Chapter 8: Unemployment and Inflation Flashcards
Employment
of people employed in economy, full or part time
Unemployment
of people actively looking for work, not employed
Labor force
= employment + unemployment
Labor force participation rate (%)
Labor force/population > or = 16 yrs x 100
% of pop aged 16 or older that in in the labor force
Unemployment rate (%)
# of unemployed workers/Labor force x 100 %of total # of people in labor force who are unemployed)
Costs of unemployment
- Lost output (billions of $)
2. Personal psychological impact
Discouraged workers
Non working people, capable of working, who have given up looking for a job due to the state of the job market.
Marginally attached workers
People who would like to be employed, have looked for a job in past, but are not currently looking
Underemployment
of people who work part time because cannot find full time
Frictional unemployment (due to time workers spend in job search)
results from fact that workers must search for job offers, which takes time, so they remain unemployed temporarily
Structural unemployment (> people looking than jobs available)
- results from a poor match of workers’ abilities/skills with current reqs of employers
- considerable evidence shows that govt labor force policies influence how many jobs businesses wish to create, which affects structural unemployment (ie minimum wage)
Unions
By collective bargaining, unions can win higher wages from employers than if workers bargained individually
Efficiency wages
wages employers set above the equilibrium wage rate as an incentive for better performance
Side effects of govt policies designed to help workers who lose jobs
Can lead to structural unemployment unintentionally
Natural rate of unemployment (NRE)
- normal unemployment rate around which the actual unemployment rate fluctuates
(frictional + structural unemployment) - should not reflect cyclical unemployment
- when seasonally adjusted, NRE should include only frictional + structural unemployment
cyclical unemployment
deviation in the actual rate of unemployment from the natural rate.
2. Results from business recessions that occur when aggregate (total) demand is insufficient to create full employment
Seasonal unemployment
- results from seasonal pattern of work in specific industries.
- Due to seasonal fluctuations in demand or changing weather conditions that affect agriculture, construction, tourism industries, etc.
Inflation
a sustained increase in the average of all prices of goods/services in an economy
deflation
a sustained decrease in the average of all prices of goods/services in an economy
Purchasing power
- the value of $ for buying goods/services
- varies with prices and income e.g. if your $ income stays the same but the price of a good goes up, your effective purchasing power falls.
Nominal value
price expressed in today’s $s
Real value
value expressed in purchasing power, adjusted for inflation
Real wage
wage rate/price level
Real income
income/price level
market basket
representative bundle of goods/services
base year
point of reference for comparison of prices in other years
Price index (%)
cost of market basket today/cost of same market basket during base year X 100
Costs of high inflation
- Shoe leather costs: increased costs of transactions caused by inflation
- Menu cost: real cost of changing a listed price
- Unit-of-account costs: arise from way inflation makes $ a less reliable unit of measurement
Anticipated inflation
rate we believe will occur
Unanticipated inflation
rate that comes as a surprise
Nominal rate of interest
market rate of interest expressed in today’s $
Real rate of interest
nominal rate of interest – anticipated rate of inflation
Example:
Nominal rate: 5%
Expected (anticipated) inflation rate: 3%
Real rate: 5% – 3% = 2%
Consumer price index (CPI)
- statistical measure of a weighted average of prices of a specified set of goods/services purchased by wage earners in urban areas
- market basket of goods/services of typical consumer
Producer price index (PPI)
- statistical measure of a weighted average of prices of goods/services that firms produce and sell
- used as a short-run leading indicator (before CPI)
- Producer price indexes for:
foodstuffs, intermediate goods, finished goods
GDP deflator
- price index measuring the changes of all new goods/services produced in economy
- Broadest measure of prices, reflects both price changes and the public’s market responses to those price changes
Personal Consumption Expenditure (PCE) Index
- statistical measure of average price using annually updated weights based on consumer spending
- primary inflation indicator used by the Federal Reserve
Cost-of-Living Adjustments (COLAs)
- protection against inflation
- clauses in contracts that allow for increases in specified nominal values to take account of changes in the cost of living
Repricing or Menu cost of inflation
- resource cost of inflation
2. cost associated with recalculating prices and printing new price lists when there is inflation
