Understanding Unemployment and Inflation: The Economy's Bad Boys

1. Types of Unemployment and Inflation The BAD BOYS OF THE ECONOMY

2. The Bad Boys!!! • Unemployment is the negative effect of a recession. If not held in check, it makes economic growth very difficult. • Inflation is the possible negative consequence of prosperity. Ultimately, if inflation is not held in check, it can lead to a recession • We tend to have one or the other. • Fighting one can lead to causing the other

3. UNEMPLOYMENT

4. Types of Unemployment • Frictional: in between jobs • Structural unemployment: due to changing technology • Seasonal unemployment: short term jobs; migrant workers, holiday retail jobs, outdoor resort work • Cyclical: unemployment due to economic downturns

5. 5 is considered Natural Rate/Full Employment • Unemployment – the percentage of the civilian labor force that is not working at a given time. • Civilian labor force – the total # of people 16 and up who are employed or actively seeking work (willing and able to work) • Unemployment rate = # of unemployed # in the civilian labor force

6. Unemployment 2007 data Under 16 And/or Institutionalized (71.8 Million) Not in Labor Force (78.7 Million) Total Population (303.6 Million) Employed (146.0 Million) Labor Force (153.1 Million) Unemployed (7.1 Million) Source: Bureau of Labor Statistics

7. UGH!!!!!

10. http://www.youtube.com/watch?v=hwWGzQ_FUtQ

12. Problems with the Unemployment Rate • Discouraged workers – people who have held jobs but have given up looking for work • Underemployed –Workers who have jobs beneath their skill level or who want full-time work and are working part-time. • Full-time students are not part of the labor force, even if seeking work. • Part Time Workers • Uneven Burden

13. Cost of Unemployment • Foregone output • Potential output • GDP gap • (Actual output – potential output) • Okun’s Law • Each 1% above NRU creates negative 2% output gap

14. INFLATION!!!!!

15. Inflation • Inflation is an increase in the average price level of all products in an economy • Inflation reduces the real purchasing power of the dollar. • Inflation usually occurs when aggregate demand increases faster than aggregate supply. • Deflation is possible but Rare.

16. Measuring Inflation • Producer Price Index (PPI) • The measure of the average change over time in the prices of goods and services used by producers. • Consumer Price index (CPI): about 2% • Specifically measures a basket of 300 goods • The measure of the average change over time in the price of a fixed group of products. • Used to adjust wages and benefits such as Social Security and COLA’s. • COLA – Cost of Living Adjust. Protects you from the detrimental effects of inflation

20. Types of Inflation • Demand pull inflation: When aggregate demand increases faster than the economy’s productive capacity. “Too many dollars chasing too few goods” • Cost-Push Inflation: When producers raise prices to cover higher resource costs. • Wage price spiral: due to higher labor costs • Price Expectations: • Hyper Inflation

21. Effects of Inflation • Changes in the purchasing power of the dollar: you can buy less • Randomly reallocates wealth • The value of real wages: wages rarely keep up with inflation • Increased Interest rates: discourage spending and investment. • FED often raises rates • Banks raise rates to protect against inflation (see next Slide) • Savings and investments: discourages savings • Increased Production costs: more expensive to produce goods

22. Inflation • Anticipated Inflation • Nominal Interest Rate • Real Interest Rate • Inflation Premium 11% 6% = + 5% Inflation Premium Nominal Interest Rate Real Interest Rate

23. Who is Helped – Who is hurt?Anticipated versus Unanticipated