people urrently employed either full time or part time

• unemployment: total number of people who are actively looking for work within 4 weeks from stats but aren’t currently employed

labor force

• labor force: the sum of employment and unemployment

• people who are not counted in the labor force:

  • discourage workers: people who stopped looking for work cuz they believe no jobs are available to them

  • retired people: retired and no longer seeking employment

  • students: people who are full time students and not looking for a job

  • stay at home parents

  • people with disabilities

  • prisoners

  • people who are voluntarily not working: not getting a job by choice

• Labor force participation rate : % of adults people 16 and older in the labor force

  • labor force/ population age 16 or older x 100

• unemployment rate: the % of the total number of people in the labor force who are unemployed

  • number of unemployed = labor force - employed → number of unemployed workers / labor force x 100 = unemployment rate

• The unemployment rate can overstate the true level of unemployment ,

  • and it has never fallen to 0% showing how its natural

  • marginally attached: those who looked for work in the past 13 months but not the past 4 weeks but are currently looking for work

  • discourage workers

• types of unemployment

  • fictional unemployment: unemployment due to the time workers spend in a job search, temporary loss of job. scarcity of information creates frictional unemployment, matching people to jobs takes time

  • structural unemployment: more people are seeking jobs tin a particular labor market than there are jobs available at the current wage even when the economy is at the peak of the business cycle

  • cyclical unemployment: is the deviation of the actual rate of unemployment from the natural rate, caused by recession and things like that

    • actual unemployment = natural unemployment + cyclical unemployment

• NAIRU : non acceleration inflation rate of unemployment, lowest possible rate of unemployment that doesn’t put pressure on the economy, which is close to the natural rate