CH 19

CHAPTER
19
Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation
Prepared by: Fernando Quijano and Yvonn Quijano
2004 Prentice Hall Business Publishing
Principles of Economics, 7/e
Karl Case, Ray Fair
C H A P T E R 19: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation
Long-Run Output and Productivity Growth

An ideal economy is one in which there is:
rapid growth of output per worker, low unemployment, and low inflation.
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The average growth rate of output in the economy since 1900 has been about 3.4 percent per year. An area of economics called growth theory is concerned with the question of what determines this rate.
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There are a number of ways to increase output. An economy can:
Add more workers
Add more machines

Increase the length of the workweek Increase the quality of the workers Increase the quality of the machines
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Output per worker hour is called labor productivity.
For the 1952-2000 period, labor productivity exhibits:
an upward trend, and fairly sizable fluctuations around that trend.
The growth rate was much higher in the 1950s and 1960s than it has been since the early 1970s.
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Output per Worker Hour (Productivity), 1952-2003
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Part of the reason for the upward trend in productivity is an increase in the amount of capital per worker. With more capital per worker, more output can be produced per year.
The other reason productivity has increased is that the quality of labor and capital has been increasing.
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Capital per Worker, 1952-2003
Capital per worker grew until about 1980 and then leveled off.

A harder question to answer is why has productivity grown more slowly since the early 1970s. The growth of the Internet, which brings about an increase in the quality of capital, should lead to a new age of productivity growth.
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Recessions, Depressions, and Unemployment

The business cycle describes the periodic ups and downs in the economy, or deviations of output and employment away from the longrun trend.
A recession is roughly a period in which real GDP declines for at least two consecutive quarters. It is marked by falling output and rising unemployment.
Recessions, Depressions, and Unemployment

A depression is a prolonged and deep recession. The precise definitions of prolonged and deep are debatable.
Capacity utilization rates, which show the percentage of factory capacity being used in production, are one indicator of a recession.
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Real GDP and Unemployment Rates, 1929-1933 and 1980-1982

THE EARLY PART OF THE GREAT DEPRESSION, 19291933
YEAR 1929 1930 1931 1932 1933 PERCENTAGE CHANGE IN REAL GDP -8.6 -6.4 -13.0 -1.4 UNEMPLOYMENT RATE 3.2 8.9 16.3 24.1 25.2 NUMBER OF UNEMPLOYED (MILLIONS) 1.5 4.3 8.0 12.1 12.8
Note: Percentage fall in real GDP between 1929 and 1933 was 26.6 percent.
THE RECESSION OF 19801982

PERCENTAGE CHANGE IN REAL GDP -0.2 2.5 -2.0 UNEMPLOYMENT RATE 5.8 7.1 7.6 9.7 NUMBER OF UNEMPLOYED (MILLIONS) 6.1 7.6 8.3 10.7 CAPACITY UTILIZATION (PERCENTAGE) 85.2 80.9 79.9 72.1
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YEAR 1979 1980 1981 1982
Note: Percentage increase in real GDP between 1979 and 1982 was 0.1 percent. Sources: Historical Statistics of the United States and U.S. Department of Commerce, Bureau of Economic Analysis.
Karl Case, Ray Fair
Defining and Measuring Unemployment
The most frequently discussed symptom of a recession is unemployment.

An employed person is any person 16 years old or older:
1.
who works for pay, either for someone else or in his or her own business for 1 or more hours per week, who works without pay for 15 or more hours per week in a family enterprise, or who has a job but has been temporarily absent, with or without pay.
2. 3.

An unemployed person is a person 16 years old or older who:
1. 2. 3.
is not working, is available for work, and has made specific efforts to find work during the previous 4 weeks.
A person who is not looking for work, either because he or she does not want a job or has given up looking, is not in the labor force.
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labor force = employed + unemployed population = labor force + not in labor force
unemployed unemployment rate = employed + unemployed
labor force labor force participation rate = population
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Computing the unemployment rate for the month of July 2003:
Labor force: 141.39 million
Employed: 133.47 million

Unemployed: 7.92 million
unemployment rateJuly 2003
7.92 = 5.6% 133.47 + 7.92
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Employed, Unemployed, and the Labor Force, 1953-2002

Employed, Unemployed, and the Labor Force, 19532002
(1)
POPULATION 16 YEARS OLD OR OVER (MILLIONS)
(2)
LABOR FORCE (MILLIONS)
(3)
EMPLOYED (MILLIONS)
(4)
UNEMPLOYED (MILLIONS)
(5)
LABOR-FORCE PARTICIPATION RATE
(6)
UNEMPLOYMENT RATE
1953 1960 1970 1980 1982 1990
107.1 117.2 137.1 167.7 172.3 189.2
63.0 69.6 82.8 106.9 110.2 125.8
61.2 65.8 78.7 99.3 99.5 118.8
1.8 3.9 4.1 7.6 10.7 7.0
58.9 59.4 60.4 63.8 64.0 66.5
2.9 5.5 4.9 7.1 9.7 5.6
2002
211.9
141.8
135.1
6.7
66.9
4.7
Note: Figures are civilian only (military excluded). Source: Economic Report of the President, 2003, Table B-35.
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Unemployment Rates for Different Demographic Groups

Unemployment Rates by Demographic Group, 1982 and 2003 YEARS Total NOVEMBER 1982 10.8 JULY 2003 4.2
White Men
Women African-American Men
20+ 1619 20+ 1619
9.6 9.0 22.7 8.1 19.7

20.2 19.3 52.4 16.5 46.3
3.6 2.6 11.7 3.5 10.2

8.6 7.1 28.5 7.0 27.2
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Women
20+ 1619 20+ 1619
Source: U.S. Department of Labor, Bureau of Labor Statistics. Data are not seasonally adjusted.
Regional Differences in Unemployment

Regional Differences in Unemployment, 1975, 1982, 1991, and 2003
1975
U.S. avg. Cal. Fla. 8.5 9.9 10.7
1982
9.7 9.9 8.2
1991
6.7 7.5 7.3
2003
5.8 6.6 5.2
Ill.
Mass. Mich. N.J. N.Y. N.C. Ohio Tex.
7.1
11.2 12.5 10.2 9.5 8.6 9.1 5.6
11.3
7.9 15.5 9.0 8.6 9.0 12.5 6.9
7.1
9.0 9.2 6.6 7.2 5.8 6.4 6.6
6.5
5.6 6.6 5.7 6.1 5.8 6.0 6.6
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Sources: Statistical Abstract of the United States, various editions.
The Discouraged-Worker Effect

The discouraged-worker effect lowers the unemployment rate. Discouraged workers are people who want to work but cannot find jobs. They grow discouraged and stop looking for work, thus dropping out of the ranks of the unemployed and the labor force.
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The Duration of Unemployment

Average Duration of Unemployment, 19792002
YEAR WEEKS YEAR WEEKS
1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
10.8 11.9 13.7 15.6 20.0 18.2 15.6 15.0 14.5 13.5 11.9 12.0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
13.7 17.7 18.0 18.8 16.6 16.7 15.8 14.5 13.4 12.6 13.2
Sources: U.S. Department of Labor, Bureau of Labor Statistics.
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Types of Unemployment
Frictional unemployment is the portion of unemployment that is due to the normal working of the labor market; used to denote short-run job/skill matching problems.
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Structural unemployment is the portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries.
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Cyclical unemployment is the increase in unemployment that occurs during recessions and depressions.
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The natural rate of unemployment is the unemployment that occurs as a normal part of the functioning of the economy. Sometimes taken as the sum of frictional unemployment and structural unemployment.
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The Benefits of Recessions

Recessions may help to reduce inflation.
Some argue that recessions may increase efficiency by driving the least efficient firms out of business and by forcing surviving firms to trim waste and manage their resources better.
Also, a recession leads to a decrease in the demand for imports, which improves a nations balance of payments.
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Two Serious Inflationary Periods Since 1970

Inflation Rates, 19741976 and 19801983 RECESSION BEGINS 1974 1975 1976 1980 1981 1982 1983
Source: See Table 19.8.
INFLATION RATE 11.0 9.1 5.8 13.5 10.3 6.2 3.2
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Inflation
Inflation is an increase in the overall price level.
Deflation is a decrease in the overall price level. Sustained inflation is an increase in the overall price level that continues over a significant period.
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Inflation and the Business Cycle

Inflation During Three Expansions INFLATION RATE
1972 1973 1974 1976 1977 1978 1979 1980 1984 1985 1986 1987 1988 1989
Source: See Table 19.8.
3.2 6.2 11.0 5.8 6.5 7.6 11.3 13.5 4.3 3.6 1.9 3.6 4.1 4.8
Price Indexes
Price indexes are used to measure overall price levels. The price index that pertains to all goods and services in the economy is the GDP price index. The consumer price index (CPI) is a price index computed each month by the Bureau of Labor Statistics using a bundle that is meant to represent the market basket purchased monthly by the typical urban consumer.
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Price Indexes
The consumer price index (CPI) is the most popular fixed-weight price index. One version of the CPI is the Chained Consumer Price Index, which uses changing weights. The CPI differs from the GDP deflator in important ways.
Price Indexes
Recreation 5.9% Medical Care 6.0% Transportation 17.3% Apparel 4.2% Housing 40.9% Education and Communication 5.8%
Other Goods and Services 4.3% Food and Beverages 15.6%
The CPI market basket shows how a typical consumer divides his or her money among various goods and services.
The Consumer Price Index (CPI)

The CPI, 19502002
YEAR 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967
PERCENTAGE CHANGE IN CPI 1.3 7.9 1.9 0.8 0.7 -0.4 1.5 3.3 2.8 0.7 1.7 1.0 1.0 1.3 1.3 1.6 2.9 3.1
CPI 24.1 26.0 26.5 26.7 26.9 26.8 27.2 28.1 28.9 29.1 29.6 29.9 30.2 30.6 31.0 31.5 32.4 33.4
YEAR 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985
PERCENTAGE CHANGE IN CPI 4.2 5.5 5.7 4.4 3.2 6.2 11.0 9.1 5.8 6.5 7.6 11.3 13.5 10.3 6.2 3.2 4.3 3.6
CPI 34.8 36.7 38.8 40.5 41.8 44.4 49.3 53.8 56.9 60.6 65.2 72.6 82.4 90.9 96.5 99.6 103.9 107.6
YEAR 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
PERCENTAGE CHANGE IN CPI 1.9 3.6 4.1 4.8 5.4 4.2 3.0 3.0 2.6 2.8 3.0 2.3 1.6 2.2 3.4 2.8
CPI 109.6 113.6 118.3 124.0 130.7 136.2 140.3 144.5 148.2 152.4 156.9 160.5 163.0 166.6 172.2 177.1
Sources: Bureau of Labor Statistics, U.S. Department of Labor.
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Price Indexes
Other popular price indexes are producer price indexes (PPIs), which measure price changes for products at all stages in the production process.
The three main categories are:
finished goods, intermediate materials, and crude materials.
The Costs of Inflation

Peoples income increases during inflations, when most prices, including input prices, tend to rise together.
Inflation changes the distribution of income. People living on fixed incomes are particularly hurt by inflation.
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The benefits received by many retired workers, including social security, are fully indexed to inflation. When prices rise, benefits rise.
The poor have not fared so well. Welfare benefits are not indexed and have not kept pace with inflation.
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Unanticipated inflationan inflation that takes people by surprisecan hurt creditors. Inflation that is higher than expected benefits debtors; inflation that is lower than expected benefits creditors. The real interest rate is the difference between the interest rate on a loan and the inflation rate.

Inflation creates administrative costs and inefficiencies. Without inflation, time could be used more efficiently. The opportunity cost of holding cash is high during inflations. People therefore hold less cash and need to stop at the bank more often. People are not fully informed about price changes and may make mistakes that lead to a misallocation of resources.

Some people consider inflation to be our public enemy number one. Elected leaders have vigorously pursued policies designed to stop inflation. The recessions of 1974 to 1975 and 1980 to 1982 were the price we had to pay to stop inflation. Stopping inflation is costly.
Review Terms and Concepts

consumer price index (CPI) cyclical unemployment deflation depression natural rate of unemployment not in the labor force producer price indexes (PPIs) real interest rate
discouraged-worker effect
employed frictional unemployment inflation labor force labor-force participation rate
recession
structural unemployment sustained inflation unemployed unemployment rate
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CHAPTER

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

Long-Run Output and Productivity Growth

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

Long-Run Output and Productivity Growth

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

Long-Run Output and Productivity Growth

Add more machines

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

Long-Run Output and Productivity Growth

2004 Prentice Hall Business Publishing

Output per Worker Hour (Productivity), 1952-2003

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

Long-Run Output and Productivity Growth

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

Capital per Worker, 1952-2003

2004 Prentice Hall Business Publishing

Long-Run Output and Productivity Growth

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

Recessions, Depressions, and Unemployment

2004 Prentice Hall Business Publishing

Recessions, Depressions, and Unemployment

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

Real GDP and Unemployment Rates, 1929-1933 and 1980-1982

THE RECESSION OF 19801982

YEAR 1979 1980 1981 1982

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

Defining and Measuring Unemployment

The most frequently discussed symptom of a recession is unemployment.

2004 Prentice Hall Business Publishing

Defining and Measuring Unemployment

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

Defining and Measuring Unemployment

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e

Karl Case, Ray Fair

Defining and Measuring Unemployment

Employed: 133.47 million

unemployment rateJuly 2003

7.92 = 5.6% 133.47 + 7.92

2004 Prentice Hall Business Publishing

Principles of Economics, 7/e