Chapter 6

UnemploymentAnd Inflation

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Learning Objectives

1. Define these concepts: the labor force, the labor force participation rate, and the unemployment rate.

2. Distinguish between cyclical, structural, and frictional unemployment.

3. Describe the costs of unemployment.4. Discuss how the Consumer Price Index is calculated.5. Explain the difference between inflation and the

price level. 6. Summarize the costs of anticipated and

unanticipated inflation.

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● The Unemployed: Individuals who do not currently have a job but are actively looking for work.

Actively looking is critical

How Is Unemployment Defined and Measured?

6.1 EXAMINING UNEMPLOYMENT

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● labor forceThe total number of workers, both the employed and the unemployed.

How Is Unemployment Defined and Measured?

● unemployment rateThe percentage of the labor force that is unemployed.

6.1 EXAMINING UNEMPLOYMENT (cont.)

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● labor force participation rateThe percentage of the population over 16 years of age that is in the labor force.

How Is Unemployment Defined and Measured?

6.1 EXAMINING UNEMPLOYMENT (cont.)

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How Is Unemployment Defined and Measured?

FIGURE 6.1Unemployment Data, March 2012

Approximately 64 percent of the civilian population is in the labor force. The unemployment rate in March 2012 was 8.2 percent.SOURCE: Bureau of Labor Statistics, U.S. Department of Labor, 2012.

6.1 EXAMINING UNEMPLOYMENT (cont.)

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How Is Unemployment Defined and Measured?

FIGURE 6.2Unemployment Rates in Developed Countries

Among the developed countries, unemployment rates vary substantially.

SOURCE: The Economist , April 7, 2012.

6.1 EXAMINING UNEMPLOYMENT (cont.)

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Who Are the Unemployed?FIGURE 6.4Selected U.S. Unemployment Statistics, Unemployment Rates for March 2012

The incidence of unemployment differs sharply among demographic groups.SOURCE: Bureau of Labor Statistics, U.S. Department of Labor, 2012.

6.1 EXAMINING UNEMPLOYMENT (cont.)

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Who Are the Unemployed?

● seasonal unemploymentThe component of unemployment attributed to seasonal factors.

6.1 EXAMINING UNEMPLOYMENT (cont.)

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Types of Unemployment: Cyclical, Frictional, and Structural

● cyclical unemploymentUnemployment that occurs during fluctuations in real GDP.

● frictional unemploymentUnemployment that occurs with the normal workings of the economy, such as workers taking time to search for suitable jobs and firms taking time to search for qualified employees.

● structural unemploymentUnemployment that occurs when there is a mismatch of skills and jobs.

6.2 CATEGORIES OF UNEMPLOYMENT

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The Natural Rate of Unemployment

● natural rate of unemploymentThe level of unemployment at which there is no cyclical unemployment. It consists of only frictional and structural unemployment.

● full employmentThe level of unemployment that occurs when the unemployment rate is at the natural rate.

6.2 CATEGORIES OF UNEMPLOYMENT (cont.)

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● unemployment insurancePayments unemployed people receive from the government.

6.3 THE COSTS OF UNEMPLOYMENT

SOURCE: Bureau of Labor Statistics, U.S. Department of Labor, 2012.

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The CPI versus the Chain Index for GDP

FIGURE 6.5Components of the Consumer Price Index (CPI)Rent and food and beverages make up 44 percent of the CPI basket. The remainder consists of other goods and services. SOURCE: Bureau of Labor Statistics, U.S. Department of Labor, 2006.

6.4 THE CONSUMER PRICE INDEX AND THE COST OF LIVING (cont.)

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Problems in Measuring Changes in Prices

● cost-of-living adjustments (COLAs)Automatic increases in wages or other payments that are tied to the CPI.

6.4 THE CONSUMER PRICE INDEX AND THE COST OF LIVING (cont.)

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● inflation rateThe percentage rate of change in the price level.

inflation rate = percentage rate of change of a price index

6.5 INFLATION

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6.5 INFLATION (cont.)Historical U.S. Inflation Rates

SOURCES: Scott Derks, The Value of a Dollar 1860–1989 (Farmington Hills, MI: Gale Group, 1993) and author’s research and estimates.

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The Perils of Deflation

● deflationNegative inflation or falling prices of goods and services.

6.5 INFLATION (cont.)

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● anticipated inflationInflation that is expected.

● unanticipated inflationInflation that is not expected.

6.6 THE COSTS OF INFLATIONHistorical U.S. Inflation Rates

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Anticipated Inflation

● menu costsThe costs associated with changing prices and printing new price lists when there is inflation.

● shoe-leather costsCosts of inflation that arise from trying to reduce holdings of cash.

● hyperinflationAn inflation rate exceeding 50 percent per month.

Unanticipated Inflation

6.6 THE COSTS OF INFLATION (cont.)

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anticipated inflation

Consumer Price Index (CPI)

cost-of-living adjustments (COLAs)

cyclical unemployment

deflation

discouraged workers

frictional unemployment

full employment

hyperinflation

inflation rate

labor force

labor force participation rate

menu costs

natural rate of unemployment

seasonal unemployment

shoe-leather costs

structural unemployment

unanticipated inflation

unemployment insurance

unemployment rate

K E Y T E R M S