Unemployment and Inflation

Question 1

Which 3 groups does Statistics Canada classify the adult population into?

Answer 1

1) Employed(E): Those with a paid job (either full time or part time)
2) Unemployed(U): Those who are currently available for work, but have not been able to find it–and who have been searching for the last 4 weeks
3) Not in the Labour Force(NILF): those who do not have a job and are not looking for one. A solid example is retired people, housewives, and full-time students

Question 2

How do we calculate the labour force?

Answer 2

Labour Force(LF)=Employed+Unemployed

Question 3

How do we calculate labour force participation rate?

Answer 3

Labour Force Participation Rate(LFPR)=(Labour force/Adult Population)*100%

Question 4

How do we calculate unemployment rate?

Answer 4

Unemployment rate(ur)=(#of unemployed/labour force)*100%

Question 5

How do we calculate employment rate?

Answer 5

Employment rate(er)=(#of unemployed/adult population)*100%

Question 6

If you are a student, and you are also working part time, how would you be classified?

Answer 6

The no double counting rule also applies to unemployment. You can’t be considered employed and not in the labour force. Chances are you would be considered not in the labour force because most of your efforts are geared towards school.

Question 7

Why might the measured unemployment rate be overstated?

Answer 7

1) People claim they are unemployed, when they actually didn’t put enough effort into finding a job. They want to claim Employment Insurance.
2) Even experienced workers take a while to find a job. Someone with a high skillset may not be accepting job offers for a long time because they are holding out for something better.

The unemployment rate will never be zero.

Question 8

Why might unemployment rate be understated?

Answer 8

1) Discouraged workers-People who faced difficulty finding a job, got discouraged, and stopped trying for a job. There will be a lot of discouraged workers during times of economic downturn.
2) Marginally attached workers-They have a job, but are waiting for their position to start.
3) Underemployed workers-individuals who work, but not in their desired capacity. For instance, accountants who work in a fast food restaurant.

Question 9

What is the natural rate of unemployment?

Answer 9

-The long run rate of unemployment in the economy.
-Occurs when they are producing at their full employment level of output.
-Resources are fully utilized
-The economy self-adjusts without government intervention.
-There are no cyclical unemployment effects, so it accounts for structural and frictional unemployment.

Question 10

What is frictional unemployment?

Answer 10

-Unemployment due to the time workers spend in the job search.
-Frictional unemployment is inevitable because there are always workers who want a new job.
-A low level of frictional unemployment is normal and may be good for the economy because it allows workers to take time to find jobs they like and suits their skills. That creates a more productive relationship between the employee and employer because they are a better fit.

Question 11

What is structural unemployment?

Answer 11

-Unemployment caused by excess supply of labour at the current wage, even in the long run.
-Linked to/caused by wage rigidities.

Question 12

What are wage rigidities caused by?

Answer 12

1) Binding minimum wages
2) Labour unions-bargain for wages that are higher than equilibrium wages. Companies then demand less labour.
3) Efficiency wages-Companies pay their people more. Happier people work better. They don’t want to get fired. Carrot and stick.
4) Side effects of government policies. Employment insurance may lead to higher unemployment.
5) Mismatch between employers and employees. Workers don’t have the skills.

Question 13

What is the formula for natural rate of unemployment?

Answer 13

NRU=Level of frictional unemployment+Level of structural unemployment/Labour force*100%

Question 14

What is the formula for natural unemployment?

Answer 14

Natural unemployment=Frictional unemployment+Structural unemployment

Question 15

What is the formula for actual unemployment?

Answer 15

Actual unemployment=Natural unemployment+Cyclical unemployment

Question 16

What is the difference between actual unemployment and natural unemployment?

Question 17

What is cyclical unemployment?

Answer 17

-Cyclical unemployment arises because the economy moves in different phases with ups and downs.
-During recessionary periods, cyclical unemployment will be high.

Question 18

If a large portion of the labour force is young workers, how does that affect natural rate of unemployment?

Answer 18

-Because they are inexperienced, they may not stay in the same job for a long period of time.
-That means they face frictional unemployment.
-Therefore, the natural rate of unemployment will be higher.

Question 19

How can changes in labour market institutions change the natural rates of unemployment?

Answer 19

1) The presence of strong labour unions may contribute to higher NRU. Related to structural unemployment. If unions bargain for job security for their members, natural rate of unemployment may go down due to less firings.
2) The presence of employment agencies may lower NRU. Employment agencies find better fits between government and job seekers. Reduces frictional unemployment.
3) Technological improvement may lead to higher NRU because it lowers the demand for unskilled workers, and reduces equilibrium quantity. Increases structural unemployment.

Question 20

How can changes in government policies affect the natural rate of unemployment?

Answer 20

1) Increase in minimum wage could lead to higher NRU
2) The provision of employment insurance(EI) might also lead to higher NRU. EI encourages people to take longer to find a job(not look for a job for a while)…leading to frictional unemployment. Or they be more picky about what they accept. That’s structural unemployment.
3) Job training programs and employment subsidies lower NRU. It increases the amount of skilled workers who can enter the labour market where demand is high. It reduces structural unemployment. Employment subsidies provide financial incentives for workers to accept new jobs or for employers to offer jobs. That reduces frictional unemployment.

Question 21

What is inflation? What is it’s formula?

Answer 21

Inflation rate(t)=Price level in year t-Price level in year t-1/price level in year t-1*100%

Question 22

How do you calculate CPI in year t?

Answer 22

CPIt=COBt/COB base year *100

Question 23

What are the various costs associated with higher inflation?

Answer 23

1) Shoe-leather Costs
-Purchasing power is eroded making people less likely to hold money.
-People may incur higher transaction costs when they reduce their money holding.
-Transaction costs occur in the form of service charges, and the time cost.
2) Menu Costs
-When firms change price, they have to print out new menus.
-When the inputs for each food dish goes out, the restaurant owner must charge higher prices.
-Therefore, they must print new menus.
-The extra printing costs will further increase the costs incurred by purchasers.
3) Unit-of-Account Costs
-Money is used to quote prices. Pricetags helps us make decisions.
-If money is a less reliable unit of measurement, it’s harder for individuals and firms to make solid decisions.
-Indexation meant we need to adjust the nominal value of the dollar to the inflation rate.

Question 24

What is the Fisher equation?

Answer 24

-Nominal interest rate (i)=Real interest rate (r)+Inflation Rate (pi)
-The equation can be rearranged such that r=i-pi. That is the interest rate that matters to lenders (savers) and borrowers (debtors).

Question 25

How do changes in the unemployment rate vary with changes in real GDP?

Answer 25

When real GDP increases, the economy produces more goods and services. So employment will go up. Unemployment rate drops.

Question 26

Why might we observe a decrease in unemployment after serveral quarters of severe recession? Conversely, why may we see an increase in the official unemployment rate after several quarters of a strong expansion?

Answer 26

-Remember the formula for unemployment rate=#of unemployed/labour force*100%
-After several quarters of severe recession, when workers try so hard to get a job, they may become discouraged workers. And then they are removed from the labour force, so they aren’t counted as unemployed.
-Conversely, when the economy is doing well, and there are a lot of jobs available, then discouraged workers will enter the labour force. And suddenly, unemployment rises because more people are looking for jobs but can’t find them. Another cause would be that when existing workers see high paying jobs out there, they quit current jobs to look for new ones.

Question 27

When are efficiency wages more likely to be paid out… in jobs where the boss can directly observe their effort, or in jobs where they can’t? Generally speaking… when else are efficiency wages paid out more frequently?

Answer 27

-If the boss can observe their work directly, they have to work harder.
-They pay the efficiency wages when they can’t directly observe the work, to motivate the employee to work harder.
-Generally speaking, efficiency wages are paid out when a worker is hard to replace.

Question 28

When inflation is high, and workers get paid more frequently and take more trips to the bank, what type of cost is associated?

Answer 28

-Shoe leather cost is associated.
-Workers spend resources going to the banks more frequently.
-Firms spend resources on bookkeping as they have to pay their workers more frequently.
-Banks spend resources to process high volume of transactions.

Question 29

What are the three questions StatsCan asks before classifying you as unemployed?

Answer 29

1) Are you 15 years old or above
2) Do you have a paid job
3) Have you been actively looking for the past 4 weeks

Question 30

What is invisible underemployment? What is visible underemployment?

Answer 30

Invisible underemployment: It appears you are employed. But your skillset is greater than your role. You have an advanced degree, but aren’t employed in your field.

Visible underemployment is more easily measured. You want full time work, but you only have part time hours.

Question 31

What is the formula to calculate inflation given CPI or GDP Deflator for two years? Now you want to find the average inflation rate for a given year?

Answer 31

New CPI-Old CPI/Old CPI100%
New GDP Deflator-Old GDP Deflator100%

-When looking at inflation rate for a given year, don’t simply divide total inflation by number of years. That takes the compound effect out of the equation. Accordingly, that would be a mistake.
-On left side of equation, take new CPI or GDP deflator divided by the old one. On the right side we have (1+x)^n, where n is the number of years between the two years we measure. Move the plus one to the other side of the equation so that it’s minus 1. And then divide each side to the power of n.

Question 32

What is the formula for real income?

Answer 32

Real income=nominal income/CPI

Question 33

What is the Fisher equation? What is the formula for expected real interest(ex-ante form)? What is the formula for actual/realized real interest(ac-ante form)?

Answer 33

Expected real interest=Nominal interest rate-Expected inflation

Question 35

Why do we care about real interest rate?

Answer 35

Borrowers and lenders care. The borrowers care about the actual additional amount they have to pay. The lenders care about the actual amount they receive.