CHAPTER 9
Macroeconomic Goals: Unemployment and Inflation
For Online Lecture see: http://www.harper.cc.il.us/mhealy/eco212i/lectures/ue%26in/ue%26in.htm
Lectures

Has the Natural Rate of Unemployment Increased since 2007?:
http://www.frbsf.org/publications/economics/letter/2011/el2011-05.html

Current Unemployment Rate:
http://data.bls.gov/timeseries/LNS14000000

How the Government Measures the Unemployment Rate:
http://stats.bls.gov/cps/cps_htgm.htm

Current Annual Rate of Inflation
http://data.bls.gov/timeseries/CUUR0000SA0?output_view=pct_12mths
ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

 

9a Unemployment

I. Macroeconomic Instability: The Business Cycle

A. Review: Macroeconomic Issues
1. UE
2. IN
3. EG

B. Review: The Business Cycle (graph)

C. Review: Maximizing Satisfaction (5Es)

D. Why Business Cycles? (Causation at First Glance)

  • From Chapter 6:
    • fluctuations are caused by "shocks"; unexpected events that people and firms may have trouble adjusting to
    • and price stickiness in the short run prvents markets form adjusting quickly resulting in changes in output and employment
  • Why are there shocks? (20th: pp. 197-198; 19th: pp. 172-173; "Causation: A First Glance")
    • irregular innovations
    • unexpected productivity changes
    • monetary factors
    • political events
    • financial instability (rapid asset price increases and decreases)
  • Recession of 2007-2009
    • housing prices
  • Most agree that the level of aggregate spending is important, especially changes on capital goods and consumer durables.

II. Unemployment

A. The Unemployment Rate

 

 

B. What is Unemployment?

1. Definition

The percentage of the labor force unemployed at any time.

2. What is the labor force?

Persons 16 years of age and older who are not in institutions and who are employed or are unemployed (and seeking work)

 

a. who is included in the labor force

b. who is not in the labor force

c. part-time = employed

d. discouraged workers = not in labor force

Employees who have left the labor force because they have been unable to find employment.

optional: How the government measures Unemployment - http://stats.bls.gov/cps/cps_htgm.htm

2009

3. Unemployment Rate = #UE/# labor force = 14.3/154.2 = 9.3%

4. The "REAL" rate of UE
http://articles.moneycentral.msn.com/learn-how-to-invest/The-real-unemployment-rate.aspx

 

C. What Is "Full Employment"?

1. Definitions:
(1) Use of all available resources to produce want-satisfying goods and services.

(2) The situation when the unemployment rate is equal to the full-employment unemployment rate and there is frictional and structural but no cyclical unemployment (and the real output of the economy equals its potential real output).

2. Full employment is using all available resource to achieve the potential output

a. NOT absolute maximum

b. graphically

1) production possibilities curve (graph)

 

 

 

2) AD - AS Model (graph1, graph2)

 

 

3) LRAS Model

 

 

3. Full employment is about 5% unemployment, called
  • the full employment rate of unemployment, or
  • the natural rate of unemployment

 

  • to understand how 5% unemployment is fullemployments we must know the three types of unemployment

 

4. Types of Unemployment

a. frictional unemployment

A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.

b. structural unemployment

Unemployment of workers whose skills are not demanded by employers, they lack sufficient skill to obtain employment, or they cannot easily move to locations where jobs are available.

c. cyclical unemployment -- business cycle

A type of unemployment caused by insufficient total spending (or by insufficient aggregate demand).

5. "full employment rate of unemployment" includes:

a. frictional unemployment PLUS
b. structural unemployment

c. also called the natural rate of unemployment

  • The full-employment unemployment rate;
  • the unemployment rate occurring when there is no cyclical unemployment and the economy is achieving its potential output;
  • the unemployment rate at which actual inflation equals expected inflation.

6. why?: potential output is still achieved

potential output (ppc: graph / AS-AD:graph1, graph2)

The real output (GDP) an economy can produce when it fully employs its available resources.

 

 

 

2) AD - AS Model (graph1, graph2)

 

 

3) LRAS Model

 

 

7. Changes in the full employment rate of unemployment

8. Quick Quiz

D. Costs of unemployment

1. Lost Output
(not achieveing the POTENTIAL output, see graphs above)

called the GDP gap

The amount by which actual gross domestic product falls below potential gross domestic product.

GDP gap = actual GDP - potential GDP

negative GDP gap: potential > actual:
  • economy is not producing as much as posible

positive GDP gap: actual > potential

 

2. unequal burdens

a. occupation
b. age
c. race
d. gender
e. duration

 

3. non economic costs

 

E. International Comparisons

 

9b Inflation

III. What is Inflation?

 

  • International comparisons: