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UK / Economics / ECON 202 / How to measure the unemployment rate?

How to measure the unemployment rate?

How to measure the unemployment rate?


School: University of Kentucky
Department: Economics
Course: Introductory Microeconomics
Professor: Gillette
Term: Spring 2016
Tags: ECO, Econ, and Economics
Cost: 25
Name: Econ 202 Ch9 Weeks 2-3
Description: These notes cover chapter 9 that was discussed in class in weeks 2 and 3
Uploaded: 02/04/2016
10 Pages 143 Views 1 Unlocks

Chapter 9: Unemployment and Inflation 

How to measure the unemployment rate?

         Classifying the Population: 

Household survey/ Current Population Survey (CPS)

∙ N = 60,000

∙ Employment status of everyone over 16

Categorized into different categories  

∙ Employed  

∙ Unemployed

∙ Not available for work

∙ Not looking for work

∙ Discouraged workers

Measuring the Unemployment Rate: 

Labor force: the sum of employed and unemployed workers in  the economy  

Unemployment rate: the percentage of the labor force that is  unemployed (looking for a job in the past 4 weeks)

What is the significance of the unemployment rate?

Discouraged workers: people who are available for work but have not looked for a job during the previous 4 weeks because they believe  no jobs are available for them We also discuss several other topics like Who is john adams?

Significance of the Unemployment Rate: 

Personal-social: stigma, welfare

Political: incumbent reelected if unemployment is falling early in  the election year

Financial: stock prices if unemployment falling

Employed if worked during the week before the survey or  temporarily away from work (vacation, sick, strike)

Unemployed if did not work the previous week but were available for work and had actively searched for a job in the last 4 weeks  

Economic Indicators: 

Unemployment rate:  

What are the economic indicators?

∙ Number of unemployed/Labor force x 100  We also discuss several other topics like What is the definition of descriptive statistics?

Labor force participation rate:

∙ Labor force/Working-age population x 100  

Employment-Population ratio:

∙ Employment/Working-age population x 100

         Unemployment Rate: 

       Problems with unemployment rate:

∙ Understates unemployment

o Ignores discouraged workers

o Underemployed

∙ Overstates unemployment

o People could be lying

o Does not count underground economy

Measuring the Unemployment Rate and the Labor Force Participation Rate: 

Problems with measuring the unemployment rate:

∙ Unemployed vs. not in the labor force

∙ Part-time vs. full-time employment

∙ Measurement error  

∙ Underground economy

∙ Stigma of unemployment (questionnaire response) The Establishment Survey (payroll survey): another measure of  employment samples about 300,000 business establishments  Total number of people employed and on a company payroll Household surveys: larger number of employed  includes self employed If you want to learn more check out What is the content of poor laws?

∙ Provides info on labor force and unemployed

Benefit: verified information


∙ Does not provide info on the number of self-employed people  (not on payroll)

∙ Fail to count some people employed at newly opened offices ∙ Provides no information on unemployment



∙ Retire earlier

∙ Stay in school longer

∙ Easier to receive transfer payments Don't forget about the age old question of What is the meaning of hue and cry in medieval england?
If you want to learn more check out Why are hydrolyzed compounds hard to break down?
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∙ Cultural changes

∙ Discrimination laws

∙ Fewer children

Second time since the Great Depression that unemployment rose above 9% for every demographic  

Sharp increase in male unemployment relative to female  unemployment

Males represented 75% of the decline in total employment from  Dec 2007- July 2009

Construction: lost 1.4 million jobs

Financial services: lost 600,000 jobs

Manufacturing: lost 2 million jobs

Job Creation and Destruction: 

We say “2 million jobs were created last year” but really… ∙ 27.8 million jobs were created

∙ 25.5 million jobs were destroyed  


∙ Some businesses expand, some contract

∙ Consumer tastes change

∙ Technology makes some jobs obsolete and some new jobs  necessary

Types of Unemployment: 


∙ Being between jobs, searching for a new job

∙ Seasonal employment


∙ Mismatch between skills and job requirements

∙ Skills can become obsolete due to technological progress or  change in taste


∙ Business cycle

∙ Full employment: cyclical unemployment is zero, frictional and structural are not

o Natural rate of unemployment

Full Employment:

Full employment: only remaining unemployment is structural and frictional  

Expansion: cyclical unemployment will drop to zero

∙ Unemployment rate will not be zero  frictional and structural  unemployment

∙ Full employment when no cyclical  

Natural rate of unemployment:

∙ The normal rate of unemployment, consisting of frictional  unemployment plus structural unemployment

∙ Approximately 5%

Causes of Unemployment:

Government policies:

∙ Government can help match workers with jobs  ∙ Trade adjustment assistance program: trains workers who lose jobs due to foreign competition

∙ Unemployment insurance

o People can receive about ½ the average wage for up to  six months after losing a job

o Raises unemployment

∙ Minimum wage

o Price floor

o Small effect on unemployment

∙ Labor unions

o Collective bargaining by employees

o Only 9% of U.S. non-government employees

∙ Efficiency wages

o Paying above market (or minimum) wage

o Opportunity cost to employees

o Structural unemployment

Explaining Unemployment: 

Unemployment insurance:

∙ Unemployment insurance payments

∙ Available in the U.S. and most other industrialized countries

∙ Approximately half of the average wage (varies by state) ∙ Incentive for people to stay unemployed  

∙ Helps maintain spending  which lessens the personal  hardship  avoid recessions

∙ Gives people a longer time to search for job  more effort  more efficient/happy workers


Prices rise over time

∙ Minimum wage in 1938: $0.25/hr

∙ Minimum wage in 2014: $7.25/hr

Price level

∙ Measure of average prices of goods and services in the  economy

∙ Different ways to measure: GDP deflator, CPI, etc. Inflation rate

∙ Percentage increase in the price level from one year to the  next

Consumer Price Index: 

Measuring inflation rate

∙ GDP deflator  

o Problem: very broad (includes prices of all goods) ∙ Consumer price index

o Market basket

Consumer price index (CPI)  

∙ CPI=Expenditures in the current year/Expenditures in the base year x 100

∙ BLS measures prices of goods in stores

∙ CPI = 100 in base year (usually 1982-84)

∙ “Cost of living index”

CPI is not perfect

4 biases cause CPI to overstate inflation

∙ Substitution Bias

o Apples become more expensive than oranges  

o Consumers buy more oranges and fewer apples  

o BLS uses quantities from the base year

∙ Increase in quality bias

o Prices increase because of inflation and because of  quality increase

∙ New product bias

o Market basket does not include new products  

o Prices of new technology change drastically after  


∙ Outlet bias

o Sam’s Club/Costco and Internet retailers offer much  lower prices that the BLS does not measure  

CPI overstates inflation by 0.5% to 1%

We can use CPI to adjust for inflation

Producer Price Index: 

Similar to CPI, but for goods and services consumed by firms ∙ Intermediate goods, business investment, etc.

Changes in PPI can predict changes in CPI

Interest Rates: 

Cost of borrowing funds

∙ I loan you $1,000 today and charge you 6% interest ∙ You pay me back $1,060 next year

We also distinguish between nominal and real interest rates ∙ Nominal: stated interest rate

∙ Real: corrected for inflation

For low inflation and interest rates, we can approximately  calculate real interest  

Real IR = Nominal IR – inflation rate

We typically use the interest rate on three-month U.S. Treasury  bills as the “nominal interest rate”

∙ Short-term loans investors make to the government  

Costs of Inflation: 

Inflation is not always a bad thing

∙ Prices go up by 3%, but incomes go up by 3%

∙ Sign of healthy economy: money is moving

∙ If you know your dollar will be worth less tomorrow, you want  to spend it today instead of hoarding it

Sometimes it is a bad thing

∙ Problems with anticipated inflation

o Redistribution of income

 Not everyone’s wages will rise with inflation

o Depreciation of cash

o Menu costs

∙ Problems with unanticipated inflation (higher than expected) o Real interest rates lower than expected

o Lenders lose (lender could be you)

o Contract issues/speculation

Measures of Inflation: 

Price level is not a measure of inflation

∙ Price level does not really exist we just approximate We measure the price level indirectly with…

∙ GDP deflator



The percent increases in each of these indicators is an inflation  rate

∙ BEA decided to use CPI for the inflation rate

Percent increase in real GDP (per capita) is our measure of long run economic growth

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