CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

PowerPoint Lectures for Principles of Economics, 9e

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By

Karl E. Case, Ray C. Fair & Sharon M. Oster

2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster

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 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

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PART IV CONCEPTS AND PROBLEMS

IN MACROECONOMICS

Unemployment, Inflation, and Long-Run Growth

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Prepared by: Fernando & Yvonn Quijano

2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster

PART IV CONCEPTS AND PROBLEMS

IN MACROECONOMICS

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

Unemployment, Inflation, and Long-Run Growth

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CHAPTER OUTLINE
Unemployment Measuring Unemployment Components of the Unemployment Rate The Costs of Unemployment Inflation The Consumer Price Index The Costs of Inflation Long-Run Growth Output and Productivity Growth Looking Ahead

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Unemployment
Measuring Unemployment

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

employed 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, (2) who works without pay for 15 or more hours per week in a family enterprise, or (3) who has a job but has been temporarily absent with or without pay. unemployed A person 16 years old or older who is not working, is available for work, and has made specific efforts to find work during the previous 4 weeks.

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Unemployment
Measuring Unemployment

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

not in the labor force A person who is not looking for work because he or she does not want a job or has given up looking. labor force The number of people employed plus the number of unemployed.

labor force = employed + unemployed

population = labor force + not in labor force

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Unemployment
Measuring Unemployment

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

unemployment rate The ratio of the number of people unemployed to the total number of people in the labor force.

unemployment rate =

unemployed employed + unemployed

labor force participation rate The ratio of the labor force to the total population 16 years old or older.

labor force participation rate =

labor force population

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Unemployment
Measuring Unemployment
TABLE 22.1 Employed, Unemployed, and the Labor Force, 19532007
CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

(1) Population 16 Years Old Or Over (Millions) 1953 1960 1970 1980 1982 1990 2000 2007 107.1 117.2 137.1 167.7 172.3 189.2 212.6 231.9

(2)

(3)

(4)

(5) Labor Force Participation Rate (Percentage Points) 58.9 59.4 60.4 63.8 64.0 66.5 67.1 66.0

(6) Unemployment Rate (Percentage Points) 2.9 5.5 4.9 7.1 9.7 5.6 4.0 4.6

Labor Force (Millions) 63.0 69.6 82.8 106.9 110.2 125.8 142.6 153.1

Employed (Millions) 61.2 65.8 78.7 99.3 99.5 118.8 136.9 146.0

Unemployed (Millions) 1.8 3.9 4.1 7.6 10.7 7.0 5.7 7.1

Note: Figures are civilian only (military excluded). Source: Economic Report of the President, 2008, Table B-35.

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Unemployment
Components of the Unemployment Rate Unemployment Rates for Different Demographic Groups
CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

TABLE 22.2 Unemployment Rates by Demographic Group, 1982 and 2008

Years Total White Men Women Both sexes African-American Men Women Both sexes Nov. 1982 10.8 9.6 9.0 8.1 21.3 20.2 19.3 16.5 49.5 March 2008 5.2 4.5 4.1 4.1 13.2 9.0 8.4 7.5 31.3

20+ 20+ 1619 20+ 20+ 1619

Source: U.S. Department of Labor, Bureau of Labor Statistics. Data are not seasonally adjusted.

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Unemployment
Components of the Unemployment Rate Unemployment Rates in States and Regions
CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

TABLE 22.3 Regional Differences in Unemployment, 1975, 1982, 1991, and 2003 U.S. avg. Cal. Fla. Ill. Mass. Mich. N.J. N.Y. N.C. Ohio Tex. 1975 8.5 9.9 10.7 7.1 11.2 12.5 10.2 9.5 8.6 9.1 5.6 1982 9.7 9.9 8.2 11.3 7.9 15.5 9.0 8.6 9.0 12.5 6.9 1991 6.7 7.5 7.3 7.1 9.0 9.2 6.6 7.2 5.8 6.4 6.6 2003 6.0 6.7 5.1 6.7 5.8 7.3 5.9 6.3 6.5 6.1 6.8

Sources: Statistical Abstract of the United States, various editions.

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Unemployment
Components of the Unemployment Rate Unemployment Rates in States and Regions
CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

A Quiet Revolution: Women Join the Labor Force

If you are interested in learning more about the economic history of American women, read the book Understanding the Gender Gap: An Economic History of American Women by Harvard University economist Claudia Goldin.

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Unemployment
Components of the Unemployment Rate Discouraged-Worker Effects
CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

discouraged-worker effect The decline in the measured unemployment rate that results when people who want to work but cannot find jobs grow discouraged and stop looking, thus dropping out of the ranks of the unemployed and the labor force.

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Unemployment
Components of the Unemployment Rate The Duration of Unemployment
CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

TABLE 22.4 Average Duration of Unemployment, 19792007

Weeks 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 10.8 11.9 13.7 15.6 20.0 18.2 15.6 15.0 14.5 13.5 11.9 12.0 13.7 17.7 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Weeks 18.0 18.8 16.6 16.7 15.8 14.5 13.4 12.6 13.1 16.6 19.2 19.6 18.4 16.8 16.8
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Sources: U.S. Department of Labor, Bureau of Labor Statistics.

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Unemployment
The Costs of Unemployment Some Unemployment Is Inevitable
CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

When we consider the various costs of unemployment, it is useful to categorize unemployment into three types:

Frictional unemployment Structural unemployment Cyclical unemployment

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Unemployment
The Costs of Unemployment Frictional, Structural, and Cyclical Unemployment
CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

frictional unemployment The portion of unemployment that is due to the normal working of the labor market; used to denote short-run job/skill matching problems. structural unemployment 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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Unemployment
The Costs of Unemployment Frictional, Structural, and Cyclical Unemployment
CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

natural rate of unemployment 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.
cyclical unemployment The increase in unemployment that occurs during recessions and depressions.

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Unemployment
The Costs of Unemployment Social Consequences
CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

In addition to economic hardship, prolonged unemployment may also bring with it social and personal ills: anxiety, depression, deterioration of physical and psychological health, drug abuse (including alcoholism), and suicide.

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Inflation
The Consumer Price Index

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

consumer price index (CPI) 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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Inflation
The Consumer Price Index

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

FIGURE 22.1 The CPI Market Basket The CPI market basket shows how a typical consumer divides his or her money among various goods and services. Most of a consumers money goes toward housing, transportation, and food and beverages.
Source: The Bureau of Labor Statistics

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Inflation
The Consumer Price Index
TABLE 22.5 The CPI, 19502007
CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968

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 4.2

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 34.8

1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

Percentage Change in CPI 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 1.9 3.6

CPI 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 99.6 103.9 107.6 109.6 113.6

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Percentage Change in CPI 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 1.6 2.3 2.7 3.4 3.2 2.8

CPI 118.3 124.0 130.7 136.2 140.3 144.5 148.2 152.4 156.9 160.5 163.0 166.6 172.2 177.1 179.9 184.0 188.9 195.3 201.6 207.3
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Sources: Bureau of Labor Statistics, U.S. Department of Labor.

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Inflation
The Consumer Price Index

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

producer price indexes (PPIs) Measures of prices that producers receive for products at all stages in the production process.
The indexes are calculated separately for various stages in the production process. The three main categories are finished goods, intermediate materials, and crude materials, although there are subcategories within each of these categories.

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Inflation
The Costs of Inflation Inflation May Change the Distribution of Income
CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

real interest rate The difference between the interest rate on a loan and the inflation rate.
The indexes are calculated separately for various stages in the production process. The three main categories are finished goods, intermediate materials, and crude materials, although there are subcategories within each of these categories.

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Inflation
The Costs of Inflation Administrative Costs and Inefficiencies
CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

There may also be costs associated even with anticipated inflation. One is the administrative cost associated with simply keeping up.

Public Enemy Number One? Economists have debated the seriousness of the costs of inflation for decades. No matter what the real economic cost of inflation, people do not like it.

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Long-Run Growth

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

output growth The growth rate of the output of the entire economy.

per-capita output growth The growth rate of output per person in the economy.

productivity growth The growth rate of output per worker.

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Long-Run Growth
Output and Productivity Growth

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

FIGURE 22.2 Output per Worker Hour (Productivity), 1952 I2007 IV Productivity grew much faster in the 1950s and 1960s than since.

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Long-Run Growth
Output and Productivity Growth

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

FIGURE 22.3 Capital per Worker, 1952 I2007 IV Capital per worker grew until about 1980 and then leveled off somewhat.

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REVIEW TERMS AND CONCEPTS

consumer price index (CPI)

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

producer price indexes (PPIs) productivity growth real interest rate structural unemployment unemployed unemployment rate

cyclical unemployment discouraged-worker effect employed frictional unemployment labor force

labor force participation rate

natural rate of unemployment not in the labor force output growth

1. Labor force = employed + unemployed

2. Population = labor force + not in labor force
unemployed employed unemployed

3. Unemployme nt rate

per-capita output growth

4. Labor force participat ion rate labor force
population

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