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Chapter 13

Copyright © by Houghton Mifflin Harcourt Publishing Company

Facing Economic Challenges


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Chapter 13

KEY CONCEPT• Unemployment has a variety of causes. Some level of unemployment is expected, even

when an economy is healthy.

Chapter 13: Facing Economic Challenges

WHY THE CONCEPT MATTERS• As the nation goes through business cycles, it faces the problems of unemployment and

inflation. Persistent unemployment can lead to poverty. During periods of inflation, wages buy less.


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Section-1

Unemployment in Today’s Economy Measuring Unemployment

KEY CONCEPTS • Closing or scaling back by large employers has major impact — unemployed cannot buy as many goods and services — other local businesses may decrease output, lay off workers — widespread unemployment across country can reduce production and GDP• Unemployment rate—percent of labor force jobless and looking for work


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The Unemployment Rate • Civilian labor force—people over 16 who are working, looking for work• Bureau of Labor Statistics determines unemployment rate — divides number of unemployed workers by total in civilian labor force — does not count discouraged who have stopped looking or underemployed• Underemployed—work part-time, want full-time or work below skill level

Measuring Unemployment


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Full Employment • Full employment—no unemployment caused by decreased economic activity • Always some degree of unemployment: — people relocate; look for better job; can’t find appropriate job • Unemployment rate of 4 to 6 percent considered full employment in U.S. — other rates in countries with different labor markets, economic policies

Measuring Unemployment


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KEY CONCEPTS • Frictional unemployment—temporary, experienced by people changing jobs • Seasonal unemployment—due to seasonal work • Structural unemployment—jobs exist but workers not qualified • Cyclical unemployment—caused by decreased activity in business cycle

Types of Unemployment


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Type 1: Frictional Unemployment • Frictional unemployment not a threat to economic stability. Includes: — Childrearing parents returning to work — new college graduates looking for first job — experienced workers who want to switch jobs• Reflects workers’ freedom to find best job for them at highest wage



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Type 2: Seasonal Unemployment • Demand for some jobs changes dramatically from season to season — construction work falls off in winter — tourism peaks at certain times of year; varies by region — migrant farm work drops off in winter; migrant families suffer



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Type 3: Structural Unemployment • As businesses become more efficient, require fewer workers — new technologies replace workers or require them to retrain — new industries requiring specialized education do not employ unskilled — change in consumer demand can shift type of workers needed — offshore outsourcing sometimes leaves people out of work



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Type 4: Cyclical Unemployment • Employers lay off workers during low points in business cycle• During recession, hard to find new jobs since demand for labor drops• Unemployment period varies by type; average relatively short — over one third of unemployed find work in five weeks or less



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The Impact of Unemployment

KEY CONCEPTS • Excessive, persistent unemployment inefficient—wastes human resources • Promotes inequality since least experienced lose jobs first — also fewer jobs means fewer opportunities to advance • Discourages workers who lose faith in ability to find good job — underemployed lose motivation to do good work


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Reviewing Key Concepts

Explain the relationship between the terms in each of these pairs:• frictional unemployment and structural unemployment• seasonal unemployment and cyclical unemployment


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Section-2

Poverty and Income Distribution What Is Poverty?

KEY CONCEPTS • Poverty—lack of income, resources to have minimum standard of living • No universal standard for poverty; varies from country to country• Poverty threshold—official minimum income to pay for basic needs — set by government


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What Is Poverty?

The Poverty Threshold • People considered in poverty if income falls below poverty threshold• Also called the poverty line• Calculated based on costs of nutritious food, other necessities — differs by size of household — adjusted annually


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What Is Poverty?

The Poverty Rate • Poverty rate—percent of people in households below poverty threshold — based on population as a whole • Poverty does not hit all sectors of society equally. Most at risk: — Children, minorities; inner-city, rural, and single–mother families


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The Problem of Poverty

KEY CONCEPTS • About half of world’s population of 6 billion live in poverty• In U.S., 40 million live below poverty line• Good economic times may not move large numbers out of poverty


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Factors Affecting Poverty • Education—the higher the level of education, the higher the income• Discrimination against minorities, women — sometimes face wage discrimination, occupational segregation • Demographic trends—single-parent families have more economic problems • Change from manufacturing to service jobs has resulted in lower wages for low-skilled

workers


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Income Distribution • Income distribution—how income is divided among people in a nation • Income inequality—unequal distribution of income; some always exists• Lorenz curve shows degree of income inequality in a nation — the more it dips away from diagonal line, the greater the inequality


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Antipoverty Programs

KEY CONCEPTS • In 1964, President Lyndon Johnson declared war on poverty• Welfare—economic, social programs providing assistance to the needy — some criticized for wasting government funds, harming recipients • Now government also uses tax breaks, grants, job training, self-help


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Programs for Low-Income Households • Food stamp program gives card, government deposits funds in account — card can be used only to buy food at grocery stores • Medicaid offers health care; funded by federal and state governments• Earned-income tax credit—refunds taxes deducted from paychecks — money usually spent in own communities, helping boost their economies



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General Programs • Social Security program pays benefits to retirees, survivors, disabled• Medicare is government health insurance for seniors• Unemployment insurance helps laid-off workers while looking for job• Social Security, Medicare funded by payroll taxes; reduced poverty • Unemployment insurance paid mostly by taxes on employer



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Other Programs • Some programs supplement the largest programs, including: — Community Services Block Grants, job training, Empowerment Zones • In 1996, federal welfare programs changed to welfare-to-work — workfare requires welfare recipients to do some work — Temporary Assistance for Needy Families has five-year limit


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Hernando de Soto: Another Path out of Poverty

Prosperity Through Property Rights • In many countries, poor have assets, lack property rights• Estimates 4 billion people are shut out of the formal economy — outdated, complex laws prevent them for owning their homes, businesses • Says that until legal systems change, poor will use informal economy — bringing them into formal economy could lift nations out of poverty


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Explain the relationship between the terms in each of these pairs: • poverty threshold and poverty rate• income distribution and income inequality• welfare and workfare


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Section-3

Causes and Consequences of InflationWhat Is Inflation and How Is It Measured?

KEY CONCEPTS • Inflation—defined two ways — sustained rise in the level of prices generally — sustained fall in the purchasing power of money


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What Is Inflation and How Is It Measured?

Consumer Price Index • Consumer price index (CPI) measures changes in prices of products • U.S. government surveys people to learn what they buy regularly — creates a “market basket” of about 400 typical products — each month researches current prices of these items — compares prices to reference base, years 1982 to 1984


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Producer Price Index • Producer price index (PPI) measures changes in wholesale prices — reflects prices producers get for goods; tied to a reference base• Over 10,000 PPIs for individual products and groups of products• Inflation rate—rate of change in prices over a set period of time• PPI tends to lead CPI as indicator of inflation


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Types of Inflation • Moderate rate of inflation—between 1 and 3 percent per year• Creeping inflation—moderate inflation over a period of time• Galloping inflation—rapid increase• Hyperinflation—over 50 percent per month • Deflation—decrease in general price level; happens rarely


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What Causes Inflation?

KEY CONCEPTS • Demand-pull inflation—total demand rises faster than production • Cost-push inflation—increases in production costs push up prices


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Demand-Pull Inflation • If total demand rises faster than production, it creates scarcity — producers need time to recognize demand, gear up for higher production — during lag period, demand pushes up prices for available products• Too much money printed during lag period will drive prices up



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Cost-Push Inflation • When production costs increase, producers make less profit — if demand is strong, may raise prices to maintain profits • Cost-push inflation may be due to higher price of materials, energy• Wages can be large part of production costs; wage-price spiral: — higher wages lead to higher costs, which lead to higher prices, which lead to higher wages


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What Is the Impact of Inflation?

KEY CONCEPTS • Since 1960s, inflation has had significant impact on U.S. economy — limited stock market growth, increased agricultural bankruptcies • For individuals and economy as a whole — reduced purchasing power of the dollar — raised interest rates


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Effect 1: Decreasing Value of the Dollar • Rising consumer price index represents declining value of the dollar• People on a fixed income are especially vulnerable — each dollar they have buys less every year • Inflation helps people who borrow at a fixed rate of interest — pay debts with dollars that are worth less, so repayments are smaller


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Effect 2: Increasing Interest Rates • Lenders raise interest rates to ensure profit on loans • Businesses avoid borrowing to expand or make capital improvements• Consumers less likely to finance high-priced items• Monthly credit card payments go up as rates rise


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Effect 3: Decreasing Real Returns on Savings • Interest on savings tends to increase during inflationary times — but rate of inflation tends to outpace interest rates • Inflation worries people about drop in standard of living, retirement


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Explain the relationship between the terms in each of these pairs: • consumer price index and producer price index• hyperinflation and deflation• demand-pull inflation and cost-push inflation


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Background• In the 1970s, the United States experienced the longest period of inflation in its history. By

1979, inflation had risen to 10 percent per year or higher. Prices of consumer goods rose dramatically. Those on fixed incomes were particularly affected.

What’s the Issue?• How did inflation affect people and businesses in the 1970s?

Thinking Economically• Name one example from each document that shows how inflation has a negative impact on

the economy.• Inflation is a general rise in price levels. Are the examples of price increases in documents B

and C symptoms of inflation or isolated price increases?• Compare the tone of documents A and C. Do economists care as much about inflation as

consumers? Explain.

The Effects of Inflation in the 1970s


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level of unemployment

employmentno unemployment

problems of unemployment

degree of unemployment

persistent unemployment

unemployment key concepts

key concept unemployment

seasonal unemployment