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Chapter 5 Thursday, January 24, 2019

5:40 PM

The working-age population is the total number of people aged 15 years and over. The labour force is the number of people employed + the number unemployed. The unemployment rate is the percentage of the people in the labour force who are unemployed. The labour force participation rate is the percentage of the working-age population who are members of the labour force. The employment-to-population ratio is the percentage of the people of working age who have jobs. A discouraged searcher is a marginally attached worker who has not made specific efforts to find a job within the past four weeks because previous unsuccessful attempts to find a job were discouraging. To be counted as unemployed, a person must be available for work and must be in one of three categories: 1. On temporary layoff with an expectation of recall 2. Without work but has looked for work in the past four weeks 3. Has a new job to start within four weeks

All people who are in the working age population who are neither employed nor unemployed are not in the labour force.

It is true that unemployment rate increases in a recession, peaks after the recession ends, and decreases in an expansion.

R1 are those unemployed for 1 year or more, R2 are those unemployed for 3 months or less. R5 adds discouraged searchers R7 dd i l R4

R7 adds involuntary part-timers to R4.

Problem 1) Pat is unemployed. He doesn't have a job but is available and looked for a job during July. Mary is unemployed. She doesn't have a job, but she is available for work. Because she will start a new job within four weeks, she is classified as unemployed. Sarah is a part-time workers, so the LFS classifies her as employed. She doesn't need to be looking for extra work. Kevin is a discouraged searcher. In the past he searched for a job but now he has given up. He is not unemployed because he didn't look for work in July, is not laidoff, and is not waiting to start a new job within four weeks. The labour force includes only those employed and those unemployed, so Kevin is not in the labour force. Johnnie is not in the labour force. When he played in the band he was employed and in the labour force. Now he is not employed. He is not unemployed because he is not looking for a job. Key Point: To be in the labour force a person must be either employed or unemployed. To be counted as employed, a person must have a full-time job or apart-time job. To be counted as unemployed, a person must be available for work and on temporary layoff with an expectation of recall, without work but has looked for work in the past four weeks, or has a new job to start within four weeks.

The unemployment rate is the percentage of the labour force who are classified as unemployed. If Sarah quits her job and searches for a full-time job, she switches from being employed to being unemployed. Does the labour force change? Unemployment rises, but does the unemployment rate remain the same?

Key Point: The labour force will change if working-age people not currently in the labour force start to look for work and become unemployed or start a job and become employed.

Key Point: The unemployment rate rises when people quit their jobs and start searching for new ones. Key Point: The labour force participation rate changes as working-age people enter and exit the labour force.

The unemployment rate is calculated as (Number of people unemployed divided Labour force)times×100. Number of people umemployed = Labour force. Minus number of people employed Labour force / working age polulation x 100 = labour force participation Employement rate = number of people employed / working age population x 100

The working age population is = labour force + not in labour force Number of people employed = labour force - unemployed

Labour force is equalled to the number of people employed + the number of ppl umemployed

When the number of discouraged searchers increases, the official unemployment rate fall R5 is the unemployment rate with discouraged searchers counted as unemployed. So an increase in the number of discouraged searchers does not change R5.

Frictional unemployment occurs when workers leave their old jobs but haven't yet found new ones

Structural unemployment exists when shifts occur in the economy that creates a mismatch between the skills workers have and the skills needed by employers.

Cyclical unemployment is not part of the natural unemployment rate. It's caused by the contraction phase of the business cycle. That's when demand for goods and services fall dramatically, forcing businesses to lay off large numbers of workers to cut costs.

Calculating CPI Example

To give a simple example, let’s assume that the typical consumers in an economy buy a basket of only two goods ice cream and candy bars. By conducting surveys, we find out that on average every consumer buys 4 ice cream cones and 8 candy bars . With this information we can now fix our market basket to 4 ice cream cones and 8 candy bars. Revisiting our example, we now have to find the prices of ice cream and candy bars . In 2017, an ice cream cone costs USD 2 and a candy bar sells at USD 1. Hence, the basket’s cost adds up to USD 16 (4 ice cream cones x USD 2 + 8 candy bars x USD 1). Back in 2016, consumers only had to pay USD 1.90 for an ice cream cone and USD 0.80 for a candy bar, which results in a basket cost of USD 14 (4 ice cream cones x USD 1.90 + 8 candy bars x USD 0.8). We can already see that the price level has increased from 2016 to 2017. In the base year, CPI always adds up to 100. This becomes obvious if we look at our example. To calculate CPI in 2016, we have to divide USD 14 by USD 14 and

multiply the result by 100 (i.e. [14/14]x100). Of course, the result is 100. Using the same formula, the CPI in 2017 is 114,3, i.e. (16/14)x100=114,3. Thus we can say that the Consumer Price Index has increased from 100 in 2016 to 114,3 in 2017.

4) Computing the Inflation Rate = cpi2-cpi1/cpi1x100

CPI = [(Cost of CPI basket in 2014 prices)divided by÷(Cost of CPI basket in 2013)]times 100.

The main sources of bias in the CPI are 1) New goods bias 2) Quality change bias 3) Commodity substitution bias 4) Outlet substitution bias. New goods bias arises because new goods are more expensive than the goods that they replace. Quality change bias arises when part of the rise in price of a good is a payment for improved quality. Commodity substitution bias arises when changes in relative prices lead consumers to change the items they buy. Outlet substitution bias arises when, confronted with higher prices, people use discount stores more frequently and convenience stores less frequently.

Alternative price indexes can avoid the sources of bias in the CPI by using current and previous period quantities rather than fixed quantities from an earlier period.

The real wage rate in 2010 = (Nominal wage rate divided CPI in 2010)times×100. When inflation occurs, the CPI increases, and the real wage rate falls. I fl ti

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Inflation gradually rises throughout the year, so the real wage rate gradually falls throughout the year. A cut in the nominal wage rate lowers the real wage rate at a point in time.

The output gap is the gap between real GDP and potential GDP. When the unemployment rate is greater than the natural unemployment rate, real GDP is less than potential GDP and the output gap is negative. When the unemployment rate is less than the natural unemployment rate, real GDP is greater than potential GDP and the output gap is positive

Note) Cyclical unemployment is the fluctuating unemployment over the business cycle that increases during a recession and decreases during an expansion. Natural unemployment is the sum of frictional unemployment and structural unemployment. If government funded retraining successfully decreases structural unemployment, the natural unemployment rate will fall.

The CPI is a measure of the average of the prices paid by urban consumers for a fixed basket of consumer goods and services.

The inflation rate is the annual percentage change in the price level. So when the CPI rises slowly, the inflation rate is low.

When inflation occurs, the CPI increases, and the real wage rate falls. Inflation gradually rises throughout the year, so the real wage rate gradually falls throughout the year. A cut in the nominal wage rate lowers the real wage rate at a point in time.

The bias in the CPI distorts private contracts. Many private agreements, such as wage contracts are linked to the CPI. For example, a firm and its workers might agree to a three-year wage deal that increases the wage rate by 2 percent a year plus the percentage increase in the CPI. Such a deal ends up giving the workers more real income than the firm intended....