Chapter 8 econ - Ariel Weinberger Macroeconomics PDF

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Ariel Weinberger Macroeconomics...

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UNEMPLOYMENT AND INFLATION DEFINING UNEMPLOYMENT -Unemployment rate:the percent of the total number of people in the labor force who are unemployed -Labor force:all workers, employed or unemployed But what does it mean to be unemployed? -Adult Population:the number of people over 16 years old and non-institutionalized -Labor force participation rate: the percentage of adults (people 16 and over) in the labor force DEFINING UNEMPLOYMENT Measuring the labor force participation rate: the % of the adult population (16+) noninstitutionalized civilian population who are working or actively looking for work Labor force Participation rate= #unemployed+#employed X100 Adult population =labor force X100 Adult population Measuring unemployment: the unemployment rate is the % of the labor force without a job Unemployment rate % = #unemployed X100 #unemployed + #employed = #unemployed X100 Labor force

The significance of the employment rate Even if the labor market is healthy, it takes time to find the right job (meanwhile you’re “unemployed”

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You are not “unemployed” if you have given up looking for a job because there are no jobs available

PROBLEMS WITH UNEMPLOYMENT STATS Discouraged workers: nonworking people who have given up looking for work for the time being. Not considered unemployed The deeper the recession, the more discouraged workers there are Marginally attached workers: those who were available and actively looked for work recently but are not currently looking (in the past 12 months but NOT in the past 4 weeks) Underemployed workers: people who work part time because they cannot find full-time jobs

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DEFINING UNEMPLOYMENT So how good an indicator is the unemployment rate? It isn’t perfect Economists also look at other indicators: Labor force participation rate Number of full-time jobs Average wages Frictional unemployment: unemployment due to the time workers spend in job search Scarcity of information creates frictional unemployment Structural unemployment: Even when the economy is at the peak of the business cycle, more people are seeking jobs in a particular labor market than there are jobs available at the current wage rate There are distortions in the labor market. Look in the slides for them Same causes of structural unemployment: Labor unions (worker bargaining power) Union: an association of workers that bargains collectively with employers over wages, benefits and working conditions Efficiency wages Efficiency wages: wages that employers set above the equilibrium rate as an incentive for better employee performance Side effects of government policies (i.e unemployment benefits) Mismatches between employees and employers (skills required are not found in the available workforce) -The traditional argument for structural unemployment: minimum wage creates low skilled unemployment: the higher the wage, the more structural unemployment Minimum wage and unemployment Research on “optimal wage” is not conclusive Bottom line: starting from the equilibrium point, raising wages should lead to some unemployment The natural rate of unemployment Frictional and structural unemployment are always present; they are “natural” Natural unemployment= frictional unemployment + structural unemployment At least over short periods of time, we think of natural unemployment as constant Actual unemployment= natural unemployment + cyclical unemployment ] Changes in the nat rate of unemployment

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What causes it to change? Changing demographics, unions, temp agencies, new technology, job training programs WOMENs DONT COUNT IN THE LABOR FORCE Cyclical unemployment: the deviation from the natural rate-unemployment Correlated with the business cycle -a short run policy question that is left to fiscal and monetary policy -one part of the feds dual mandate The short run phillips curve: the negative short-run relationship between the unemployment rate and the inflation rate The level of prices doesn’t matter Inflation does not make everyone poorer because income often rises with the prices A better measure? Real wages Real wage is the wage rate divided by the price level Real income is the income divided by the price level The rate of change does matter Its crucial to distinguish between the level of prices and the inflation rate Inflation rate= price index in year 2 - price index in year 1 X100 Price index in year 1 Shoe-leather costs: the increased costs of transactions caused by inflation Since cash loses its value quickly during high inflation, people waste more time running around to spend it as fast as they can Menu cost: the real cost of changing a listed price Some businesses will list prices in another currency Unit of account costs: costs arising from the way inflation makes money a less reliable unit of measure Planning is hard when inflation is hard Examples: investment/savings decisions. How much to tax? Interest rates: the price (calculated as a percentage of the amount borrowed) that a lender changes for the use of his or her savings for one year SILVIA AND JIM lend money and get interest but is the end cost with interest worth the same? Winners and losers from inflation If inflation is different from predictions, some will lose and some will benefit Nominal interest rate: the interest rate expressed in dollar terms Real interest rate: the nominal interest rate minus the rate of inflation Real rate=nominal rate-inflation rate (even here we can only account for expected inflation) Americans who took out mortgages in the early 1970s quickly found their real payments reduced by higher than expected inflation

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Deflation Deflation occurs when the price level is decreasing (negative inflation rate) Although rare, deflation has occurred in the US Both inflation and deflation are problematic Great depression is most important example Since cash gains value if the price level is failing, holding on to it is more attractive than investing in new factories and other productive assets Inflation is easy, disinflation is hard The policies needed to slow prices usually cause unemployment Disinflation is the process of bringing the inflation rate down Do not confuse with deflation...