Chapter 8: Inflation and Unemployment

Question 1

Employment

Answer 1

The total number of people who are currently employed either full time or part time

Question 2

Unemployment

Answer 2

the number of people who are actively looking for work (and have been in the past 4 weeks) but are not currently employed

Question 3

What is the relationship between the business cycle and unemployment?

Answer 3

Unemployment tends to rise sharply during recession and tends to fall during expansions (but not always)

Question 4

Labor Force

Answer 4

the sum of employment and unemployment

Question 5

Unemployment Rate, u

Answer 5

(unemployed/labor force)*100 is the percentage of the total number of people in the labor force who are unemployed.

Question 6

Participation rate

Answer 6

(labor force/population over 16 years and older) *100

is the percentage of the population aged 16 or older that is in the labor force.

Question 7

What does the unemployment rate indicate?

Answer 7

how easy or difficult it is to find a job in the current state of the economy

Question 8

In what measures is the unemployment rate an ineffective indicator?

Answer 8

It is not a literal measure of people who want a job but cannot find one because in some ways, the unemployment rate exaggerates the difficulty in finding jobs or downplays it

Question 9

How can the unemployment rate overstate the true level of unemployment?

Answer 9

A worker who has been offered a job but has not yet accepted the position or begun work may be counted as unemployed (or if they are moving between job). The unemployment rate thus is never 0 and overstates the number of people who want a job but cannot find one

Question 10

How can the unemployment rate understate the true level of unemployment?

Answer 10

Discouraged workers who have become depressed or are not searching actively for work in the last 4 weeks but would like to work are not counted in the unemployment rate
They are part of a larger group of marginally attached workers who would like to be employed, have looked in the recent past, but are not currently looking, and they too are not counted in unemployment rate
Underemployed workers are also not counted

Question 11

Discouraged workers

Answer 11

As subset of marginally attached workers: Nonworking people who are capable of working but have given up looking for a job given the state of the job market (also perhaps due to location). i.e. a laid-off steel worker in a depressed steel town without the resources to move

Question 12

Marginally Attached Workers

Answer 12

would like to be employed, have looked for a job in the recent past, but are not currently looking for work

Question 13

Underemployed workers

Answer 13

the number of people who work part time because they cannot find full time jobs

Question 14

While the BLS does not include discouraged, marginally attached, and underemployed workers in the main unemployment rate, what do they use to take these into account?

Answer 14

The BLS calculates “measures of labor underutilization” which includes these categories. The different rates run in parallel, giving an idea of how the economy is generally moving

Question 15

How do unemployment rates differ in age groups?

Answer 15

Those between 25 and 54 (in the working prime) tend to have an easier time finding jobs than those below 24 or in retirement age

Question 16

How can we evaluate the unemployment rate as an economic indicator

Answer 16

We can use it to determine overall labor market conditions and the ups and downs in the economy which impact lives. We cannot use it as an exact, literal measure of the people without work who want a job.

Question 17

What is the main caveat regarding economic expansions and the unemployment rate?

Answer 17

the unemployment rate usually, BUT NOT ALWAYS, decreases in an expansion. In the last 3 recessions in the 1990s, early 2000s and the Great Recession, unemployment continued to expand well into the expansion

Question 18

Why might unemployment continue to rise despite economic expansion?

Answer 18

The economy was growing but not fast enough to keep pace with unemployment

Question 19

What is the relationship between economic growth rates and unemployment change rate?

Answer 19

Generally, as economic growth rates increase, unemployment change rates decrease and vice versa

Question 20

Jobless Recovery

Answer 20

A period in which the Real GDP growth rate is positive but so too is the unemployment growth rate (unemployment is still rising)

Question 21

Falling real GDP is ___ associated with a rising rate of unemployment

Answer 21

ALWAYS

Question 22

Simply put, why does the natural rate of unemployment exist above 0%

Answer 22

jobs are always being created and destroyed

Question 23

Job separation

Answer 23

terminations of employment that occur when a worker is fired or quits voluntarily. it does not need to be related to the business cycle.

Question 24

What are two reasons for job separation?

Answer 24

Structural unemployment and poor management/bad luck

Question 25

What are the two types of natural unemployment in modern economies?

Answer 25

frictional and structural

Question 26

Frictional Unemployment

Answer 26

unemployment due to the time workers spend in the job search. A certain amount of frictional unemployment is inevitable due to the constant process of economic change and may even be a sign of a healthy, growing economy

Question 27

The job search

Answer 27

Workers who spend time looking for employment are engaged in the job search

Question 28

How might a certain level of frictional unemployment be a good sign?

Answer 28

It is a sign that workers are taking the time to find better jobs to improve productivity and therefore the productivity of the economy

Question 29

How does frictional unemployment relate to joblessness

Answer 29

In times of low unemployment, a greater share of the rate is due to frictional unemployment and the time unemployed is less than if the unemployment was higher

Question 30

Structural Unemployment

Answer 30

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 its business cycle

Question 31

How do frictional and structural unemployment relate to the supply and demand of jobs?

Answer 31

Frictional unemployment DOES NOT mean that there is a job surplus. It exists even when the number of job seekers equals the number of available jobs. A persistent surplus even at the peak of a cycle may indicate structural unemployment

Question 32

How does structural unemployment relate to the market supply and demand of work?

Answer 32

structural unemployment does not exist at equilibrium (but frictional does). It only exists when the wage rate is consistently above equilibrium and there are excess workers

Question 33

What are the 5 primary causes of structural unemployment

Answer 33

1. minimum wages
2. labor unions
3. efficiency wages
4. government policy side effects
5. mismatches between employers and employees

Question 34

Minimum wage

Answer 34

A government mandated floor on the price of labor

Question 35

What is the rationale behind a minimum wage and what is its subsequent drawback?

Answer 35

Governments want to ensure that people at the minimum wage can live a relatively comfortable lifestyle, but it eliminates job opportunities for other workers who may have worked at lower wages. Based on the supply-demand graph, there are not only fewer workers but also more jobs offered at equilibrium below the minimum wage

Question 36

Labor Unions

Answer 36

Utilize collective bargaining practices to tip the scales in favor of the worker to demand higher wages, better benefits, and threaten firms with labor strikes.

Question 37

How might employers fight against labor unions

Answer 37

lockouts in which they render them useless or unemployed while hiring new workers

Question 38

How might labor unions lead to structural unemployment

Answer 38

They demand more benefits per worker, meaning, in a similar fashion to the minimum wage, the supply of workers increases but the demand drops

Question 39

Efficiency Wages

Answer 39

wages employers set above the equilibrium wage rate as an incentive for better employee performance. this is similar to a minimum wage, but set by the employer with a focus on productivity rather than lifestyle

Question 40

The natural rate of unemployment u*

Answer 40

the unemployment rate that arises from the effects of frictional + structural unemployment. It is the normal rate around which the actual rate fluctuates. It is the combination of unemployment due to time spent in the job search and the unemployment for over demand for jobs in an industry where there are not enough at the current wage rate (even at the peak of the business cycle)

Question 41

Cyclical Unemployment

Answer 41

the deviation of the actual rate of unemployment from the natural rate due to downturns in the business cycle. It is the difference between the actual and natural rates.

cyclical = actual - natural.

This means that there can be negative cyclical unemployment, like between 2005 and 2007

Question 42

Why don’t governments aim to keep unemployment persistently below the natural rate? (i.e. why wouldn’t the America Works Program in House of Cards work?)

Answer 42

We cannot keep negative cyclical unemployment without leading to accelerating inflation.

Question 43

The equation for actual unemployment

Answer 43

natural + cyclical

Question 44

True or False, the natural rate of unemployment is constant and cannot be affected by the government

Answer 44

FALSE: the natural rate changes over time and it is affected by government policy

Question 45

Why do private-sector economists and government agencies need estimates of the natural rate of unemployment?

Answer 45

They need it to make forecasts about the unemployment rate and to conduct policy analysis

Question 46

What three primary factors cause changes in the natural rate of unemployment?

Answer 46

Changes in labor force characteristics, changes in the labor market institutions, and changes in government policy

Question 47

Why did 1970s unemployment rates rise? What factor of the change in the natural rate does this apply to?

Answer 47

The baby-boomers from the post-World War II era and more women hit the workforce, and many were inexperienced. This is part of changing labor force characteristics

Question 48

Why might be a reason natural unemployment rates fell between the 1970s and 1990s in the US but remain higher in Europe?

Answer 48

Changes in labor market institutions: Labor unions in the EU have remained strong, therefore contributing to higher wages, structural unemployment, and natural unemployment. In the US, union membership declined between 1970 and 1990, leading to less union power, and so less natural unemployment

Question 49

How do temporary employment agencies affect the natural rate?

Answer 49

They reduce frictional unemployment rates by increasing the speed with which workers and employers find each other

Question 50

How might periods of faster technological change induce increased natural unemployment rates? (think of coal miners)

Answer 50

Increased tech changes and advancements mean that those who are less skilled will see a decrease in employment and wages. If there is a minimum wage, reduces employment further, creating more structural unemployment due to the minimum wage, and therefore increasing natural rates.

Question 51

How might changes in government policies increase natural rates?

Answer 51

A higher minimum wage or generous unemployment benefits can increase both structural and frictional unemployment. People will take longer to look for work due to benefits and they will have to compete for fewer jobs.

Question 52

How might changes in government policies decrease natural rates?

Answer 52

Job training programs can increase the skill set to increase matching and employment subsidies can be given to workers or employers to incentivize working/hiring

Question 53

Real wage

Answer 53

the wage rate divided by the price level. Remember that we get the price level (or aggregate price level) or measure of overall prices in the economy using a price index, or the cost of purchasing a market basket, or a hypothetical set of consumer goods and services purchases, in a given year normalized so that the price index of the basket in a base year is 100

Question 54

Real income

Answer 54

the income divided by price level

Question 55

How do real wages and real income interact with the price level and inflation?

Answer 55

Since they are each divided by the overall price level, they are not really affected directly by inflation (but they are affected by inflation rate). Basically, the level of prices doesn’t matter. The US would be no richer if the level of prices were in 1961 dollars of 2017 dollars

Question 56

If the level of prices and the increase in the price level do not matter to real wages and income, then what does matter in regards to inflation?

Answer 56

the rate of change of inflation, or the percentage change in the price index from year to year. NOTE: inflation does not affect the price levels, but the rate of change of inflation does

Question 57

How is the aggregate price level related to the price index and inflation?

Answer 57

The aggregate price level is a measure of the overall level of prices in the economy and the price index gives us the ability to find a single number representing the overall level of prices to compare different years (we must use a base year) in terms of market baskets. The percentage change in the price index, which we use to represent the overall price level, is what gives us the inflation rate

Question 58

How do we find the base year on a graph of price level over time?

Answer 58

Find where the price level is 100

Question 59

Even though the price level does not really affect real income and wages, what factors make high inflation rates costly?

Answer 59

1. shoe-leather costs
2. menu costs
3. Unit-of-account costs

Question 60

Shoe-leather costs

Answer 60

are the increased costs of transactions due to inflation. For example during the 1921-1923 German hyperinflation, merchants spent resources and time hiring runners to take their money to the bank many times a day and exchange it for commodities or foreign currencies. The payment to these runners is considered a shoe and leather cost. Shoe-leather costs come from people running around trying to avoid holding money and the amount of resources that go into the banking sector or other industries (like runners) as a result of this, when the money could have gone somewhere more productive

Question 61

Menu Cost

Answer 61

the real cost of changing a listed price (like on a book or restaurant menus)

Question 62

The unit of account role of money

Answer 62

the role of the dollar as a basis for contracts and calculations

Question 63

the unit of account cost

Answer 63

the costs arising from the way inflation makes money a less reliable unit of measurement. They change purchasing power of currencies and can affect the quality of economic decisions, such as contracts and budgeting

Question 64

How can taxes and unit of account costs relate to worsening conditions

Answer 64

A higher inflation rate can mean that a business which purchases a good and resells it at a higher price down the road may make no profit in a realistic sense and only in a number sense. However, the government will count this as profit and collect taxes –the business loses money

Question 65

What is the main reasons that some people can win and lose from inflation

Answer 65

transactions often take place over long periods of time but contracts are often stated in nominal value

Question 66

The interest rate on a loan

Answer 66

the price, calculated as a percentage of the amount borrowed, that lenders charge borrowers the of their savings for one year

Question 67

The nominal interest rate

Answer 67

The interest rate expressed in dollar terms

Question 68

The real interest rate

Answer 68

the nominal rate minus the rate of inflation

Question 69

When people borrow and lend, they have expectations regarding inflation; what happens when the rate is higher than expected

Answer 69

The value of the dollar and the nominal rate change. Borrowers gain at the expense of lenders and borrowers repay their loans with funds that have lower real value (but the same nominal value) than had been expected. It is a risk by lenders

Question 70

When people borrow and lend, they have expectations regarding inflation; what happens when the rate is lower than expected

Answer 70

Lenders gain at the expense of borrowers since borrowers pay back their loans with funds that have higher real value (but same nominal value) than expected

Question 71

What is a major drawback from the higher or lower levels of inflation than expected?

Answer 71

uncertainty discourages people from entering into long-term contracts, making it difficult to make long-term investments

Question 72

Disinflation

Answer 72

The process of bringing down the inflation rate

Question 73

Core Inflation Rate

Answer 73

excludes volatile food and energy prices