Chapter 8: Inflation and Unemployment Flashcards
Employment
The total number of people who are currently employed either full time or part time
Unemployment
the number of people who are actively looking for work (and have been in the past 4 weeks) but are not currently employed
What is the relationship between the business cycle and unemployment?
Unemployment tends to rise sharply during recession and tends to fall during expansions (but not always)
Labor Force
the sum of employment and unemployment
Unemployment Rate, u
(unemployed/labor force)*100 is the percentage of the total number of people in the labor force who are unemployed.
Participation rate
(labor force/population over 16 years and older) *100
is the percentage of the population aged 16 or older that is in the labor force.
What does the unemployment rate indicate?
how easy or difficult it is to find a job in the current state of the economy
In what measures is the unemployment rate an ineffective indicator?
It is not a literal measure of people who want a job but cannot find one because in some ways, the unemployment rate exaggerates the difficulty in finding jobs or downplays it
How can the unemployment rate overstate the true level of unemployment?
A worker who has been offered a job but has not yet accepted the position or begun work may be counted as unemployed (or if they are moving between job). The unemployment rate thus is never 0 and overstates the number of people who want a job but cannot find one
How can the unemployment rate understate the true level of unemployment?
Discouraged workers who have become depressed or are not searching actively for work in the last 4 weeks but would like to work are not counted in the unemployment rate
They are part of a larger group of marginally attached workers who would like to be employed, have looked in the recent past, but are not currently looking, and they too are not counted in unemployment rate
Underemployed workers are also not counted
Discouraged workers
As subset of marginally attached workers: Nonworking people who are capable of working but have given up looking for a job given the state of the job market (also perhaps due to location). i.e. a laid-off steel worker in a depressed steel town without the resources to move
Marginally Attached Workers
would like to be employed, have looked for a job in the recent past, but are not currently looking for work
Underemployed workers
the number of people who work part time because they cannot find full time jobs
While the BLS does not include discouraged, marginally attached, and underemployed workers in the main unemployment rate, what do they use to take these into account?
The BLS calculates “measures of labor underutilization” which includes these categories. The different rates run in parallel, giving an idea of how the economy is generally moving
How do unemployment rates differ in age groups?
Those between 25 and 54 (in the working prime) tend to have an easier time finding jobs than those below 24 or in retirement age
How can we evaluate the unemployment rate as an economic indicator
We can use it to determine overall labor market conditions and the ups and downs in the economy which impact lives. We cannot use it as an exact, literal measure of the people without work who want a job.
What is the main caveat regarding economic expansions and the unemployment rate?
the unemployment rate usually, BUT NOT ALWAYS, decreases in an expansion. In the last 3 recessions in the 1990s, early 2000s and the Great Recession, unemployment continued to expand well into the expansion
Why might unemployment continue to rise despite economic expansion?
The economy was growing but not fast enough to keep pace with unemployment
What is the relationship between economic growth rates and unemployment change rate?
Generally, as economic growth rates increase, unemployment change rates decrease and vice versa
Jobless Recovery
A period in which the Real GDP growth rate is positive but so too is the unemployment growth rate (unemployment is still rising)
Falling real GDP is ___ associated with a rising rate of unemployment
ALWAYS
Simply put, why does the natural rate of unemployment exist above 0%
jobs are always being created and destroyed
Job separation
terminations of employment that occur when a worker is fired or quits voluntarily. it does not need to be related to the business cycle.
What are two reasons for job separation?
Structural unemployment and poor management/bad luck
What are the two types of natural unemployment in modern economies?
frictional and structural
Frictional Unemployment
unemployment due to the time workers spend in the job search. A certain amount of frictional unemployment is inevitable due to the constant process of economic change and may even be a sign of a healthy, growing economy
The job search
Workers who spend time looking for employment are engaged in the job search
How might a certain level of frictional unemployment be a good sign?
It is a sign that workers are taking the time to find better jobs to improve productivity and therefore the productivity of the economy
How does frictional unemployment relate to joblessness
In times of low unemployment, a greater share of the rate is due to frictional unemployment and the time unemployed is less than if the unemployment was higher
Structural Unemployment
More people are seeking jobs in a particular labor market than there are jobs available at the current wage rate, even when the economy is at the peak of its business cycle
How do frictional and structural unemployment relate to the supply and demand of jobs?
Frictional unemployment DOES NOT mean that there is a job surplus. It exists even when the number of job seekers equals the number of available jobs. A persistent surplus even at the peak of a cycle may indicate structural unemployment
How does structural unemployment relate to the market supply and demand of work?
structural unemployment does not exist at equilibrium (but frictional does). It only exists when the wage rate is consistently above equilibrium and there are excess workers
What are the 5 primary causes of structural unemployment
- minimum wages
- labor unions
- efficiency wages
- government policy side effects
- mismatches between employers and employees
Minimum wage
A government mandated floor on the price of labor
What is the rationale behind a minimum wage and what is its subsequent drawback?
Governments want to ensure that people at the minimum wage can live a relatively comfortable lifestyle, but it eliminates job opportunities for other workers who may have worked at lower wages. Based on the supply-demand graph, there are not only fewer workers but also more jobs offered at equilibrium below the minimum wage
Labor Unions
Utilize collective bargaining practices to tip the scales in favor of the worker to demand higher wages, better benefits, and threaten firms with labor strikes.
How might employers fight against labor unions
lockouts in which they render them useless or unemployed while hiring new workers
How might labor unions lead to structural unemployment
They demand more benefits per worker, meaning, in a similar fashion to the minimum wage, the supply of workers increases but the demand drops
Efficiency Wages
wages employers set above the equilibrium wage rate as an incentive for better employee performance. this is similar to a minimum wage, but set by the employer with a focus on productivity rather than lifestyle
The natural rate of unemployment u*
the unemployment rate that arises from the effects of frictional + structural unemployment. It is the normal rate around which the actual rate fluctuates. It is the combination of unemployment due to time spent in the job search and the unemployment for over demand for jobs in an industry where there are not enough at the current wage rate (even at the peak of the business cycle)
Cyclical Unemployment
the deviation of the actual rate of unemployment from the natural rate due to downturns in the business cycle. It is the difference between the actual and natural rates.
cyclical = actual - natural.
This means that there can be negative cyclical unemployment, like between 2005 and 2007
Why don’t governments aim to keep unemployment persistently below the natural rate? (i.e. why wouldn’t the America Works Program in House of Cards work?)
We cannot keep negative cyclical unemployment without leading to accelerating inflation.
The equation for actual unemployment
natural + cyclical
True or False, the natural rate of unemployment is constant and cannot be affected by the government
FALSE: the natural rate changes over time and it is affected by government policy
Why do private-sector economists and government agencies need estimates of the natural rate of unemployment?
They need it to make forecasts about the unemployment rate and to conduct policy analysis
What three primary factors cause changes in the natural rate of unemployment?
Changes in labor force characteristics, changes in the labor market institutions, and changes in government policy
Why did 1970s unemployment rates rise? What factor of the change in the natural rate does this apply to?
The baby-boomers from the post-World War II era and more women hit the workforce, and many were inexperienced. This is part of changing labor force characteristics
Why might be a reason natural unemployment rates fell between the 1970s and 1990s in the US but remain higher in Europe?
Changes in labor market institutions: Labor unions in the EU have remained strong, therefore contributing to higher wages, structural unemployment, and natural unemployment. In the US, union membership declined between 1970 and 1990, leading to less union power, and so less natural unemployment
How do temporary employment agencies affect the natural rate?
They reduce frictional unemployment rates by increasing the speed with which workers and employers find each other
How might periods of faster technological change induce increased natural unemployment rates? (think of coal miners)
Increased tech changes and advancements mean that those who are less skilled will see a decrease in employment and wages. If there is a minimum wage, reduces employment further, creating more structural unemployment due to the minimum wage, and therefore increasing natural rates.
How might changes in government policies increase natural rates?
A higher minimum wage or generous unemployment benefits can increase both structural and frictional unemployment. People will take longer to look for work due to benefits and they will have to compete for fewer jobs.
How might changes in government policies decrease natural rates?
Job training programs can increase the skill set to increase matching and employment subsidies can be given to workers or employers to incentivize working/hiring
Real wage
the wage rate divided by the price level. Remember that we get the price level (or aggregate price level) or measure of overall prices in the economy using a price index, or the cost of purchasing a market basket, or a hypothetical set of consumer goods and services purchases, in a given year normalized so that the price index of the basket in a base year is 100
Real income
the income divided by price level
How do real wages and real income interact with the price level and inflation?
Since they are each divided by the overall price level, they are not really affected directly by inflation (but they are affected by inflation rate). Basically, the level of prices doesn’t matter. The US would be no richer if the level of prices were in 1961 dollars of 2017 dollars
If the level of prices and the increase in the price level do not matter to real wages and income, then what does matter in regards to inflation?
the rate of change of inflation, or the percentage change in the price index from year to year. NOTE: inflation does not affect the price levels, but the rate of change of inflation does
How is the aggregate price level related to the price index and inflation?
The aggregate price level is a measure of the overall level of prices in the economy and the price index gives us the ability to find a single number representing the overall level of prices to compare different years (we must use a base year) in terms of market baskets. The percentage change in the price index, which we use to represent the overall price level, is what gives us the inflation rate
How do we find the base year on a graph of price level over time?
Find where the price level is 100
Even though the price level does not really affect real income and wages, what factors make high inflation rates costly?
- shoe-leather costs
- menu costs
- Unit-of-account costs
Shoe-leather costs
are the increased costs of transactions due to inflation. For example during the 1921-1923 German hyperinflation, merchants spent resources and time hiring runners to take their money to the bank many times a day and exchange it for commodities or foreign currencies. The payment to these runners is considered a shoe and leather cost. Shoe-leather costs come from people running around trying to avoid holding money and the amount of resources that go into the banking sector or other industries (like runners) as a result of this, when the money could have gone somewhere more productive
Menu Cost
the real cost of changing a listed price (like on a book or restaurant menus)
The unit of account role of money
the role of the dollar as a basis for contracts and calculations
the unit of account cost
the costs arising from the way inflation makes money a less reliable unit of measurement. They change purchasing power of currencies and can affect the quality of economic decisions, such as contracts and budgeting
How can taxes and unit of account costs relate to worsening conditions
A higher inflation rate can mean that a business which purchases a good and resells it at a higher price down the road may make no profit in a realistic sense and only in a number sense. However, the government will count this as profit and collect taxes –the business loses money
What is the main reasons that some people can win and lose from inflation
transactions often take place over long periods of time but contracts are often stated in nominal value
The interest rate on a loan
the price, calculated as a percentage of the amount borrowed, that lenders charge borrowers the of their savings for one year
The nominal interest rate
The interest rate expressed in dollar terms
The real interest rate
the nominal rate minus the rate of inflation
When people borrow and lend, they have expectations regarding inflation; what happens when the rate is higher than expected
The value of the dollar and the nominal rate change. Borrowers gain at the expense of lenders and borrowers repay their loans with funds that have lower real value (but the same nominal value) than had been expected. It is a risk by lenders
When people borrow and lend, they have expectations regarding inflation; what happens when the rate is lower than expected
Lenders gain at the expense of borrowers since borrowers pay back their loans with funds that have higher real value (but same nominal value) than expected
What is a major drawback from the higher or lower levels of inflation than expected?
uncertainty discourages people from entering into long-term contracts, making it difficult to make long-term investments
Disinflation
The process of bringing down the inflation rate
Core Inflation Rate
excludes volatile food and energy prices
