CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

PowerPoint Lectures for

Principles of Economics,
9e
; ;

By
Karl E. Case,
Ray C. Fair &
Sharon M. Oster

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CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

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PART IV CONCEPTS AND PROBLEMS

IN MACROECONOMICS

22

Unemployment,
Inflation, and
Long-Run Growth

Prepared by:
Fernando & Yvonn Quijano
2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster

PART IV CONCEPTS AND PROBLEMS

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

IN MACROECONOMICS

22
11

Unemployment,
Inflation, and
Long-Run Growth

CHAPTER OUTLINE
Unemployment
Measuring Unemployment
Components of the Unemployment Rate
The Costs of Unemployment
Inflation
The Consumer Price Index
The Costs of Inflation
Long-Run Growth
Output and Productivity Growth
Looking Ahead

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Unemployment

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

Measuring Unemployment
employed Any person 16 years old or older (1)
who works for pay, either for someone else or in
his or her own business for 1 or more hours per
week, (2) who works without pay for 15 or more
hours per week in a family enterprise, or (3) who
has a job but has been temporarily absent with or
without pay.
unemployed A person 16 years old or older who
is not working, is available for work, and has made
specific efforts to find work during the previous 4
weeks.

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Unemployment

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

Measuring Unemployment
not in the labor force A person who is not
looking for work because he or she does not want
a job or has given up looking.
labor force The number of people employed plus
the number of unemployed.

labor force = employed + unemployed

population = labor force + not in labor force

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Unemployment

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

Measuring Unemployment
unemployment rate The ratio of the number of
people unemployed to the total number of people
in the labor force.

unemploymentrate=

unemployed
employed+unemployed

labor force participation rate The ratio of the

labor force to the total population 16 years old or
older.

laborforceparticipationrate=

laborforce
population

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Unemployment
Measuring Unemployment

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

TABLE 22.1 Employed, Unemployed, and the Labor Force, 19532007

(1)
Population
16 Years
Old Or Over
(Millions)

(2)

Labor
Force
(Millions)

(3)

(4)

(5)

(6)

Employed
(Millions)

Unemployed
(Millions)

Labor Force
Participation
Rate
(Percentage
Points)

Unemployment
Rate
(Percentage
Points)

1953

107.1

63.0

61.2

1.8

58.9

2.9

1960

117.2

69.6

65.8

3.9

59.4

5.5

1970

137.1

82.8

78.7

4.1

60.4

4.9

1980

167.7

106.9

99.3

7.6

63.8

7.1

1982

172.3

110.2

99.5

10.7

64.0

9.7

1990

189.2

125.8

118.8

7.0

66.5

5.6

2000

212.6

142.6

136.9

5.7

67.1

4.0

2007

231.9

153.1

146.0

7.1

66.0

4.6

Note: Figures are civilian only (military excluded).

Source: Economic Report of the President, 2008, Table B-35.

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Unemployment
Components of the Unemployment Rate

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

Unemployment Rates for Different Demographic Groups

TABLE 22.2 Unemployment Rates by Demographic Group, 1982 and 2008
Years
Total
White
Men
Women
Both sexes
African-American
Men
Women
Both sexes

20+
20+
1619
20+
20+
1619

Nov. 1982

March 2008

10.8
9.6
9.0
8.1
21.3

5.2
4.5
4.1
4.1
13.2

20.2
19.3
16.5

9.0
8.4
7.5

49.5

31.3

Source: U.S. Department of Labor, Bureau of Labor Statistics. Data are not seasonally adjusted.

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Unemployment
Components of the Unemployment Rate

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

Unemployment Rates in States and Regions

TABLE 22.3 Regional Differences in Unemployment, 1975, 1982, 1991, and 2003
U.S. avg.
Cal.
Fla.
Ill.
Mass.
Mich.
N.J.
N.Y.
N.C.
Ohio
Tex.

1975
8.5
9.9
10.7
7.1
11.2
12.5
10.2
9.5
8.6
9.1
5.6

1982
9.7
9.9
8.2
11.3
7.9
15.5
9.0
8.6
9.0
12.5
6.9

1991
6.7
7.5
7.3
7.1
9.0
9.2
6.6
7.2
5.8
6.4
6.6

2003
6.0
6.7
5.1
6.7
5.8
7.3
5.9
6.3
6.5
6.1
6.8

Sources: Statistical Abstract of the United States, various editions.

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Unemployment
Components of the Unemployment Rate

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

Unemployment Rates in States and Regions

A Quiet Revolution:
Women Join the Labor
Force
If you are interested in learning
more about the economic
history of American women,
read the book Understanding
the Gender Gap: An Economic History of American
Women by Harvard University economist Claudia Goldin.

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Unemployment
Components of the Unemployment Rate

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

Discouraged-Worker Effects
discouraged-worker effect The decline in the
measured unemployment rate that results when
people who want to work but cannot find jobs grow
discouraged and stop looking, thus dropping out of
the ranks of the unemployed and the labor force.

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Unemployment
Components of the Unemployment Rate

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

The Duration of Unemployment

TABLE 22.4 Average Duration of Unemployment, 19792007
Weeks
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992

10.8
11.9
13.7
15.6
20.0
18.2
15.6
15.0
14.5
13.5
11.9
12.0
13.7
17.7

Weeks
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

18.0
18.8
16.6
16.7
15.8
14.5
13.4
12.6
13.1
16.6
19.2
19.6
18.4
16.8
16.8

Sources: U.S. Department of Labor, Bureau of Labor Statistics.

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Unemployment
The Costs of Unemployment

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

Some Unemployment Is Inevitable

When we consider the various costs of
unemployment, it is useful to categorize
unemployment into three types:

Frictional unemployment

Structural unemployment

Cyclical unemployment

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Unemployment
The Costs of Unemployment

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

Frictional, Structural, and Cyclical Unemployment

frictional unemployment The portion of
unemployment that is due to the normal working of
the labor market; used to denote short-run job/skill
matching problems.
structural unemployment The portion of
unemployment that is due to changes in the
structure of the economy that result in a significant
loss of jobs in certain industries.

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Unemployment
The Costs of Unemployment

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

Frictional, Structural, and Cyclical Unemployment

natural rate of unemployment The
unemployment that occurs as a normal part of the
functioning of the economy. Sometimes taken as
the sum of frictional unemployment and structural
unemployment.
cyclical unemployment The increase in
unemployment that occurs during recessions and
depressions.

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Unemployment
The Costs of Unemployment

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

Social Consequences
In addition to economic hardship, prolonged
unemployment may also bring with it social and
personal ills: anxiety, depression, deterioration of
physical and psychological health, drug abuse
(including alcoholism), and suicide.

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Inflation

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

The Consumer Price Index

consumer price index (CPI) A price index

computed each month by the Bureau of Labor
Statistics using a bundle that is meant to represent
the market basket purchased monthly by the
typical urban consumer.

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Inflation

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

The Consumer Price Index

FIGURE 22.1 The CPI Market Basket

The CPI market basket shows how a typical consumer divides his or her money among various goods and
services. Most of a consumers money goes toward housing, transportation, and food and beverages.
Source: The Bureau of Labor Statistics

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Inflation
The Consumer Price Index

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

TABLE 22.5 The CPI, 19502007

1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968

Percentage
Change
in CPI
1.3
7.9
1.9
0.8
0.7
0.4
1.5
3.3
2.8
0.7
1.7
1.0
1.0
1.3
1.3
1.6
2.9
3.1
4.2

CPI
24.1
26.0
26.5
26.7
26.9
26.8
27.2
28.1
28.9
29.1
29.6
29.9
30.2
30.6
31.0
31.5
32.4
33.4
34.8

1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987

Percentage
Change
in CPI
5.5
5.7
4.4
3.2
6.2
11.0
9.1
5.8
6.5
7.6
11.3
13.5
10.3
6.2
3.2
4.3
3.6
1.9
3.6

CPI
36.7
38.8
40.5
41.8
44.4
49.3
53.8
56.9
60.6
65.2
72.6
82.4
90.9
96.5
99.6
103.9
107.6
109.6
113.6

1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

Percentage
Change
in CPI
4.1
4.8
5.4
4.2
3.0
3.0
2.6
2.8
3.0
2.3
1.6
2.2
3.4
2.8
1.6
2.3
2.7
3.4
3.2
2.8

CPI
118.3
124.0
130.7
136.2
140.3
144.5
148.2
152.4
156.9
160.5
163.0
166.6
172.2
177.1
179.9
184.0
188.9
195.3
201.6
207.3

Sources: Bureau of Labor Statistics, U.S. Department of Labor.

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Inflation

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

The Consumer Price Index

producer price indexes (PPIs) Measures of

prices that producers receive for products at all
stages in the production process.
The indexes are calculated separately for various
stages in the production process. The three main
categories are finished goods, intermediate
materials, and crude materials, although there are
subcategories within each of these categories.

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Inflation
The Costs of Inflation

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

Inflation May Change the Distribution of Income

real interest rate The difference between the
interest rate on a loan and the inflation rate.
The indexes are calculated separately for various
stages in the production process. The three main
categories are finished goods, intermediate
materials, and crude materials, although there are
subcategories within each of these categories.

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Inflation
The Costs of Inflation

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

Administrative Costs and Inefficiencies

There may also be costs associated even with
anticipated inflation. One is the administrative cost
associated with simply keeping up.

Public Enemy Number One?

Economists have debated the seriousness of the
costs of inflation for decades.
No matter what the real economic cost of inflation,
people do not like it.

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CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

Long-Run Growth

output growth The growth rate of the output of

the entire economy.
per-capita output growth The growth rate of
output per person in the economy.

productivity growth The growth rate of output

per worker.

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Long-Run Growth

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

Output and Productivity Growth

FIGURE 22.2 Output per Worker Hour (Productivity), 1952 I2007 IV

Productivity grew much faster in the 1950s and 1960s than since.

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Long-Run Growth

CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

Output and Productivity Growth

FIGURE 22.3 Capital per Worker, 1952 I2007 IV

Capital per worker grew until about 1980 and then leveled off somewhat.

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CHAPTER 22 Unemployment, Inflation, and Long-Run Growth

REVIEW TERMS AND CONCEPTS

consumer price index (CPI)

producer price indexes (PPIs)

cyclical unemployment

productivity growth

discouraged-worker effect

real interest rate

employed

structural unemployment

frictional unemployment

unemployed

labor force

unemployment rate

labor force participation rate

1. Labor force = employed + unemployed

natural rate of unemployment

2. Population = labor force + not in labor force

not in the labor force

output growth

3. Unemployme nt rate

unemployed
employed unemployed

per-capita output growth

4. Labor force participation rate

labor force
population

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