Econ 202 Ch9 Weeks 2-3
Econ 202 Ch9 Weeks 2-3 Econ 202
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This 10 page Class Notes was uploaded by Lauren Von Alst on Thursday February 4, 2016. The Class Notes belongs to Econ 202 at University of Kentucky taught by Robert Perez Jr in Spring 2016. Since its upload, it has received 76 views. For similar materials see Principles of Economics: Microeconomics in Economcs at University of Kentucky.
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Date Created: 02/04/16
▯ Chapter 9: Unemployment and Inflation ▯ 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) ▯ 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 ▯ ▯ 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: Number of unemployed/Labor force x 100 ▯ 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 Provides info on labor force and unemployed ▯ Benefit: verified information ▯ Drawbacks: 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 ▯ ▯ Demographics: ▯ Men: Retire earlier Stay in school longer Easier to receive transfer payments ▯ Women: 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 ▯ Why?: Some businesses expand, some contract Consumer tastes change Technology makes some jobs obsolete and some new jobs necessary ▯ ▯ Types of Unemployment: ▯ Fictional: Being between jobs, searching for a new job Seasonal employment ▯ Structural: Mismatch between skills and job requirements Skills can become obsolete due to technological progress or change in taste ▯ Cyclical: 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 Inflation: 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 introduction 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 CPI PPI ▯ 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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