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UNEMPLOYMENT,

INFLATION AND
LONG TERM
GROWTH
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.
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


UNEMPLOYMENT
UNEMPLOYMENT RATE - The ratio of the number of people
unemployed to the total number of people in the labor force.
unemployed
unemploymentrate=
employed+unemployed

LABOR FORCE PARTICIPATION RATE - The ratio of the labor


force to the total population 16 years old or older.

laborforce
laborforceparticipationrate=
population
UNEMPLOYMENT
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.
Job Search the process by which workers find appropriate jobs
given their tasters and skills.
Union a worker association that bargains with employers over
wages, benefits, and working conditions.
Collective Bargaining the process by which unions and firms
agree on the terms of employment.
Efficiency Wages above equilibrium wages paid by firms to
increase worker productivity.
UNEMPLOYMENT
Efficiency wage theory states that such a constraint on firms
is unnecessary in many cases because firms may be better off
keeping wages above the equilibrium level.

Several Types of Efficiency wage theory:


Worker Health
Worker Turnover
Worker Quality
Worker Effort
UNEMPLOYMENT
WORKER HEALTH
It emphasizes the link between wages and worker health.
Better paid workers eat a more nutritious diet, and workers
who eat better diet are healthier and more productive.

WORKER TURNOVER
It emphasizes the link between wages and worker turn over.
Workers quit jobs for many reasons: to take jobs in other firms,
to move to other parts of the country, to leave the labor force,
and so on. The frequency with which they quit depends of the
entire set of incentives they face, including the benefits of
leaving and benefits of staying.
UNEMPLOYMENT
WORKER QUALITY
It emphasizes the link between wages and worker quality. All firms want
workers who are talented, and they try to pick the best applicants to fill job
openings. When a firm pays a high wage, it attracts a better pool of workers to
apply for its jobs and thereby increases the quality of its workforce.

WORKER EFFORT
It emphasizes the link between wages and worker effort. In many jobs, workers
have some discretion over how hard to work. As a result, firm monitor the
efforts of their workers and those who are caught shirking their responsibilities
are fired. But monitoring is costly and imperfect.
One solution is paying wages above the equilibrium level. High wages make
workers more eager to keep their jobs and give workers an incentive to put
forward their best effort.
UNEMPLOYMENT
THREE TYPES OF UNEMPLOYMENT
1. FRICTIONAL UNEMPLOYMENT temporary unemployment caused by
the time required of workers to move from one job to another.
2. STRUCTURAL UNEMPLOYMENT unemployment caused by a
mismatch of the skills of workers out of work and the skills required for
existing job opportunities.
3. CYCLICAL UNEMPLOYMENT - The increase in unemployment that
occurs during recessions and depressions.

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.
Unemployment
Four Causes of Structural Unemployment:
1. Lack of Education
2. Changes in Consumer Demand
3. Technological Advances
4. Globalization
Outsourcing the practice of a company having its work done
by another company in another country.
Offshoring the practice of having work for a company
performed by the companys employees located in another
country.
INFLATION
Inflation
INFLATION an increase in the general
(average) price level of goods and
services in the economy.
DEFLATION a decrease in the general
(average) price level of goods and
services in the economy.
Inflation
TWO BASIC TYPES OF INFLATION:
1.Demand-pull inflation a rise in the
general price level resulting from an excess of
total spending (demand)
2.Cost-push inflation an increase in the
general price level resulting from an increase
in the cost of production.
THE COSTS OF INFLATION
Inflation Changes the Distribution of Incomes
If your incomes is fixed and prices rise, your ability
to purchase goods and services falls
proportionately.
Effects on Debtors and Creditors
Inflation that is higher than expected benefits
debtors; inflators that is lower than expected
benefits creditors.
THE COSTS OF INFLATION
Administrative Costs and Inefficiencies
More frequent banking transactions; mistakes in business
dealings; misallocation of resources
Increased Risk and Slower Economic Growth
The degree of risk associated with investment in the
economy increases which will make investors reluctant to
invest in capital and to make long term commitments. As
the level of investment falls, the prospects for long term
economic growth are lessened.
PRODUCTION AND
GROWTH
Production and Growth
PRODUCTIVITY the quantity of goods and service produced
from each unit of labor input.
PHYSICAL CAPITAL the stock of equipment and structures
that are used to produce goods and services.
HUMAN CAPITAL the knowledge and skills that workers
acquire through education, training and experience.
NATURAL RESOURCES the inputs into the production of
goods and services that are provided by nature, such as land,
rivers, and mineral deposits.
TECHNOLOGICAL KNOWLEDGE societys understanding of
the best ways to produce goods and services.
LONG RUN GROWTH
Add more workers
If, for example, 12 workers are added, 2 extra per machine, then more
output can be produced per machine per hour worked because there are
more workers helping out on each machine.
Add more machines
If 4 machines are added, then the 60 workers have a total of 10
machines to work with instead of 6, and more output can be
produced per worker per hour worked.
Increase the length of the workweek
For example, from 40 hours to 45 hours. With workers and
machines working more hours, more output can be produced.
LONG RUN GROWTH
Increase the quality of the workers
If the education of the workers increases, this may add
to their skills and may increase their ability to work on
the machines.
Increase the quality of the machines
New machines that replace old machines may allow
more output to be produced per hour with the same
number of workers.