Chapter Four - Unemployment and Inflation

What is Unemployment?

• It applies to labor, land and capital, occurring when some of these factors are idle

  • Labour unemployment is when someone who is actively seeking employment can't get a job

Measuring Unemployment

• The working-age population is the country's total population excluding: under 15 years old, those in the 3 territories, on Aboriginal reserves, full-time residents of mental or penal institutions, hospitals or armed forces

• Labour Force

  • Members of the working-age population, who are employed or unemployed. Full-time or part-time

  • Unemployed plus employed is the labour force

• Employed.

  • Working

• Unemployed

  • In the labor force and actively seeking employment but does not hold paid employment. Not discouraged workers

Type of Unemployment

• Frictional Unemployment

  • Unemployment related to the time between jobs or finding first job.

  • Time between ending school and finding a full-time job

• Structural Unemployment

  • Results from a mismatch in the skills or location between jobs available and the people looking to work

  • Possibility leaving a closed industry, re-learn or obtain education and move into new industry

• Cyclical Unemployment

  • Occurs as a result of the recessionary phase of the business cycle

  • At peak of the business cycle, at or near full employment

• 

• Natural Rate of Unemployment

  • No cyclical unemployment, occurs when there is full employment

  • Number of people who are unemployed, mostly frictional and always have some natural rate of unemployment 

  • Can change over time as a result of changes in:

    • Employment insurance benefit, average job search time, labor-force participation rate increasing

Understand the picture below

Criticisms of the Official Rate of Unemployment

• The reported unemployment rate may be:

  • Understated because part-timers are included as full-timers

  • Understated because it excludes discouraged workers (people who want to work but not seeking)

  • Overstated because of false information from EI recipients

  • Overstated because of false information from those working in the underground economy

Costs of Unemployment

• GDP Gap

  • 

  • Actual GDP is real or nominal

  • What is the cost of unemployment if the economy is functioning at seemingly full capacity? (potential question)

• Okun's Law

  • For every 1% of cyclical unemployment, an economy's GDP is 2.5% below its potential

  • 

Inflation – increase in the general level of prices sustained over a period in an economy

• Measured using a price index

  • Consumer Price Index (CPI)

    • Base year could be last year or any year given (nominal and real GDP is the same)

    • 

• Core CPI

  • Excludes items with highly volatile prices (fruits, vegetables, gas, fuel oil, mortgage interest rates, tobacco)

  • This gives a better indication of underlying long-term inflation rate

• GDP Deflator

  • 

• Need to know above

• test question

Measuring the Past

• Benefits of using a Price Index

  • Enables us to compare values from past to present if all calculated using the same methods

  • 

Nominal Income

• The present dollar-value of income

Real Income

• The purchasing power of income

• Nominal income divided by the price level

Rule of 70

• Estimated that the time it will take for a figure to double in value given a certain percentage of growth rate (time value of money)

Costs of Inflation

• Redistributive Costs

  • Shifts income from the economically weak to the economically strong

  • Shifts income from lenders to borrowers

  • Check textbook for better explanation

• Output Costs

  • Reduces the level of investments and economic growth

  • Increase menu costs (always having to re-list prices with inflation)

  • Reduces export and increases imports

• Real Interest Rates

  • The rate of interest measured in constant dollars OR the interest rate when inflation is zero

Causes of Inflation

• Demand-side Inflation (Demand Pull)

  • When the demand for goods and service in the whole economy exceeds its capital to produce them, pulling prices up

  • Aggregate Demand is more than the economy's capable of producing, even at full employment

  • Demand is pulling the prices up because demand Is higher then supply

• Supply-side Inflation (Cost Push)

  • Caused by increase in production cost due to: union pushing nominal wage rate, increase in firms profit margins (price gouging), supply chain disruptions

Galloping Inflation or Hyperinflation (high rates of inflation in extreme cases)