Unemployment and Inflation Flashcards
Answer questions at beginning of slides
Unemployment, natural rate of unemployment, why does unemployment exist?, how is unemployment affected by unions and minimum wage laws, efficiency wages
Groups in Labor Stats
Employed, Unemployed, Not in the Labor Force
Employed
paid employees, self-employed, unpaid workers in family business
Unemployed
people not working who have looked for work during previous 4 weeks
Not in the Labor Force
everyone else (not working and not looking for work)
Labor Force
The labor force is the total number of workers (adjust population: 16 years or older), including the employed and unemployed
Unemployment Rate (“u-rate”)
% of the labor force that is unemployed
Unemployment Rate Equation
u-rate = 100 x number of employed/ labor force
Labor Force Participation Rate
% of the labor force that is in the labor force
Labor Force Equation
labor force participation rate: = 100 x (labor force/ adult population)
Natural Rate
“Normal Rate” of unemployment around which the actual unemployment rate fluctuates. Unemployment rate that would exist in a growing and healthy economy from the combination of economic, social, and political factors that exist at a time
Cyclical Unemployment (Short Run)
Deviation of unemployment from its natural rate. It is closely linked to the business cycle, like higher unemployment during a recession
Explaining Natural Unemployment (Terms)
Frictional unemployment, Structural Unemployment
Frictional unemployment
Occurs when workers spend time searching for the job that best suis their skills and tastes; when workers move between jobs - short term
Structural Unemployment
Occurs when there are fewer jobs than workers - long term
Unemployment Insurance
Government program that partially protects workers’ incomes when they become unemployed
Structural Unemployment
Occurs when wage is kept above equilibrium wage. Wages are “sticky downward” because of institutions or economics
Structural Unemployment - Minimum Wage Laws
Minimum wage works just like a price floor. It may exceed the equilibrium wage for the least skilled or experienced workers, causing structural unemployment - small group cannot explain unemployment
Structural Unemployment - Unions
Raise the equilibrium of wage: Insiders (who remain employed) are better off;
Outsiders (workers who lose their jobs) are worse off
Structural Unemployment - Efficiency Wages
Firms voluntarily pay above-equilibrium wages to boost worker productivity (either individually or as a group)
Benefits of Wage Theory in Practice
Worker health: paying higher wages allows workers to eat better, healthier, more productive
Worker Turnover: minimize cost of high turnover by giving a stronger incentive to stay
Worker quality: Higher wages attracts better job applicants, increases quality of the firm’s workforce
Implicit Contracts
An unwritten agreement in the labor market that the employer will try to keep wages from falling when the economy is weak or the business is having trouble, and the employee will not expect huge salary increases when the economy or the busines is strong
Why implicit contracts?
Wage-setting behavior acts like a form of insurance
First will be hesitant to cut wages to avoid worker’s negative reactions (work less hard, leave the firm; see efficiency wages)
Natural Rate of Unemployment - Summary
Frictional Unemployment- time to search for the right job
Structural Unemployment - above equilibrium = not enough jobs
due to minimum wage, labor unions, efficiency wages, implicit contracts
Inflation
A general and ongoing rise in the level of prices in the economy
General Inflation
prices do not increase by the same amount; pressure for price increases reach across most markets
Ongoing Inflation
price increases in the microeconomic supply - demand model are one time events
Basket of Goods and Services
Hypothetical group of different items, with specified quantities or each one, used as a basis for calculating how the price level changes over time
Index Number
on arbitrary year is chosen to equal 100, and then values in all other years are set proportionally equal to that base year.
Measure of Inflation
CPI - Consumer price index - measures the typical consumer’s cost of living
CPI Equation
100 x cost of basket in current year/cost of basket in base year
Inflation Rate
(CPI this year - CPI last year) / CPI last year) x 100%
Core Inflation
Represents a long run trend in price levels. Transitory price changes are excluded
Deflation
Negative Inflation
Hyper Inflation
Extremely high rates of inflation
Substitution Bias
Inflation rate calculated using a fixed basket of goods over time tends to overstate the true cost of living because it does not take into account that the person can substitute away from goods whose prices rise a lot.
Quality/New Good Bias
Inflation calculate using a fixed basket of goods over time tends to overstate the true rising cost of living, because it does not take into account improvements in the quality of existing goods or the invention of new goods
Alternative Price Indicies
Producer Price Index, International Price Index, Employment Cost Index, GDP Deflator
GDP Deflator
A measure of the price level calculated as the ration of nominal GDP to real GDP times 100
GDP Deflator Equation
GDP deflator = Nominal GDP/Real GDP x 100
Inflation Rate Equation
Inflation Rate = ((GDP deflator this year - GDP deflator last year) / GDP deflator last year) x 100
Converting Equation
Amount in Today’s dollars = amount in year T dollars x (Price level today/Price Level in year T)
Indexation
Dollar amount is indexed for inflation if it is automatically corrected for inflation by law or in a contract
Correcting Variables for Inflation - terms
Nominal Interest Rate, Real Interest Rate
Nominal Interest Rate
Interest rate not corrected for inflation
Rate of growth in the dollar value of a deposit or debt
Real Interest Rate
- Corrected for inflation
- Rate of growth in the purchasing power of a deposit or debt
- Equal to the nominal interest rate minus the inflation rate
