Monitoring Jobs and Inflation

Chapter 5
Employment and Unemployment
Why Unemployment Is a Problem
Unemployment is a serious personal and social economic problem for two main
reasons. It results in
• Lost incomes and production
• Lost human capital
Employment and Unemployment
The working-age population is the total number of people aged 16
years and over who are not in jail, hospital, or some other form of
institutional care.

The working-age population is divided into two groups: those in the labor force
and those not in the labor force.

The labor force is the sum of the employed and the unemployed.
Employment and Unemployment
• To be counted as employed a person must have either a full-time job or a part-time
job.

• To be counted as unemployed, a person must be available for work and must be in

one of three categories:
➢Without work but has made specific efforts to find a job within the
previous four weeks

➢Waiting to be called back to a job from which he or she has been laid off.

➢Waiting to start a new job within 30 days.

Employment and Unemployment

Working Age
Population

Not in Labor
Labor Force
Force

Employed Unemployed
Three Labor Market Indicators
Three indicators of the state of the labor market.
1. The unemployment rate
2. The employment-to-population ratio
3. The labor force participation rate
Unemployment Rate
• The amount of unemployment is an indicator of the extent to
which people who want jobs can’t find them.

• The unemployment rate is the percentage of the people in the

labor force who are unemployed. That is,

𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝑷𝒆𝒐𝒑𝒍𝒆 𝑼𝒏𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒅

• Unemployment Rate = ×100
𝑳𝒂𝒃𝒐𝒓 𝑭𝒐𝒓𝒄𝒆

• Labor force = Number of people employed +Number of people

unemployed.
The Employment-to-Population Ratio
• The number of people of working age who have jobs is an indicator of both the
availability of jobs and the degree of match between people’s skills and jobs.

• The employment-to-population ratio is the percentage of people of working age

who have jobs.
That is,

Number of people employed

The Employment to Population Ratio= ×100
Working−age population
The Labor Force Participation Rate
• The number of people in the labor force is an indicator of the willingness of
people of working age to take jobs.

• The labor force participation rate is the percentage of the working-age

population who are members of the labor force. That is,

𝑳𝒂𝒃𝒐𝒓 𝑭𝒐𝒓𝒄𝒆
Labor Force Participation Rate = ×100
𝑾𝒐𝒓𝒌𝒊𝒏𝒈−𝑨𝒈𝒆 𝑷𝒐𝒑𝒖𝒍𝒂𝒕𝒊𝒐𝒏
Most Costly Unemployment
• All unemployment is costly, but the most costly is long-term unemployment that
results from job loss.

• Also, people who are unemployed because they voluntarily quit their jobs to find
better ones or because they have just entered or reentered the labor market bear
some costs of unemployment. But these costs are lower than those borne by people
who lose their job and are forced back into the job market.

• If most of the unemployed are long-term job losers, the situation is much worse than
if most are short-term voluntary job searchers.
Unemployment and full employment
Frictional Unemployment- Structural Unemployment-
The unemployment that arises from The unemployment that arises when
the normal labor turnover from changes in technology or
people entering and leaving the labor international competition change the
force and from the ongoing creation skills needed to perform jobs or
and destruction of jobs—is called change the locations of jobs is called
frictional unemployment. structural unemployment.

Cyclical unemployment-
The higher than normal unemployment
at a business cycle trough and the lower
than normal unemployment at a
business cycle peak is called cyclical
unemployment.
Unemployment and full employment
“Natural” Unemployment-
Natural unemployment is the unemployment that
arises from frictions and structural change when there
is no cyclical unemployment—when all the
unemployment is frictional and structural.
Natural unemployment as a percentage of the labor
force is called the natural unemployment rate.

Full employment is defined as a

situation in which the unemployment
rate equals the natural unemployment
rate.
Unemployment and full employment
The age distribution of the
• What determines the natural
population
unemployment rate? Is it
constant or does it change
over time?
The scale of structural change
• The natural unemployment
rate is influenced by many
factors but the most
important ones are The real wage rate (minimum
wage and efficiency wage)

Unemployment benefits
Real GDP and Unemployment Over the Cycle
✓The quantity of real GDP at full employment is potential GDP

✓Over the business cycle, real GDP fluctuates around potential GDP.

✓The gap between real GDP and potential GDP is called the output
gap.

✓As the output gap fluctuates over the business cycle, the
unemployment rate fluctuates around the natural unemployment
rate.
The Price Level, Inflation and Deflation
.
price level-
The average level of
prices.

Inflation- Deflation-
A persistently rising A persistently falling
price level is called price level is called
inflation deflation
Why Inflation and Deflation are Problems

Redistributes income

Redistributes wealth

Lowers real GDP and employment

Diverts resources from production

Hyperinflation
• If inflation becomes hyperinflation—an inflation rate of 50
percent a month or higher that grinds the economy to a halt and
causes a society to collapse.
The Consumer Price Index
Consumer Price Index (CPI), which is a measure of the average of the prices paid
by urban consumers for a fixed basket of consumer goods and services.

• The CPI tells you about the value of the money in your pocket.
Reading the CPI Numbers
• The CPI is defined to equal 100 for a period called the reference base period.
• In June 2010, the CPI was 218. This number tells us that the average of the
prices paid by urban consumers for a fixed market basket of consumer goods
and services was 118 percent higher in 2010 than it was on the average
during 1982–1984.
The Consumer Price Index
• Constructing the CPI
Constructing the CPI involves three stages:
1. Selecting the CPI basket
2. Conducting the monthly price survey
3. Calculating the CPI
The Consumer Price Index
• Calculating the CPI To calculate the CPI, we
1. Find the cost of the CPI basket at base-period prices.
2. Find the cost of the CPI basket at current-period prices.
3. Calculate the CPI for the base period and the current period.
The Consumer Price Index
The Consumer Price Index
Measuring the Inflation Rate with CPI
The Consumer Price Index
• The Biased CPI
• The main sources of bias in the CPI are

New goods bias

Quality change bias

Commodity substitution bias

Outlet substitution bias

Alternative Price Indexes
• Chained CPI
• It incorporates substitutions and new goods bias by using current
and previous period quantities rather than fixed quantities from an
earlier period.

• Personal consumption expenditure deflator

• PCE deflator = (Nominal C ÷ Real C) ×100

• GDP deflator
• GDP deflator=(Nominal GDP ÷ Real GDP) ×100
Measuring the Inflation Rate with GDP Deflator

𝐆𝐃𝐏 𝐃𝐞𝐟𝐥𝐚𝐭𝐨𝐫 𝐢𝐧 𝐲𝐞𝐚𝐫 𝟑 − 𝐆𝐃𝐏 𝐃𝐞𝐟𝐥𝐚𝐭𝐨𝐫 𝐢𝐧 𝐲𝐞𝐚𝐫 𝟐

𝐈𝐧𝐟𝐥𝐚𝐭𝐢𝐨𝐧 𝐫𝐚𝐭𝐞 𝐟𝐫𝐨𝐦 𝐲𝐞𝐚𝐫 𝟐 𝐭𝐨 𝐲𝐞𝐚𝐫 𝟑 = × 𝟏𝟎𝟎
𝐆𝐃𝐏 𝐃𝐞𝐟𝐥𝐚𝐭𝐨𝐫 𝐢𝐧 𝐲𝐞𝐚𝐫 𝟐