1 of 35 chapter: 24 >> krugman/wells ©2009 worth publishers unemployment and inflation
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3 of 35 WHAT YOU WILL LEARN IN THIS CHAPTER The economic costs of inflation How inflation and deflation create winners and losers Why policy makers try to maintain a stable rate of inflationTRANSCRIPT
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chapter:
24>>
Krugman/Wells
©2009 Worth Publishers
Unemployment and Inflation
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WHAT YOU WILL LEARN IN THIS CHAPTER
How unemployment is measured and how the unemployment rate is calculated
The significance of the unemployment rate for the economy
The relationship between the unemployment rate and economic growth
The factors that determine the natural rate of unemployment
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WHAT YOU WILL LEARN IN THIS CHAPTER
The economic costs of inflation How inflation and deflation create winners and
losers Why policy makers try to maintain a stable rate of
inflation
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Unemployment Rate Employment is the number of people currently
employed in the economy, either full time or part time.
Unemployment is the number of people who are actively looking for work but aren’t currently employed.
The labor force is equal to the sum of employment and unemployment.
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Unemployment Rate The labor force participation rate is the
percentage of the population aged 16 or older that is in the labor force.
The unemployment rate is the percentage of the total number of people in the labor force who are unemployed.
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Unemployment RateThe U.S. Unemployment Rate, 1948-2008
1948 1960 1970 1980 1990 2000 2008
Year
12%
10
8
6
4
2
Unemployment Rate
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Unemployment Rate – Great Depression
http://www.econreview.com/events/ur1932b.htm
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Unemployment Rate – 2007-NOW
Click on ‘Merica to get to interactive map! Super Fun!
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Unemployment Rate Discouraged workers are nonworking people who
are capable of working but have given up looking for a job given the state of the job market.
Marginally attached workers would like to be employed and have looked for a job in the recent past but are not currently looking for work.
Underemployment is the number of people who work part time because they cannot find full-time jobs.
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Unemployment Rate
Alternative Measures of Unemployment, 1994-2008
1994 1996 1998 2000 2002 2004 2006 2008
Year
12%
10
8
6
4
2
Percentage of labor force
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Unemployment Rate
Unemployment Rates of Different Groups, 2007
White teenager
35%
30
25
20
15
10
5
0
Unemployment rate
Overall African-Amerian teenager
African-Amerian
14.4%
4.7%
31.2%
7.7%
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Unemployment RateUnemployment and Recessions, 1978-2008
1980 1985 1990 1995 2000 2005 2008
Year
12%
10
8
6
4
2
Unemployment Rate
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Types of Unemployment Frictional Unemployment – Unemployment that results
b/c it takes time for workers to search for jobs that best suit their tastes and skills.
Structural unemployment – Unemployment that results b/c of fundamental, underlying change in an economy that can create job loss for skills that are no longer in demand.
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Types of Unemployment Seasonal Unemployment – periodic and predictable job
loss that follows the calendar. Cyclical Unemployment – Jobs are gained and lost as
business cycle improves and worsens. As an economy is expanding, less unemployment, and vice versa.
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Structural UnemploymentThe Effect of a Minimum Wage on the Labor Market
Quantity of Labor
W
Wage Rate
W
F
E
QD QE QS
Structuralunemployme
nt
Minimum
wage
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Structural Unemployment Minimum wages - a government-mandated floor
on the price of labor. Unions - by bargaining for all a firm’s workers
collectively (collective bargaining), unions can often win higher wages from employers than the market would have otherwise provided when workers bargained individually. Is this a good thing?
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Structural Unemployment Efficiency wages - wages that employers set
above the equilibrium wage rate as an incentive for better performance.
Side effects of government policies - public policies designed to help workers who lose their jobs; these policies can lead to structural unemployment as an unintended side effect.
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The Natural Rate of Unemployment The natural rate of unemployment is the normal
unemployment rate around which the actual unemployment rate fluctuates. It is the unemployment rate that arises from the effects of frictional plus structural unemployment. Natural unemployment = Frictional unemployment +
Structural unemployment Cyclical unemployment is a deviation in the
actual rate of unemployment from the natural rate. Actual unemployment = Natural unemployment + Cyclical
unemployment
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Inflation Costs
Shoeleather costs More bank trips, keep less money in hand
Menu Costs Relative Price Variability & Misallocation of
resources Slow reaction/inaction to inflation-induced
changes distort relative prices skew consumer decisions Lead to misallocation of resources
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Inflation Costs - Continued
Confusion and inconvenience Money is a yardstick With inflation, tougher to measure important
variables Income or profitability…
Redistribution of Wealth With higher than expected inflation… Wealth flows from lenders to borrowers If your student loan is set at 5%, but inflation raises
to 20% Deflation in late 19th C and The Wizard of Oz
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Inflation and Deflation The nominal interest rate is the interest rate
expressed in dollar terms. The real interest rate is the nominal interest rate
minus the rate of inflation. REAL=NOMINAL-INFLATION
Disinflation is the process of bringing the inflation rate down. Volker Disinflation of 1979-1982 We’ll watch this in Commanding Heights!
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Inflation and DeflationThe Cost of Disinflation
Year 1978 1980 1982 1984 1986 1988
16%
14
12
10
8
6
4
2
Inflation rate
12%
10
8
6
Inflation rate
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The End of Chapter 24
coming attraction:Chapter 25:
Long-run Economic Growth