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Unemployment and Inflation. Lucent Technologies Deals with Unemployment and Inflation. 1. 2. 3. 4. 5. 6. 7. After studying this chapter, you should be able to: Define the unemployment rate and the labor force participation rate, and understand how they are computed.

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lucent technologies deals with unemployment and inflation
Lucent Technologies Deals with Unemployment and Inflation

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  • After studying this chapter, you should be able to:

Define the unemployment rate and the labor force participation rate, and understand how they are computed.

Identify the three types of unemployment.

Explain what factors determine the unemployment rate.

Define the price level and the inflation rate, and understand how they are computed.

Use price indexes to adjust for the effects of inflation.

Distinguish between the nominal interest rate and the real interest rate.

Discuss the problems caused by inflation.

LEARNING OBJECTIVES

…, the contract between Lucent and its union workers increased wages by less than the increase in prices expected by the firm and the workers.

measuring the unemployment rate and the labor force participation rate
Measuring the Unemployment Rateand the Labor Force Participation Rate

1

LEARNING OBJECTIVE

The Household Survey

Labor force The sum of employed and unemployed workers in the economy.

Unemployment rate The percentage of the labor force that is unemployed.

Discouraged workers People who are available for work, but who 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 rate4
Measuring the Unemployment Rateand the Labor Force Participation Rate

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The Employment Status of the Civilian Working-Age Population, June 2005

The Household Survey

measuring the unemployment rate and the labor force participation rate5
Measuring the Unemployment Rateand the Labor Force Participation Rate
  • The Household Survey
    • The unemployment rate measures the percentage of the labor force that is unemployed:
    • The labor force participation ratemeasures the percentage of the working-age population that is in the labor force:
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12 - 1

1

LEARNING OBJECTIVE

  • What Happens If You Include the Military?

People on active military service are not included in the employment, labor force, or working-age population totals compiled in the BLS household survey. Suppose people in the military were included in these statistics.

measuring the unemployment rate and the labor force participation rate7
Measuring the Unemployment Rateand the Labor Force Participation Rate

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Trends in the Labor ForceParticipation Rates of AdultMen and Women Since 1948

Problems with Measuring the Unemployment Rate

Trends in Labor Force Participation

measuring the unemployment rate and the labor force participation rate8
Measuring the Unemployment Rateand the Labor Force Participation Rate

12 – 2

Household and Establishment Survey Data for May and June 2005

The Establishment Survey: Another Measure of Employment

measuring the unemployment rate and the labor force participation rate9
Measuring the Unemployment Rateand the Labor Force Participation Rate

12 – 3

Establishments Creating and Eliminating Jobs, September-December 2004

Job Creation and Job Destruction Over Time

types of unemployment
Types of Unemployment

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LEARNING OBJECTIVE

12 - 4

The Annual Unemployment Rate in the United States, 1950-2004

types of unemployment11
Types of Unemployment

Frictional Unemployment and Job Search

Frictional unemployment Short-term unemployment arising from the process of matching workers with jobs.

Structural Unemployment

Structural unemployment Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of jobs.

types of unemployment12
Types of Unemployment

Cyclical Unemployment

Cyclical unemployment Unemployment caused by a business cycle recession.

Full Employment

Natural rate of unemployment The normal rate of unemployment, consisting of structural unemployment plus frictional unemployment.

explaining unemployment
Explaining Unemployment

3

LEARNING OBJECTIVE

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Average Unemployment Ratesin the United States, Canada,Japan, and Europe, 1995-2004

Government Policies and the Unemployment Rate

UNEMPLOYMENT INSURANCE AND OTHER PAYMENTS TO THE UNEMPLOYED

INTERNATIONAL COMPARISONS

explaining unemployment14
Explaining Unemployment

Government Policies and the Unemployment Rate

MINIMUM WAGE LAWS

Labor Unions

Efficiency Wages

Efficiency wage A higher-than-market wage paid by a firm to increase worker productivity.

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  • Why Did Henry Ford Pay His Workers Twice As Much As Other Car Manufacturers?

Henry Ford claimed that paying a wage twice as high as his competitors was the finest cost-cutting move he ever made.

measuring inflation
Measuring Inflation

4

LEARNING OBJECTIVE

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 inflation17
Measuring Inflation

12 - 6

The CPI Market Basket,December 2004

The Consumer Price Index

Consumer price index (CPI) An average of the prices of the goods and services purchased by the typical urban family of four.

measuring inflation18
Measuring Inflation

CPI =

Don’t Miscalculate the Inflation Rate

measuring inflation19
Measuring Inflation
  • Is the CPI Accurate?
    • Substitution bias.
    • Increase in quality bias.
    • New product bias.
    • Outlet bias.
measuring inflation20
Measuring Inflation

The Producer Price Index

Producer price index (PPI) An average of the prices received by producers of goods and services at all stages of the production process.

using price indexes to adjust for the effects of inflation
Using Price Indexes to Adjust for the Effects of Inflation

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LEARNING OBJECTIVE

Value in 2004 dollars = Value in 1980 dollars

Falling Real Wages at Lucent

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5

LEARNING OBJECTIVE

  • Calculating Real Average Hourly Earnings
real versus nominal interest rates
Real versus Nominal Interest Rates

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LEARNING OBJECTIVE

Nominal interest rate The stated interest rate on a loan.

Real interest rate The nominal interest rate minus the inflation rate.

Deflation A decline in the price level.

real versus nominal interest rates24
Real versus Nominal Interest Rates

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Nominal and Real Interest Rates, 1970-2004

does inflation impose costs on the economy
Does Inflation Impose Costs on the Economy?

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LEARNING OBJECTIVE

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

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  • Why a Lower Inflation Rate Is Like a Tax Cut for Lucent’s Bondholders

A lower inflation rate is like a tax cut for investors.

slide27
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