Alcatel-Lucent Contributes to Unemployment Learning Objectives When total employment in the United States declined during 2001, Lucent contributed to the decline. Discuss the problems that inflation causes. 8.7 Distinguish between the nominal interest rate and the real interest rate . 8.6 Use price indexes to adjust for the effects of inflation. 8.5 Define price level and inflation rate and understand how they are computed. 8.4 Explain what factors determine the unemployment rate . 8.3 Identify the three types of unemployment . 8.2 Define unemployment rate and labor force participation rate and understand how they are computed. 8.1
<ul><li>Labor force The sum of employed and unemployed workers in the economy. </li></ul><ul><li>Unemployment rate The percentage of the labor force that is unemployed. </li></ul>Measuring the Unemployment Rate and the Labor Force Participation Rate Learning Objective 8.1 The Household Survey Discouraged workers People who are available for work but have not looked for a job during the previous four weeks because they believe no jobs are available for them.
Measuring the Unemployment Rate and the Labor Force Participation Rate Learning Objective 8.1 FIGURE 8-1 The Employment Status of the Civilian Working-Age Population, April 2007 The Household Survey
Measuring the Unemployment Rate and the Labor Force Participation Rate Learning Objective 8.1 • The unemployment rate measures the percentage of the labor force that is unemployed. The Household Survey • The labor force participation rate measures the percentage of the working-age population in the labor force.
What Happens if You Include the Military? Learning Objective 8.1 In the BLS household survey, people on active military service are not included in the totals for employment, the labor force, or the working-age population. Suppose people in the military were included in these categories. Solved Problem 8-1
Learning Objective 8.1 Measuring the Unemployment Rate and the Labor Force Participation Rate Problems with Measuring the Unemployment Rate Although the BLS reports the unemployment rate measured to the tenth of a percentage point, it is not a perfect measure of the current state of joblessness in the economy. The unemployment rate provides some useful information about the employment situation in the country, but it is far from an exact measure of joblessness in the economy.
Learning Objective 8.1 FIGURE 8-2 Trends in the Labor Force Participation Rates of Adult Men and Women Since 1948 Measuring the Unemployment Rate and the Labor Force Participation Rate Trends in Labor Force Participation
<ul><li>What Explains the Increase in “Kramers”? </li></ul>Learning Objective 8.1 Why do more men seem to be adopting Kramer’s lifestyle? Making the Connection
Learning Objective 8.1 FIGURE 8-3 Unemployment Rates in the United States by Demographic Group, April 2007 Measuring the Unemployment Rate and the Labor Force Participation Rate Unemployment Rates for Demographic Groups
Learning Objective 8.1 Table 8-1 Duration of Unemployment Measuring the Unemployment Rate and the Labor Force Participation Rate How Long Are People Usually Unemployed? 17.5 27 weeks or more 15.7 15 to 26 weeks 31.3 5 to 14 weeks 35.6% Less than 5 weeks PERCENTAGE OF TOTAL UNEMPLOYED LENGTH OF TIME UNEMPLOYED
Learning Objective 8.1 Table 8-2 Household and Establishment Survey Data for March and April 2007 Measuring the Unemployment Rate and the Labor Force Participation Rate The Establishment Survey: Another Measure of Employment +0.1% 4.5% 4.4% UNEMPLOYMENT RATE − 392,000 152,587,000 152,979,000 LABOR FORCE +77,000 6,801,000 6,724,000 UNEMPLOYED +88,000 137,684,000 137,596,000 − 468,000 145,786,000 146,254,000 EMPLOYED CHANGE APRIL MARCH CHANGE APRIL MARCH ESTABLISHMENT SURVEY HOUSEHOLD SURVEY
Learning Objective 8.1 Table 8-3 Establishments Creating and Eliminating Jobs, April–June 2006 Measuring the Unemployment Rate and the Labor Force Participation Rate Job Creation and Job Destruction Over Time NUMBER OF JOBS NUMBER OF ESTABLISHMENTS 1,358,000 341,000 Closing establishments 5,937,000 1,543,000 Existing establishments ESTABLISHMENTS ELIMINATING JOBS 1,475,000 360,000 New establishments 6,286,000 1,558,000 Existing establishments ESTABLISHMENTS CREATING JOBS
Types of Unemployment Learning Objective 8.2 FIGURE 8-4 The Annual Unemployment Rate in the United States, 1950–2006
Learning Objective 8.2 Frictional Unemployment and Job Search Frictional unemployment Short-term unemployment that arises from the process of matching workers with jobs. Types of Unemployment Structural unemployment Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of jobs. Cyclical unemployment Unemployment caused by a business cycle recession. Cyclical Unemployment Structural Unemployment
Learning Objective 8.2 Natural rate of unemployment The normal rate of unemployment, consisting of frictional unemployment plus structural unemployment. Full Employment Types of Unemployment
<ul><li>How Should We Categorize the Unemployment at Alcatel-Lucent? </li></ul>Learning Objective 8.2 The people who lost their jobs at Alcatel-Lucent fit into more than one category of unemployment. Making the Connection
Learning Objective 8.3 Unemployment Insurance and Other Payments to the Unemployed Government Policies and the Unemployment Rate Explaining Unemployment In the United States and most other industrial countries, the unemployed are eligible for unemployment insurance payments from the government. In the United States, these payments are equal to about half the average wage. Unemployment insurance helps the unemployed maintain their income and spending, which lessens the personal hardship of being unemployed and also helps reduce the severity of recessions.
Learning Objective 8.3 FIGURE 8-5 Average Unemployment Rates in the United States, Canada, Japan, and Europe, 1997–2006 International Comparisons Government Policies and the Unemployment Rate Explaining Unemployment
Learning Objective 8.3 Minimum Wage Laws Government Policies and the Unemployment Rate Explaining Unemployment In 1938, the federal government enacted a national minimum wage law. If the minimum wage is set above the market wage determined by the demand and supply of labor, the quantity of labor supplied will be greater than the quantity of labor demanded. Economists agree that the current minimum wage is above the market wage for some workers, but they disagree on the amount of unemployment that has resulted.
Learning Objective 8.3 Efficiency Wages Efficiency wage A higher-than-market wage that a firm pays to increase worker productivity. Labor Unions Explaining Unemployment Labor unions are organizations of workers that bargain with employers for higher wages and better working conditions for their members.
<ul><li>Why Does Costco Pay Its Workers So Much More Than Wal-Mart Does? </li></ul>Learning Objective 8.3 Costco’s relatively high wages and health benefits reduce employee turnover and raise morale and productivity. Making the Connection
Measuring Inflation Learning Objective 8.4 Price level A measure of the average prices of goods and services in the economy. Inflation rate The percentage increase in the price level from one year to the next.
Measuring Inflation Learning Objective 8.4 The Consumer Price Index FIGURE 8-6 The CPI Market Basket, December 2006
Measuring Inflation Learning Objective 8.4 Consumer price index ( CPI ) An average of the prices of the goods and services purchased by the typical urban family of four. The Consumer Price Index $915.00 $900.00 $750.00 Total 550.00 27.50 500.00 25.00 500.00 25.00 20 Books 280.00 14.00 300.00 15.00 200.00 10.00 20 Pizzas $85.00 $85.00 $100.00 $100.00 $50.00 $50.00 1 Eye examinations EXPENDITURES (ON BASE-YEAR QUANTITIES) PRICE EXPENDITURES (ON BASE-YEAR QUANTITIES) PRICE EXPENDITURES PRICE QUANTITY PRODUCT 2009 2008 BASE YEAR (1999)
Measuring Inflation Learning Objective 8.4 The Consumer Price Index Don’t Let This Happen to YOU! Don’t Miscalculate the Inflation Rate APPLIED TO 2009 APPLIED TO 2008 FORMULA CPI =
Measuring Inflation Learning Objective 8.4 Is the CPI Accurate? • Substitution bias. • Increase in quality bias. • Outlet bias. • New product bias. <ul><ul><li>It is important that the CPI be as accurate as possible, but there are four biases that make changes in the CPI overstate the true inflation rate: </li></ul></ul>
Measuring Inflation Learning Objective 8.4 The Producer Price Index <ul><ul><li>Producer price index ( PPI ) An average of the prices received by producers of goods and services at all stages of the production process. </li></ul></ul>
Using Price Indexes to Adjust for the Effects of Inflation Learning Objective 8.5 Falling Real Wages at Alcatel-Lucent For some purposes, we are interested in tracking changes in an economic variable over time rather than in seeing what its value would be in today’s dollars. In that case, to correct for the effects of inflation, we can divide the nominal variable by a price index and multiply by 100 to obtain a real variable . Nominal average hourly earnings are often referred to as the nominal wage , and real average hourly earnings are often referred to as the real wage .
Calculating Real Average Hourly Earnings Learning Objective 8.5 Solved Problem 8-5 201.6 16.76 2006 195.3 16.13 2005 188.9 $15.69 2004 CPI (1982-1984 = 100) NOMINAL AVERAGE HOURLY EARNINGS YEAR 8.31 201.6 16.76 2006 8.26 195.3 16.13 2005 $8.31 188.9 $15.69 2004 REAL AVERAGE HOURLY EARNINGS (1982-1984 DOLLARS) CPI (1982-1984 = 100) NOMINAL AVERAGE HOURLY EARNINGS YEAR
Real versus Nominal Interest Rates Learning Objective 8.6 Nominal interest rate The stated interest rate on a loan. Real interest rate The nominal interest rate minus the inflation rate. Real interest rate = Nominal interest rate − Inflation rate Deflation A decline in the price level.
Real versus Nominal Interest Rates Learning Objective 8.6 FIGURE 8-7 Nominal and Real Interest Rates, 1970–2006
Does Inflation Impose Costs on the Economy? Learning Objective 8.7 Inflation Affects the Distribution of Income The Problem with Anticipated Inflation Menu costs The costs to firms of changing prices. The Problem with Unanticipated Inflation The extent to which inflation redistributes income depends in part on whether the inflation is anticipated —in which case consumers, workers, and firms can see it coming and can prepare for it— or unanticipated —in which case they do not see it coming and do not prepare for it. Like many of life’s other problems, inflation is easier to manage if you see it coming. Even when inflation is perfectly anticipated, however, some individuals will experience a cost.
<ul><li>Why a Lower Inflation Rate Is Like a Tax Cut for Alcatel-Lucent’s Bondholders </li></ul>Learning Objective 8.7 Making the Connection 6% 2% 4% $1,000 10% 6% 4% $1,000 NOMINAL INTEREST RATE INFLATION RATE REAL INTEREST RATE PRINCIPAL = $25 – $20 = $45 – $15 $60 2% = $15 – $60 = $75 – $25 $100 6% REAL AFTER-TAX INTEREST PAYMENT ADJUSTMENT FOR INFLATION AFTER-TAX INTEREST PAYMENT TAX PAYMENT NOMINAL INTEREST PAYMENT INFLATION RATE
An Inside LOOK Making Sense of Employment Data Jobs Data Signal Growth Is Easing but Still Solid
Consumer price index (CPI) Cyclical unemployment Deflation Discouraged workers Efficiency wage Frictional unemployment Inflation rate Labor force Labor force participation rate Menu costs Natural rate of unemployment Nominal interest rate Price level Producer price index (PPI) Real interest rate Structural unemployment Unemployment rate K e y T e r m s