chapter 8- econ

unemployed
jobless, looking for jobs within the last 4 weeks, available for work
total number of people who are actively looking for work but aren’t currently employed
employment
total number of people currently employed
full or part time
unemployment always rises during __and usually (but not always) __during periods of economic expansion
recessions
falls
to measure unemployment what happens?
every month the Census Bureau contracts 60,000 HH to determine their economic activity
it asks a series of questions that the Bureau of Labor Statistics uses to determine unemployment
labor force=
employed + unemployed
all workers, employed or unemployed

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labor force participation rate =
(unemployed + employed OR labor force / adult population) X 100
what is labor force participation rate
the percent of the adult (16+) non institutionalized civilian population who are working or actively looking for work
percentage of adults in the labor force
unemployment rate (%) =
unemployed / (unemployed + employed OR labor force) x 100
the unemployment rate is ___
the percent of the labor force without a job
the percent of the total number of people in the labor force who are unemployed
if the unemployment rate is 4% then __. if 9% then __.
jobs abundant
jobs very hard to find
can unemployment rate fall to 0?
unemployment rate can never fall to 0 (because worker who is confident of finding a job, but not accepted position is unemployed. frequently ppl who would like to work but aren’t working still don’t get counted as unemployed)
the unemployment rate is a good indicator of __
how easy or difficult it is to find a job given the current state of the economy
how can it overstate the true level of unemployment?
even if the labor market is healthy, it takes time to find the right job (meanwhile, you’re unemployed)
how can it understate the true level of unemployment?
you are not “unemployed” if you have given up looking for a job because there are no jobs available
problems with unemployment statistics
1. discouraged workers
2. marginally attached workers
3. underemployed workers
discouraged workers
nonworking people who have given up looking for work for the time being. not considered unemployed
this may understate % of people who want to work but are unable to find jobs
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)
are considered unemployed
underemployed workers
people who work part time because they cannot find full-time jobs
aren’t counted as unemployed
the deeper the recession, the __ discouraged workers there are.
more
so how good an indicator is the unemployment rate?
what doesn’t it measure?
not perfect
doesn’t measure the quality of jobs or how well people are matched to their jobs
besides unemployment rate, economists also look at other indicators such as
labor force participation rate
number of full-time jobs
average wages
the prime age for employment is
age 25-54
unemployment and recession chart
shaded areas are recessions
during every recession the unemployment rate __
rose
during economic expansion unemployment rate __
decrease
economic expansions aren’t always periods of falling unemployment (although economy is growing, not fast enough to reduce unemployment)
jobless recovery
also called
“growth recession”
a period in which the real GDP growth rate is positive but the unemployment rate is still rising (growing at a below-average rate)
generally there is a __ relationship btw growth in the economy and the rate of unemployment
negative
graph with change in unemployment rate (vertical axis) and real GDP on horizontal axis

strong negative relationship btw growth in econ and unemployment is shown by a __

in 2000 avg unemployment rate fell to 4% from 4.2%. this is shown as __
real GDP grew by 3.7%. this is shown__

points to right of green line are years
points to left of green line are years

low/neg growth in real GDP means that unemployment_
years of high growth in real GDP means that unemployment__

downward trend

shown as a value of -.2 along vertical axis

shown along horizontal axis

above average growth, unemployment decreased
below-average growth, unemployment increased

increased
decreased

times of high unemployment are especially hard on __
new graduates
many workers moved into and out of both employment and unemployment each month because jobs are constantly being ___ and ___
created and destroyed
over past half-century (50 years) national unemployment rate has never dropped below
2.9%
some unemployment is __
natural
there are 3 types of unemployment:
1. frictional
2. structural
3. cyclical
workers who spend time looking for employment are engaged in ___.
if all workers and jobs were __ then this wouldn’t be necessary
job search
alike
reasons for job loss
1.
2.
1. structural change in the economy (industries rise and fall as new technologies emerge and tastes change)
2. poor management performance/bad luck at companies
frictional unemployment
unemployment due to the time workers spend in job search
__ creates frictional unemployment
scarcity of information
matching people to jobs takes time
economy is more productive if workers find jobs that are well matched to skills
when there is a low unemployment rate, periods of unemployment tend to be ___, suggesting that ___
short
much of the unemployment is frictional
(opposite for high unemployment)
frictional unemployment can be result of ___
frictional unemployment includes those __
new people entering labor force
includes those involved in search
structural unemployment
more people are seeking jobs in a particular labor market than there are jobs available at the current wage rate, even when the economy is at the peak of the business cycle
structural unemployment occurs when the wage rate is __
persistently above We (equilibrium wage rate)
even at We (equilibrium wage rate), there will be ___
some frictional unemployment but no structural
some causes of structural unemployment
labor unions
efficiency wages
side effects of government policies
mismatches btw employees and employers
– sufficiently high minimum wage
labor unions sometimes
increase wages above the equilibrium
by bargaining collectively for all of a firm’s workers, unions can often win ___ from employers than workers would have obtained by bargaining individually
this is called__
higher wages

collective bargaining

labor unions exercise bargaining power by __
threatening firms with labor strike (refusal to work)
(employers use lock-outs)
unionized workers earn higher wages, unions push the wage that workers receive ___, consequently ___
above the equilibrium wage
consequently there are more people willing to work at the wage being paid than there are jobs available, and this leads to structural unemployment
efficiency wages
wages that employers set above the equilibrium rate as incentive for better employee performance
when may firms pay efficiency wages, the result is__
a pool of workers who want jobs but can’t find them, so this leads to structural unemployment
side effects of government policies such as
unemployment insurance
policies designed to help workers who lose their jobs replace small fraction of worker’s income and expire after 26 weeks
generosity ___ worker’s incentive to quickly find a new job
reduces
mismatches btw employees and employers
geography or skills
adjusting to shifts in economy mismatch btw what employees have to offer and what they are looking for
until mismatch is resolved through a big enough fall in wages of the surplus workers that induces re-training or relocation, there ___
will be structural unemployment
labor demand curve indicates that when the price of labor–the wage rate– ___, employers demand __

when price of labor increases, more workers are willing to __ at the prevailing wage rate.

these two forces coincide to lead to __

increases
less labor

supply labor

equilibrium wage rate

America’s minimum wage is __
low
minimum wage is
gov’t mandated floor on price of labor
union
an association of workers that bargains collectively with employers over wages, benefits, and working conditions

unions take many forms: some acts to increase wages simply by restricting entry into a profession with licensing requirements

since reunification in 1989, East Germany’s economy__
has remained depressed with productivity low and structural unemployment high
structural unemployment on a wage rate vs. quantity of labor graph
labor supply – labor demand
where they intersect with minimum wage
when minimum wage (Wf) is greater than equilibrium wage (We) then there is a __
when quantity of labor supplied is greater than quantity of demanded then ___
surplus

structural unemployment

btw 1980 and 2000
decrease in natural rate of unemployment because of internet communication, growth of temporary worker industry, aging baby generation at age when they keep existing jobs
frictional and structural unemployment are always present, they are __
natural
natural rate of unemployment
the unemployment rate that arises form the effects of frictional plus structural unemployment
normal unemployment rate around which the actual unemployment rate fluctuates
natural unemployment =
frictional + structural
actual unemployment =
natural unemployment + cyclical unemployment
cyclical unemployment
unemployment correlated with the business cycle–the deviation form the natural rate

the share of unemployment that arises from the downturns of the business cycle

difference btw actual and natural rates of unemployment

lower growth is usually correlated with higher unemployment for two 2 reasons:
1. when GDP falls, firms lay off workers
2. idle labor and capital—economic growth not being maximized — down ability of the economy to create more jobs
we need ___ both to make forecasts and to conduct policy analyses
estimates of the natural rate of unemployment
what causes the natural rate of unemployment to change?
changes in characteristics of the labor force
changes in labor market institutions
changes in government policies
changes in characteristics of the labor force
changing demographics
unemployment rates lower for experienced than inexperienced–lower frictional unemployment
changes in labor market institutions
unions, temp employment agencies, and new technology (internet sites)
agencies—reduced frictional unemployment
changes in government policies
job training programs
if wages for unskilled workers can’t go down then there is an ___ and higher rate of ___ would result
increased structural unemployment

unemployment would results

in the 1970s: __
women and baby boomers join the labor force in droves
so natural rate of unemployment rose during this time
if union membership decreases, unemployment __
decreases
inflation __ the economy
hurts
real wage
is the wage rate divided by the price level
real income
is income divided by the price level
inflation does not ___ because ___
make everyone poorer
incomes often rise with prices
how inflation works
would not be richer if we went to price level in 1962, becuase although prices would be lower, so would wages and incomes

like replacing a dollar with a new dollar at an exchange rate of say 7 to 1, if you owed $140,000 on your home that debt would be $20000

real income =
nominal – inflation
there is a difference between level or prices and inflation rate
inflation rate =
price index in year 2 – price index in year 1 / price index in year 1
from the 1900s to today __ has continually increased, and __ fluctuates.
consumer price index
inflation rate (negative rate)
high rates of inflation impose the following economic costs
shoe-leather
menu
unit of accounts
shoe-leather costs
the increased costs of transactions caused by inflation
shoe-leather costs of inflation in Israel
when the inflation rate hit 500% in 1985, people spent a lot of time in line at banks
with shoe-leather costs, __ grows
bank sector
shoe-leather costs of inflation cause an allusion to the

so people __

wear/tear caused by running around trying to avoid holding money

so people take money to bank to convert cash into something that would hold value, such as stable foreign currency

high inflation rate discourages people from holding money because
purchasing power of cash in your wallet and funds in your bank account steadily erode as overall level of prices increases
menu costs
the real cost of changing a listed price
firms forced to change prices more often than if price level was stable–so this means increase costs for economy
(they are also available in low inflation economies, but aren’t severe)
example: change in supermarket money
menu costs are __ important now because
less
now it is easier because electronic (no stickers)
with menu costs companies many use
artificial unit or a more stable currency (such as US dollars)
unit of account costs
costs arising from the way inflation makes money as less reliable unit of measurement
calculations are hard when inflation is high
unit of accounts costs are important in __ because
tax system
inflation can distort the measures of income on which taxes are collected
with unit of account costs the role of the dollar as a basis for contracts and calculations __
can be degraded by inflation, which causes the purchasing power of a dollar to change over time
example of unit of account costs
assume inflation rate 10% so overall level of prices rises 10% each year. buys land $100,000, resells 1 year later for $110,000 in fundamental sense, business didn’t make a profit, but US tax law would say that the business made a capital gain of $10,000 and it would have to pay taxes on it
unit of account costs causes difficulty in __ and can reduce __
firms/individuals financial planning
quality of economic decisions
if inflation is different from predictions, __
some will lose and some will benefit
interest rate
the price (calculated as a percentage of the amount borrowed) that a lender charges for the use of his or her savings for one year

return a lender receives for allowing borrowers the use of their savings for 1 yr

nominal interest rate
the interest rate expressed in dollar terms
example: interest rate on student loan
real interest rate
the nominal interest rate minus the rate of inflation
if loan carries interest rate of 8%, 5% inflation, real interest rate is 3%
loan
borrower receives a certain amount of funds at the beginning, and the loan contract specifies the interest rate on the loan and when it must be paid off
contract is normally written in __
dollar terms—nominal interest rate
if the actual inflation rate is higher than expected,
borrower gain at the expense of lenders
borrowers will repay their loans with funds that have a higher real value than had been expected
if the actual inflation rate is lower than expected,
lenders gain
borrowers must repay loans with funds that have a higher value than had been expected
look at example of page 10
in modern America, __ are the most important sources of gains and losses from inflation
home mortgages

Americans who took out mortgages in the early 1970s quickly found their real payments reduced by higher-than-expected inflation

by 19883, the purchasing power of a dollar was only 45% of what it had been in 1973

unexpected deflation
surprise fall in price level
creates winners and losers too
why do policy makers move forcefully to bring inflation back down when it creeps above 2% to 3%?
because the policies needed to slow prices usually cause unemployment
disinflation
the process of bringing th inflation rate down
disinflation is ___ once a higher rate of inflation has become well established
difficult and costly
in countries with high and uncertain inflation long term loans are __, which makes it hard to make __
rare
long-term investments
uncertainty about the future inflation rate discourages people from entering into any form of __
long-term contract
in each episode, unemployment/inflation followed a sort of __
clockwise spiral with high inflation gradually falling in the face of an extended period of high unemployment
in the 1970s and early 1980s, bringing inflation down required a temporary but very large increase __
the unemployment rate
period of high unemployment that temporary depressed the economy were necessary to reduce inflation. to avoid this, __
avoid have an inflation problem in the 1st place
which of the following doesn’t influence natural rate of unemployment
a. recessions
b. demand of labor
c. gov’t policy
d. age distribution
e. increase use of internet for job search
james- architect laid off due to slump in demand for property feels like he will have to wait until economy picks up
cyclical
sarah recent graduate, entering difficult labor market due to continued recession. continuing to look for work, but difficult
cyclical
experienced project manager, lost job because company’s product failed to take off. confident he can get a new job. rejected lots of offers
frictional
craig lost job several months ago. reluctant to get new job as he feels that he can make almost as much $ on welfare
structural
hamid graduate as lawyer. confident of getting job, already refused a few lower paid jobs
frictional
unexpected inflation
Joy borrowed $40000 to pay 4 college education
loser
unexpected inflation
US federal gov’t which had almost $15 trillion in debt in 2011
loser
unexpected inflation
Herb keeps savings in piggy bank
gain
unexpected inflation
bank loaned people money for home purchases
gain
unexpected inflation
retired teacher relies upon her fixed pension to pay for her expenses
gain
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