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Unemployment and Inflation. EVERYONE’S NIGHTMARE Chapter 6. Unemployment and Inflation. The two key concepts of Macroeconomics Either can destabilize the economy. When BOTH happen together – REALLY, REALLY BAD. STAGFLATION. Unemployment. People who are looking for work but have no jobs.

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Unemployment and inflation

Unemployment and Inflation


Chapter 6

Unemployment and inflation1
Unemployment and Inflation

  • The two key concepts of Macroeconomics

    • Either can destabilize the economy.

    • When BOTH happen together – REALLY, REALLY BAD.



  • People who are looking for work but have no jobs.

    • ACTIVELY LOOKING is critical to the definition.

Definitions for unemployment
Definitions for Unemployment

  • Labor Force = Employed + unemployed

  • Unemployment Rate = number of unemployed / total labor force

  • Labor Force Participation Rate = labor force / population 16 and over

Definitions of unemployment
Definitions of Unemployment

  • Discouraged Workers

    • People who left the labor force because they could not find jobs.

  • Underemployed

    • Workers holding part-time work, but prefer full-time work OR hold jobs that are far below their capabilities.

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The reasons for unemployment

  • Frictional Unemployment

  • Structural Unemployment

  • Seasonal Unemployment

  • Cyclical Unemployment

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Cyclical Unemployment

  • When GDP fluctuates demand in the economy is not sufficient to provide jobs for all those who seek work.

    • Recession

    • Depression

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Frictional Unemployment

  • People in between jobs.

  • Short period of time while changing jobs.

  • 3% - 4% frictional employment is considered normal.

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Structural Unemployment

  • When changes in market supply or demand conditions affect major industries or regions.

  • The part of unemployment that results from the mismatch of skills and jobs.

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Causes of Structural Unemployment

  • Decline in demand for a product

  • Increased foreign competition

  • Automation of production

  • Increased raw material costs

  • Lack of labor mobility between occupations or regions.

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Seasonal Unemployment

Not included in your book – but in most other Econ texts

  • Most seasonal unemployment is tends to occur in certain industries.

    • Hotel and catering

    • Tourism

    • Fruit picking

    • Christmas

Suspicious unemployment statistics
Suspicious Unemployment Statistics

  • Natural Rate of Unemployment

    • Level of unemployment at which there is no cyclical unemployment.

  • Full Employment

    • Level of employment that occurs when the unemployment rate is at the “natural rate.”

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  • Why do we need unemployment to make the economy healthy?

The natural rate of unemployment
The Natural Rate of Unemployment

  • Depending on whom you talk to …

  • 4% to 5% is considered the natural rate.

    • Consists of only structural and frictional unemployment.

Historic unemployment rates
Historic Unemployment Rates

  • 1933 during the Great Depression – 25%

  • 1998 – Unemployment fell to 3.9%

  • October 2009 – 10.2% - highest in 26 years!

3 9 unemployment
3.9% Unemployment

  • Why wouldn’t this be good for the economy???

Wage inflation
Wage Inflation

  • How do employers attract or keep employees if there is not enough workers?

    • Higher Wages

    • More Benefits

    • 1999, Amigos was paying $9 per hour and McDonalds offered $500 signing bonuses.

Why would that be bad
Why would that be bad?

  • Costs go up (labor), so prices have to be upped to cover labor.

  • Higher prices make workers demand more money.

  • Cost – Push Inflation

Btw current data on unemployment for the us
BTW: Current Data on Unemployment for the US

  • According to the Bureau of Labor Statistics (www.bls.gov)

    • Unemployment Rate in October – 10.2%

      Average Hourly Earnings are up $ .01 in September.

Unemployment data
Unemployment Data

  • Previously: 303,000 new jobless claims were filed in March 2009.

  • October 2009 claims dropped 3000 to 523700.

How does the us compare 07 september 09
How does the US compare? 07-September 09

Bric country unemployment
BRIC Country Unemployment

  • Brazil – 9.7% (est.)

  • Russia – 6.4% (est.)

  • India – 6.8% (DOWN)

  • China – 4.0% (UNRELIABLE!)

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  • Top 3 of unemployment:

    • Nauru

    • Liberia

    • Zimbabwe

Stuff i know christa wants to know
Stuff I know Christa wants to know -

  • Countries with the lowest unemployment

    • Andorra

    • Monaco

    • Qatar


  • How do economists measure the unemployed?

  • Previously unemployed individuals who have stopped looking for work are called ____ workers.

  • What are the types of unemployment?

  • The natural rate of unemployment consists solely of _______ and ____ unemployment.

What do you think
What do you think?

  • 1976: Starting salary for an economics professor was $15,000

  • 2001: Starting salary for an econ prof was $55,000.

  • Considering the REALITY PRICIPLE, who had a better life?

Reality principle
Reality Principle

  • What matters to people is the real value of money – its PURCHASING POWER – not the nominal or face value of money.

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  • Consumer Price Index

  • A price index that measures the cost of a fixed basket of goods chosen to represent the consumption pattern of individuals.

    • Tracks the cost of living over time.

What is in the market basket
What is in the “market basket”?

  • Food and Beverages

  • Housing

  • Apparel

  • Transportation

  • Medical Care

  • Recreation

  • Education

  • Other goods and services

Food and beverages
Food and Beverages

  • Breakfast Cereal

  • Milk

  • Chicken

  • Wine

  • Coffee

  • Service meals

  • Snacks


  • Rent for primary residences

  • Owners equivalent rent

  • Fuel Oil (home heating)

  • Bedroom furniture


  • Men’s shirts and sweaters

  • Women’s dresses

  • Jewelry


  • New cars

  • Airline fares

  • Gasoline

  • Car insurance

Medical care
Medical Care

  • Prescription drugs

  • Medical supplies

  • Doctor services

  • Eyeglasses

  • Eyeglass services

  • Hospital care


  • Television

  • Pets

  • Pet products

  • Sports equipment

  • Admissions

Education and communication
Education and Communication

  • College Tuition

  • Postage

  • Telephone Services

  • Computer Software

  • Computer accessories

Other goods and services
Other Goods and Services

  • Tobacco and smoking products

  • Haircuts

  • Other personal services

  • Funeral Expenses

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  • CPI - U for 2009:

  • UP .1% so far for the year.

  • CPI – U for 2009 w/o fuel costs and food. – UP .2%

  • How does that compare with our wages?

  • Statistics from bls.gov

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  • Used by both government and the private sector to measure changes in prices facing consumers.

  • SEE PAGE 122 to calculate CPI

Cpi versus chained gdp
CPI versus Chained GDP

  • CPI measures goods produced in prior years (older cars) as well as imported goods.

  • Chained GDP does not measure either of these. ONLY new goods and those produced in the country.

Cpi v chained gdp
CPI v. Chained GDP

  • Because consumers will cut back on goods that cost more – the CPI will tend to overstate true changes in cost of living.

    • If chicken goes up in price, we switch to hamburger.

Cpi problems
CPI Problems

  • Does not “cut back” on higher priced goods like consumers do.

  • Would still count the same share of chicken as it did before the price index.

What economists think
What Economists THINK

  • CPI may be overestimated by .5% to 1.5% each year.

  • BIG argument among the econ community.

Cost of living adjustments
Cost of Living Adjustments

Automatic increases in wages or other payments that are tied to a price index.

For Future Reference on contract negotiations: Called COLA.

Cola and cpi

  • As CPI goes up, our wages or Social Security makes adjustments to keep up with the cost of living.



  • Inflation Rate:

    • The percentage rate of change of the price level of the economy.

Calculating inflation rates
Calculating Inflation Rates

  • Inflation Rate = percentage rate of change of a price index.

  • See page 124 for more on how to calculate!

Looking ahead
Looking Ahead

  • Two “Schools” of Macroeconomics

    • Classical Economics

    • Keynsian Economics

Classical economics
Classical Economics

  • A school of economic thought that provides insights into the economy when it operates at or near full employment.

    • Popular thought so far in 2006.

    • Picture of David Ricardo (Travis’ favorite economist)

      • Darwin meets Economics

Keynsian economics
Keynsian Economics

  • A school of economic thought that provides insights into the economy when it operates away from full employment.

    • Economic fluctuations, business cycles, sharp changes in the economy.

This concludes what the book has on unemployment and inflation

THIS Concludes what the book has on unemployment and inflation

I THINK you need and deserve more info on inflation!

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THE ANSWER???? inflation


    • The trade-off with more employment.

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What is the CPI pattern in 2009? inflation

  • CPI measures the dollar’s worth.

    • Check out the website

    • http://minneapolisfed.org/Research/data/us/calc/index.cfm

    • TRY THE professor’s salary from the beginning with this site!

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Types of Inflation inflation

  • Demand-Pull Inflation

  • Cost-Push Inflation

  • Monetary Inflation

  • Stagflation

  • Hyperinflation

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Demand-Pull Inflation inflation

  • When the demand for goods and services exceeds the production capacity.

    • Prices rising because of shortages.

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Cost-Push Inflation inflation

  • Inflation can arise from changes in the costs of production of goods and services.

    • Increase in the price of raw materials

    • Increase in the price of labor

    • Increase in the cost of capital.

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Cost-Push v. Demand Pull inflation

  • They push and pull prices up.

    • Labor contracts containing COLA clauses.

      • Cost-Of-Living Adjustments.

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Monetary Inflation inflation

  • Inflation caused by excessive growth in the money supply.

    • Value of money decreases if it isn’t that “rare.”

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Rule for Monetary Inflation: inflationVELOCITY

  • Quantity Equation

    • M x V = T x P

    • Money supply times the velocity at which it changes hands equals the number of transactions times the average level of prices.

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M x V = T x P inflation

  • Direct relationship between the money supply and the price level.

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What happens when the quantity equation is inflation“off”?

  • Hyperinflation

  • Money supply increases much, much faster than an economy’s output of goods and services.

    • THINK RUSSIA in 1990s.

    • Zimbabwe in 2000s

    • Germany post WWI

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Phillips Curve: The relationship between unemployment and inflation.

INVERSE relationship.

Unemployment goes UP, then inflation goes DOWN.

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Stagflation: When things REALLY go wrong on the Phillips Curve

  • Inflation and unemployment were at higher levels.

    • Combination of stagnation and inflation.

    • Both were increasing.

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1970s: What caused Stagflation? Curve

  • Spending on the Vietnam War PLUS spending on domestic social programs.

  • Inflationary expectations

  • Rise in energy costs caused by OPEC

  • Monopolistic pricing

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What is wrong with Inflation? Curve

  • Inflation reduces REAL INCOME of those whose incomes do not rise as fast as the price level.

  • Hurts:

    • People holding assets in MONEY

    • Lenders

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Special Note: Phillips Curve International Curve

  • Europe 1970s had higher inflation and unemployment.

  • Worse because:

    • Labor union practices

    • Tax structures

    • Government economic policies

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Consequences of Unemployment Curve

  • Real Output Effects

    • Each 1% of unemployment results in a reduction of $100-billion in output.

    • Lower real investment means less growth and reduced future output.

    • OKUN’S LAW!

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Consequences of Unemployment Curve

  • Income Effects

    • Loss of income and benefits (Health insurance)

    • Loss of income to others because of reduced purchasing power

    • Reduced tax income and increased outlays of government.

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Consequences of Unemployment Curve

  • Social Effects

    • Health Problems

    • Increased suicides

    • Break up of families

    • Increased child abuse

    • Increased crime

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Consequences of INFLATION Curve

  • Income Effects:

    • Reduced purchasing power of the dollar

    • Reduced real income for fixed income receivers

    • Reduced real wealth of savings

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Income Effects of Inflation (cont.) Curve

  • Benefits those whose incomes rise faster than the inflation rate.

  • Benefits owners of real assets (real estate, precious metals (kinda!))

  • Benefits debtors

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How Inflation effects Real Output Curve

  • Inflation initially stimulates output

  • Near full employment, there arise bottlenecks in supplies

  • Costs begin rising faster than prices

  • Interest rates accelerate, discouraging new investment.