Chapter 5: Unemployment and Inflation Flashcards
Misery Index
Adds the inflation rate and the unemployment rate together to give a rough measure of the state of the economy
Unemplyment Rate
The percentage of the labor force that is unemployed
= unemployed over labor force x 100%
Labor Force Survey
Interviews households to gain info on peoples labor market activities as well as demographic makeup of the people living in the household
- Focuses on the working-age population 15 and older who are legally entitled to work in Canada
Employed
- Anyone who did paid work, unpaid work for a family business or worded for themselves
- Anyone who would normally have worked by did not due to illness, disability, family crisis, vacation or labor dispute
Unemployed
People who don’t have a job but are willing and able to work and have looked for work in the last four weeks
Not in the labor force
People who were unable or unwilling to do paid work
Labor Force
All the people who are working or actively looking for work
Employed + unemployed
Participation Rate
= Labor force over working-age population x 100%
Employment-population ratio
The portion of the population engaged in paid work
= Employed over working-age x100%
Problems with measuring unemployment rate
- people who are having a hard time finding a job will stop looking
- Individuals with part-time work may be looking for full-time but are still considered employed (Understates problems in labor market)
- People may be employed in illegal activity or concealing a legitimate job to avoid taxes
- People claim to be looking for work but aren’t actually
Why is labor force participation rate important
- determines the amount of labor that will be available to the economy form a given population
- more labor = higher GDP
Frictional Unemployment
Short-term unemployment that arises from the process of matching workings with jobs
- necessary time to ensure a good match between the at worker and job
Structured Unemployment
Arises from a persistent mismatch between skills or attributes of workers and the requirements of jobs
- Can last long period of time because workers need to learn new skills
Cyclical Unemployment
Workers who lose their jobs due to a recession
Seasonal Unemployment
Unemployment that is due to seasonal factors, such as weather or the fluctuation in demand for some products during different times of the year
Full employment
When the only remaining unemployment is structural and frictional unemployment
Natural Rate of unemployment
The sum of frictional and structural unemployment
- Theoretical concept that represents the portion of the labor force that would be unemployed if everything in the economy was going well and only structural and frictional unemployment occur
Government policies influence on unemployment rate
- Reduce level of frictional unemployment by pursuing policies that speed up the process of matching employees with employers
- Reduce structural unemployment by implementing policies that air worker retraining
- Can increase unemployment rate by providing disincentives for firms to hire worker, increasing the time workers devote to searching for jobs, keeping wages above the market clearing wage
Employment Insurance
With EI payments spend more time searching for a job because there is a lower opportunity cost
- increase unemployment rate
- but less of a decrease in spending decreasing effect on recession and personal hardship
- helps find good matches
Minimum Wage Laws
If the minimum wage is set above the market clearing wage, the quantity of labor supplied will be greater than the quantity of labor demanded - higher unemployment rate
Labor Unions
Organizations of workers that bargain with employers for higher wages and better working conditions for their members
- harder to find a job in unionized industries
Efficiency wage
A higher-than-market wage that a firm pays to motivate workers to be more productive
- Firm raises cost to workers of losing their jobs because many other available jobs pay less
- Increase in productivity that results from paying a higher wage can more than offset the extra cost of the wage
- leads to unemployment because more people willing to work for that price
Inflation
A general increase in the prices of goods and services over time
Price Level
A measure of the average prices of goods and services in the economy
Inflation Rate
The percentage increase in the price level from one year to the next
Consumer Price Index
An average of the prices of the goods and services purchased by a typical household
- Measures changes in the price faced by the average household
- Equal to the ratio of the dollar amount necessary to buy the basket of goods and services in that year to the dollar amount required to purchase the same basket of goods and services in the base year X100
Substitution Bias
- Households will buy less of a product when its prices increase relative to other goods
- Prices of the basket households actually buy will rise less than the prices of the basket stats can uses to compute the CPI
Increase in quality bias
- Most products included in the CPI improve in quality
- Increases in the prices of these products partly reflect their improved quality and partly are pure inflation
New Product Bias
The CPI list isn’t updated every time a new product comes out
- Applies to all new products that become popular quickly
Outlet Bias
CPI basket is not updated to reflect changes in where people buy things, the CPI will overstate inflation
- people change to discount stores or internet
What biases will alter the accuracy of CPI
- Substitution bias
- Increase in quality bias
- New product bias
- Outlet Bias
Producer Price Index
An average of the prices received by producers of goods and services at all stages of production
- Increase in prices of goods means it costs the firms more to produce final goods and services which many lead to future increases in the prices of goods
- Can give early warning to future movements of CPI
Interest Rate
The cost of borrowing money expressed as a percentage of the amount borrowed
Nominal Interest Rate
The stated interest rate on a loan
Real Interest Rate
The nominal interest rate minus the inflation rate
Prime Rate
The rate at which the most credit-worthy businesses can borrow
Conventional Mortgage rate
The rate at which the most credit-worthy individuals can borrow to purchase a house
Overnight rate
The rate at which banks can borrow form other banks for a period of 24 hours
Bank Rate
The rate at which the bank of Canada will lend to commercial banks
The Problem with Anticipated Inflation
- Redistribution of income
- Purchasing power decreases of paper money that is held by firms and consumers
- Menu costs: cost of firms of changing the prices they charge for their products
- raises taxes paid by investors and raises the cost of capital for business investments
