Chapter eight economic fluctuations unemployment and inflation
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Chapter Eight Economic Fluctuations, Unemployment, and Inflation. Swings in the Economic Pendulum. Instability in the Growth of Real GDP. Annual Rate of Growth in Real GDP (long-run growth rate approximately 3%).

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Chapter Eight Economic Fluctuations, Unemployment, and Inflation

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Chapter eight economic fluctuations unemployment and inflation

Chapter EightEconomic Fluctuations, Unemployment, and Inflation


Swings in the economic pendulum

Swings in theEconomic Pendulum


Instability in the growth of real gdp

Instability in the Growth of Real GDP

Annual Rate of Growth in Real GDP(long-run growth rate approximately 3%)

  • Although real GDP in the United States has grown at an average rate of approximately 3%, the growth has been characterized by economic ups-and-downs. Note:periods of recession are indicated with shading.

8%

6%

4%

2%

0%

-2%

-4%

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

Source: Economic Report of the President, various issues.


The hypothetical business cycle

Trend line

Business

peak

Business

peak

Recessionary

trough

Expansion

Contraction

Recessionary

trough

The Hypothetical Business Cycle

Real GDP

  • The four phases of the hypothetical business cycle are expansion, peak, contraction, and recessionary trough.

  • In contrast with the business cycle represented here, as the previous exhibit illustrated, real world business cycles are characterized by expansions and contractions of varying duration and magnitude.

Time


Economic fluctuations and the labor market

Economic Fluctuationsand the Labor Market


Labor market classifications

Labor Market Classifications

  • Employed – a person (16 years old or over) who is:

    • working for pay at least one hour per week,

    • self employed, or,

    • working 15 hours or more each week without pay in a family-operated enterprise.

  • Unemployed – a person not currently employed who is:

    • actively seeking a job, or,

    • waiting to begin a job, or,

    • on layoff, waiting to return to a previous job.


Labor market classifications1

Labor Market Classifications

  • Civilian Labor force – civilians (16 years and older) who are:

    • either employed or unemployed.

  • Not in the labor force – persons (16 years and older) who are:

    • neither employed nor unemployed (like retirees, students, homemakers, or disabled persons).


Labor market indicators

Employed + Unemployed

Recall the Labor Force=

# in the Labor Force

Civilian population (16+)

Labor Market Indicators

  • The non-institutional civilian adult population is grouped into two broad categories:

    • Persons not in the labor force, and,

    • persons in the labor force (this group includes both the employed and unemployed).

Labor ForceParticipation Rate

=


U s population employment and unemployment may 2009

239.1 million

Civilian population

153.4 million

16 and over

85.7 million

Civilian

Not in the

13.7 million

labor force

labor force

  • Household workers

  • Students

  • Retirees

  • Disabled

Employed

  • Employees

  • Self-employed

139.7 million

workers

153.4

Civilian labor force

=

Labor Force Participation Rate

=

=

239.1

Civilian population (16+)

139.7

=

Number employed

=

Employment / Population Ratio

=

239.1

Civilian population (16+)

13.7

Number unemployed

=

=

Rate ofUnemployment

=

153.4

Civilian labor force

U.S. Population, Employment,and Unemployment: May 2009

Unemployed

  • New entrants

  • Reentrants

  • Lost last job

  • Quit last job

  • Laid off

64.2%

58.4%

9.0%


Instability in the growth of real gdp1

Instability in the Growth of Real GDP

Labor Force Participation Rate

of Men and Women

87 %

83%

  • The labor force participation rate of women has been steadily increasing for several decades.

  • During the same period the rate of men has been falling.

78 %

76 %

71 %

59 %

58 %

46 %

38 %

33 %

1948

1960

1975

1990

2010

1948

1960

1975

1990

2010

–––––– Women ––––––

––––––– Men –––––––

Source: www.bls.gov.


Composition of the unemployed by reason in 2011

Composition of the Unemployed by Reason in 2011

Breakdown of Unemployed 2011

Job leavers

New entrants

  • There are various reasons why persons were unemployed in 2011.

  • Half (49.9%) of the unemployed were dismissed from their previous jobs.

  • 34.2% of the unemployed were either new entrants or reentrants into the labor force.

6.8%

9.8%

Reentrants

24.4%

49.9%

Dismissedfrom Previous Job

9.1%

On Layoff


The unemployment rate by age and gender may 2009

20-24

16-19

25+

16-19

20-24

25+

–– Women aged ––

–– Men aged ––

The Unemployment RateBy Age and Gender: May 2009

Civilian Rates of Unemployment – April 2011

28.1%

  • In 2011, the unemployment rate of men was 9.4%, compared to only 8.4% for women.

  • The male-female differential was even higher for younger workers.

  • Note: unemployment for persons under age 25 was much higher than for older workers.

21.8%

16.1%

13.7%

9.4%

9.0%

8.4%

7.9%

7.3%

Allmen

Allwomen

Both

Source: www.bls.gov.


Three types of unemployment

Three Types of Unemployment


Three types of unemployment1

Three Types of Unemployment

  • Frictional Unemployment:

    • Caused by imperfect information.

    • Occurs because:

      • employers are not aware of all available workers and their qualifications, and,

      • available workers are not fully aware of all the jobs being offered by employers.


Three types of unemployment2

Three Types of Unemployment

  • Structural Unemployment:

    • Reflects an imperfect match of employee skills to skill requirements of the available jobs.

    • Also reflects structural and demographic characteristics of the labor market.

  • Cyclical Unemployment:

    • Reflects business cycle conditions

    • When there is a general downturn in business activity, cyclical unemployment increases.


Employment fluctuations the historical record

Employment Fluctuations: The Historical Record


Unemployment and output are linked over the business cycle

Unemployment and Output AreLinked Over the Business Cycle

  • The unemployment rate from 1960-2011 is illustrated here.

  • As expected, unemployment rose rapidly during each of the eight recessions (the shaded years indicate periods of recession).

  • In contrast, after each recession ended, the unemployment rate began to decline as the economy moved into an expansionary phase of the business cycle.

  • Note that the actual rate of unemployment was greater than the natural rate during and immediately following each recession.

Unemployment Rate (U.S) 1960 - 2011

12%

10%

8%

6%

4%

2%

0%

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2011

Actual rate

Natural rate

of unemployment

of unemployment

Source : http://www.bls.gov/ and, Robert J. Gordon, Macroeconomics (Boston: Addison-Wesley, 2011).


The concept of full employment

The Concept of Full Employment

  • Full Employment: Level of employment resulting when the rate of unemployment is normal, considering both frictional and structural factors.

  • Full employment is closely related to the concept of the natural rate of unemployment.

  • Natural Rate of Unemployment: Level of unemployment that reflects “job shopping” in an economy of imperfect information and dynamic change.


The concept of full employment1

The Concept of Full Employment

  • The natural rate of unemployment is:

    • neither a temporary high nor temporary low.

    • a rate that is both achievable and sustainable.

    • the level of unemployment accompanying an economy’s “maximum sustainable rate of output.”

  • Both demographic factors (e.g. young workers as a share of the labor force) and public policy (e.g. the level of unemployment benefits) influence the natural rate of unemployment.

  • Actual rate of unemployment generally rises above natural rate during a recession and falls below the natural rate during a boom.


Unemployment across economies

Unemployment Across Economies

Average Unemployment Rate

(2001-2010)

  • The unemployment rate in the United States, United Kingdom, and Japan has been persistently lower than the comparable rate of major continental European economies.

  • The high unemployment countries have higher unemployment benefits, less flexible collective bargaining, and more regulated labor markets.

8.9 %

Germany

8.6 %

France

7.9 %

Italy

6.1 %

U.S.

5.7 %

U.K.

4.3 %

Japan


Actual and potential gdp

Actual and Potential GDP


Actual and potential gdp1

Actual and Potential GDP

  • Potential output: Maximum sustainable output level consistent with the economy’s resource base, given its institutional arrangements.

  • Actual and potential output will be equal when the economy is at full employment.


Actual potential gdp 1960 2011

2001recession

1990-91recession

PotentialGDP

1982recession

2008-10recession

1980recession

1960recession

1974-75recession

1970recession

Actual & Potential GDP, 1960-2011

Real GDP(billions of 2000 $)

14,000

ActualGDP

12,000

  • Here we illustrate both actual GDP and potential GDP.

  • Note the gap (shaded area) between actual and potential GDP during periods of recession.

10,000

8,000

6,000

4,000

2,000

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2011


The effects of inflation

The Effects of Inflation


Inflation

Inflation

  • Inflation is a change in the general level of prices as measured by a price index such as the GDP deflator or the consumer price index.

    • Inflation is generally measured at an annual rate.

    • When inflation is high, the year-to-year changes in the inflation rate are nearly always highly variable, making them difficult to predict.


Actual potential gdp 1960 20111

1973-1981 averageinflation rate = 9.2 %

1983-2011 averageinflation rate = 2.9 %

1956-1965 averageinflation rate = 1.6 %

Actual & Potential GDP, 1960-2011

  • Between 1956 and 1965, the general price level increased at an average annual rate of only 1.6%.

  • In contrast, the inflation rate averaged 9.2% from 1973 to 1981, reaching double-digits during several years.

  • Since 1982, the average rate of inflation has been lower (2.9% from 1983-2011) and more stable.

15%

10%

5%

0%

-5%

1956

1960

1965

1970

1975

1985

1990

1995

2000

2005

2011

2011


Unanticipated and anticipated inflation

Unanticipated and Anticipated Inflation

  • There are two different kinds of inflation:

    • Unanticipated inflation: An increase in the price level that comes as a surprise, at least for most individuals.

    • Anticipated inflation: A widely expected change in the price level.


Effects of inflation

Effects of Inflation

  • High & variable rates of inflation are harmful for several reasons:

    • Because unanticipated inflation alters the outcomes of long-term projects like the purchase of a machine or operation of a business, it will both increase the risks and retard the level of such productive activities.

    • Inflation distorts the information delivered by prices.

    • People will respond to high and variable rates of inflation by spending less time producing and more time trying to protect their wealth and income from the uncertainty created by inflation.


What causes inflation

What Causes Inflation?

  • Nearly all economists believe that rapid expansion in the money supply is the primary cause of inflation.


Chapter eight economic fluctuations unemployment and inflation

End of

Chapter 8


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