Econ214 macroeconomics chapter 6

1. Chapter 6
Unemployment
And Inflation
.

2. 5-2
Learning Objectives
1. Define these concepts: the labor force, the labor
force participation rate, and the unemployment
rate.
2. Distinguish between cyclical, structural, and
frictional unemployment.
3. Describe the costs of unemployment.
4. Discuss how the Consumer Price Index is
calculated.
5. Explain the difference between inflation and the
price level.
6. Summarize the costs of anticipated and
unanticipated inflation.

3. 5-3
● The Unemployed: Individuals who do not
currently have a job but are actively
looking for work.
Actively looking is critical
How Is Unemployment Defined and Measured?
6.1 EXAMINING UNEMPLOYMENT

4. 5-4
● labor force
The total number of workers, both
the employed and the unemployed.
How Is Unemployment Defined and Measured?
● unemployment rate
The percentage of the labor force
that is unemployed.
labor force = employed + unemployed
unemployed
labor force
unemployment rate = 100×
6.1 EXAMINING UNEMPLOYMENT
(cont.)

5. 5-5
● labor force participation rate
The percentage of the population
over 16 years of age that is in the
labor force.
How Is Unemployment Defined and Measured?
labor force
100
population 16 years and older
labor force participation rate = ×
6.1 EXAMINING UNEMPLOYMENT
(cont.)

6. 5-6
How Is Unemployment Defined and Measured?
 FIGURE 6.1
Unemployment Data, March 2012
Approximately 64 percent of the civilian population is in the labor force.
The unemployment rate in March 2012 was 8.2 percent.
SOURCE: Bureau of Labor Statistics, U.S. Department of Labor, 2012.
6.1 EXAMINING UNEMPLOYMENT
(cont.)

7. 5-7
How Is Unemployment Defined and Measured?
 FIGURE 6.2
Unemployment Rates in
Developed Countries
Among the developed
countries, unemployment
rates vary substantially.
SOURCE: The Economist ,
April 7, 2012.
6.1 EXAMINING UNEMPLOYMENT
(cont.)

8. 5-8
Who Are the Unemployed?
FIGURE 6.4
Selected U.S. Unemployment
Statistics, Unemployment Rates
for March 2012
The incidence of unemployment
differs sharply among demographic
groups.
SOURCE: Bureau of Labor Statistics,
U.S. Department of Labor, 2012.
6.1 EXAMINING UNEMPLOYMENT
(cont.)

9. 5-9
Who Are the Unemployed?
● seasonal unemployment
The component of unemployment
attributed to seasonal factors.
6.1 EXAMINING UNEMPLOYMENT
(cont.)

10. 5-10
Types of Unemployment: Cyclical, Frictional, and Structural
● cyclical unemployment
Unemployment that occurs during
fluctuations in real GDP.
● frictional unemployment
Unemployment that occurs with the
normal workings of the economy, such
as workers taking time to search for
suitable jobs and firms taking time to
search for qualified employees.
● structural unemployment
Unemployment that occurs when there
is a mismatch of skills and jobs.
6.2 CATEGORIES OF UNEMPLOYMENT

11. 5-11
The Natural Rate of Unemployment
● natural rate of unemployment
The level of unemployment at which
there is no cyclical unemployment. It
consists of only frictional and
structural unemployment.
● full employment
The level of unemployment that
occurs when the unemployment rate
is at the natural rate.
6.2 CATEGORIES OF UNEMPLOYMENT
(cont.)

12. 5-12
● unemployment insurance
Payments unemployed people
receive from the government.
6.3 THE COSTS OF UNEMPLOYMENT
SOURCE: Bureau of Labor Statistics, U.S. Department of Labor, 2012.

13. 5-13
The CPI versus the Chain Index for GDP
FIGURE 6.5
Components of the
Consumer Price Index (CPI)
Rent and food and beverages
make up 44 percent of the CPI
basket. The remainder consists
of other goods and services.
SOURCE: Bureau of Labor
Statistics, U.S. Department of
Labor, 2006.
6.4 THE CONSUMER PRICE INDEX AND
THE COST OF LIVING (cont.)

14. 5-14
Problems in Measuring Changes in Prices
● cost-of-living adjustments (COLAs)
Automatic increases in wages or other
payments that are tied to the CPI.
6.4 THE CONSUMER PRICE INDEX AND
THE COST OF LIVING (cont.)

15. 5-15
● inflation rate
The percentage rate of change in
the price level.
inflation rate = percentage rate of change of a price index
6.5 INFLATION

16. 5-16
6.5 INFLATION (cont.)
Historical U.S. Inflation Rates
SOURCES: Scott Derks, The Value of a Dollar 1860–1989 (Farmington Hills, MI: Gale Group, 1993) and
author’s research and estimates.

17. 5-17
The Perils of Deflation
● deflation
Negative inflation or falling prices
of goods and services.
6.5 INFLATION (cont.)

18. 5-18
● anticipated inflation
Inflation that is expected.
● unanticipated inflation
Inflation that is not expected.
6.6 THE COSTS OF INFLATION
Historical U.S. Inflation Rates

19. 5-19
Anticipated Inflation
● menu costs
The costs associated with changing
prices and printing new price lists
when there is inflation.
● shoe-leather costs
Costs of inflation that arise from trying
to reduce holdings of cash.
● hyperinflation
An inflation rate exceeding 50 percent per month.
Unanticipated Inflation
6.6 THE COSTS OF INFLATION (cont.)

20. 5-20
anticipated inflation
Consumer Price Index (CPI)
cost-of-living adjustments (COLAs)
cyclical unemployment
deflation
discouraged workers
frictional unemployment
full employment
hyperinflation
inflation rate
labor force
labor force participation rate
menu costs
natural rate of unemployment
seasonal unemployment
shoe-leather costs
structural unemployment
unanticipated inflation
unemployment insurance
unemployment rate
K E Y T E R M S