1. Chapter 7
Unemployment and Inflation

2. Unemployment
 What is the lost to the us- personally and for the
economy when unemployment happens?
 Personally:
 Steady Paycheck to consumers
 Social loss: low self-esteem and lost of identity
 To the economy:
 Lost output due to decreased disposal income in the
economy

3. What does the unemployment rate
measure?
 The unemployment rate measures the healthiness of a
specific economy.

4. Measuring Unemployment
 Civilian non-institutional adult population: all civilian
(meaning excluding the military) age 16 or older, except
those in prison, mental facilities or in homes for the
aged.
 Labor Force: people in the adult population who are
either working or looking for work
 People looking for a job, but cannot find one are unemployed
 Not in the work force:
 Stay at home moms
 College students not looking for work
 Retired workers

5. Measuring Unemployment

6. Measuring Unemployment
 Under-employed: individuals who are working part-time
but would prefer full-time status.
 These individuals are counted in the employed rate, making the
unemployment rate seem better than it actually is.
 Where are we now:
http://data.bls.gov/timeseries/LNS14000000

7. Exhibit 1
LO1
The Adult Population Sums the Employed,
the Unemployed, and Those Not in the
Labor Force: February 2009 (in millions)
Unemployed
(12.5)
LABOR FORCE
(154.2)
Employed
(141.7)
NOT WORKING
(93.2)
Not in labor force
(80.7)

8. Labor Force Participation Rate
 This measures the total number of people in a nation
that are ACTIVELY participating in the labor force, i.e.
they are working a part-time or full-time job.
 Increase in women participates from 34% of adult women in
1950 to 60% of adult women today

9. LO1
Exhibit 2
The U.S. Unemployment Rate Since 1900

10. Unemployment among Various
Groups
 Unemployment in various groups:





Age: Higher unemployment among teenagers
Race
Gender
Geography
Occupation

11. LO1
Exhibit 3(a)
Unemployment Rates for Various Groups

12. LO1
Exhibit 3(b)
Unemployment Rates for Various Groups

13. Unemployment varies across
occupations and regions
 Varies by occupations
 Blue-collar workers- higher unemployment that professional and
technical workers
 Varies by regions
 Specific regions have higher unemployment rates

14. Unemployment Rates Differ Across
U.S. Metropolitan Areas
Exhibit 4
LO1

15. Sources of Unemployment
 Frictional Unemployment: occurs when job seekers and
employers are not matched up.
 The employer cannot find a qualified candidate
 The job seeker is unable to find a match for his/her background
 Seasonal Unemployment: occurs during seasonal
changes throughout the year
 Landscapers
 Snow Plowers
 Amusement park operators

16. Sources of Unemployment
 Structural Unemployment: occurs when the skills
demanded by employers do not match those of the
unemployed or the unemployed do not live where the
jobs are
 Financial Analyst looking in a small town
 Cyclical Unemployment: occurs with fluctuations to the
business cycle, increase during recessions and decrease
during booms
 When cyclical unemployment is present, then the economy is
inside it’s PPF
 The government will begin to make economic policy to increase
Aggregate Demand

17. Duration of Unemployment
 Long-term unemployed: Those who have been out of
work for 27 weeks or longer

18. What is full employment?
 What is full employment so important?
 It measures the health of the economy
 This happens when cyclical unemployment is zero
 This does not mean zero unemployment, but low
unemployment between 4 to 6 %

19. Unemployment Compensation
 Cash transfers to those who lose their jobs and actively
seek employment
 Benefits can last up to 6 months, during recessions
sometimes longer
 Opportunity cost of unemployment benefits:
 They may reduce the incentive for some individuals to find work

20. LO1
Exhibit 5
During the Last Quarter Century, the U.S.
Unemployment Rate Fell, Europe’s Remained
High, and Japan’s Rose

21. Problems with official unemployment
figures
 Under-employment: the problem of individuals working a
part-time job when they actually want a full-time job
 This is not measured in the unemployment rate
 Example: M.S. in Economics working at a p-t bank teller
 Some people may be pretending to look for jobs
 Underground economy
 Selling baked goods to friend
 Selling illegal drugs
 Doing the books for a friend

22. Inflation
 What is inflation?
 This is when the average price level increases for all goods
 This has been a current concern due to the aggressive monetary
policy done by Ben Bernanke during the last few years

23. Duck Tales explains Inflation

24. Hyperinflation
 Hyperinflation: A very high rate of inflation. VERY
DANGEROUS!!!
 In 1923 Germany faced this, please read the article on Germany
and watch this short youtube video

25. Germany explains hyperinflation

26. Two Sources of Inflation
 Demand-pull inflation: a sustained rise in the price level
caused by a rightward shift of the aggregate demand
curve.
 Increase in consumers purchasing ALL consumer items on the
average
 This has not been a concern in the last few years because
consumers have not been consuming items due to the
uncertainty in the economy.

27. Two Sources of Inflation
 Cost-push inflation: a sustained rise in the price level
caused by a leftward shift of the aggregate supply curve.
 Also know as stagflation
 A little look at inflation:

28. LO2
Exhibit 6
Inflation Caused by Shifts of Aggregate Demand
and Aggregate Supply Curves
(a) Demand-pull inflation: inflation caused
by an increase of aggregate demand
Price
level
AS
(b) Cost-push inflation: inflation caused
by a decrease of aggregate supply
Price
level
AD’
P
AD
AD
0
AS
P’
P’
P
AS’
Aggregate output
An outward shift of the aggregate demand
to AD’ “pulls” the price level up from P to P’.
0
Aggregate output
A decrease of aggregate supply to AS’
“pushes” the price level up from P to P’.

29. A little history on inflation and the
price level
 Since 1913, steady increase in price levels
 Before 1950s
 High inflation that was war related, then in 1930s deflation occurred
 Since 1950s
 Inflation around 3.8% per year

30. Exhibit 7(a)
LO2
Consumer Price Index Since 1913

31. LO2
Exhibit 7(b)
Inflation Since 1913

32. Anticipated Versus Unanticipated
Inflation
 Unanticipated will create more problems that anticipated
inflation
 Example: Expected inflation of 3%, so lenders (such as banks)
will plan for this. However, if inflation increases to 5%, then the
lender will lose out, but the borrower will win!
 Problems:
 Real wages decrease- the dollar has less value
 Real interest rates decrease- lenders lose money
 Result:
 Overall lose to the economy

33. Average Annual Inflation from 2004
to 2008 Differed across U.S.
Metropolitan Areas
Exhibit 8
LO2

34. Inflation and Interest Rates
 What is interest?
 The dollar amount paid by borrowers to lenders
 Interest Rate: the amount paid per year as percentage of
the amount borrowed.
 The lower this rate, the cheaper it is to borrow or invest in the
economy
 Nominal Interest Rate: the interest rate expressed in
dollars of value as a percentage of the amount loaned (it
is not adjusted for inflation)

35. Inflation and Interest Rates
 Real interest rate: the nominal rate minute the inflation
rate
 Real interest rate= Nominal interest rate – inflation rate
 What happens if expected inflation is high?
 The nominal interest rate will increase because lenders want to get
them money back with INTEREST!!

36. Exhibit 10
LO2
The Market for Loanable Funds
Nominal interest rate
S
i
D
0
Loanable funds per period
The upward sloping supply
curve, S, shows that more
loanable funds are supplied at
higher interest rates.
The downward-sloping demand
curve, D, shows that the quantity
of loanable funds demanded is
greater at lower interest rates.
The two curves intersect to
determine the market interest
rate, i.

37. Why are we scared of inflation?
 The presence of inflation means EVERYTHING cost
more, so the price of goods goes up
 What does this mean?
 It is hard for firms to hire as much
 It makes it hard for consumers to buy as much!!!
 Why do we care?
 These two things decrease economic growth!!!