Unemployment and Inflation Flashcards
(24 cards)
How does the ABS do their labour force survey?
Monthly sample of around 0.32% of the population aged 15 and over.
To be classified as employed, a person must have worked in paid employment only 1 hour or more in the week before the survey
To be classified as unemployed, a person must not have worked at all in the week before the survey, must have been actively looking for work in the past 4 weeks, and must be ready to start work immediately
What is the equation for the unemployment rate?
Number of unemployed / labour force x 100
What is the equation for the participation rate?
Labour force / working age population x 100
What are some problems with measuring the unemployment rate?
Number of discouraged workers increases during a recession
- official unemployment rate appears lower than it would otherwise be
Under-employed workers
- people who work part-time but would like to work more hours
People who claim to be unemployed but are not
- leads to the unemployment rate being overstated
What are the costs to the economy as a result of unemployment?
- loss of GDP
- loss or deterioration of human capital
- retraining costs
What are the costs to the gov. as a result of unemployment?
- unemployment benefit payments are a net drain on the federal budget
- opportunity cost of funds directed towards unemployment benefits
- loss of tax revenue
What are the costs to the individual as a result of unemployment?
- loss of income
- loss of skills
- retraining costs
- loss of self-esteem
- social costs
What are the 4 types of unemployment?
- Cyclical
- also referred to as ‘demand deficient’ unemployment
- due to economic fluctuations
- Structural
- arises from changes in tech and structure of economy
- Frictional
- arises from normal labour turnover
- Seasonal
- due to lack of demand during certain times of the year
What is full employment?
When all unemployment is frictional and structural.
DONT confuse full employment with zero unemployment
What is the natural rate of unemployment?
The unemployment rate that exists when the economy is operating at potential GDP
What is the natural rate of unemployment or non-accelerating inflation rate of unemployment (NAIRU)?
Level of unemployment below which the rate of inflation will rise.
How can government policy affect unemployment?
- Minimum wage
- labour mark deregulation
- a shift from a highly centralised wage and industrial relations system to a relatively deregulated system.
- enterprise bargaining - wages and workplace conditions negotiated at the workplace level.
- social security and other payments
What is the unemployment trap?
When the opportunity cost to go to work is more than the income received.
What other factors affect unemployment?
- Trade unions
- organisations of workers that bargain for higher wages and better working conditions for their members
- in doing so they may also increase employer costs, which may reduce employment
- Efficiency wage
- a higher-than-market wage paid by a firm to increase worker productivity
- may reduce the need for worker monitoring
- may provide motivation for more productive work
- efficiency wages increases the labour supply, so many increase unemployment
What is inflation and the inflation rate?
Inflation - sustained increase in the general level of prices in the economy. Price level is a measure of the av. prices of G/S in the economy
Inflation rate - % increase in the general price level in the economy from one year to the next
How is inflation measured?
- GDP delator
- Consumer Price Index - closest to measuring the cost of living as experienced by the typical household
- Producer price index - tracks the prices of G/S at all stages of production
How to calculate the inflation rate?
CPI = exp. in the current year / exp. in the base year x 100
e.g. 2015:
900/750 x 100 = 120
2016:
915/750 x 100 = 122
The inflation rate is 2016 would be 122-120/120 x 100 = 1.7%
INFLATION IS ALWAYS ON THE PREVIOUS YEAR
What are the 4 types of bias that can compromise CPI accuracy?
- substitution bias
- CPI assumes that each month we buy the same quantities of goods but variations in price can cause us to buy cheaper stuff
- quality bias
- product improvements are under-counted
- new product bias
- new products are not counted for a while after they appear
- outlet bias or discount store bias
- significant purchases from discount outlets means the CPI is overstated
What are nominal values?
Values not adjusted for inflation. An increase in nominal value reflects the effect on inflation.
What are real values?
Values adjusted for inflation, enabling comparison of quantities AS IF PRICES HAD NOT CHANGED.
Changes in real terms therefore exclude the effect of inflation.
What are some problems with inflation?
- Anticipated inflation
- income redistribution:
- some people’s income will fall behind anticipated inflation
- people on fixed incomes are likely to experience reduced purchasing power due to inflation
- Bracket creep
- Menu costs
- costs of updating prices
Income shrinks if…?
Wealth increases if…?
Savers lose if…?
Borrowers win if…?
Income shrinks if rate of inflation is greater than your increase in nominal income.
Wealth increases if nominal value of your assets increases faster than the rate of inflation.
Savers lose if nominal interest rate on their savings is less that the rate of inflation
Borrowers win if nominal interest rate on their loans is less than the rate of inflation.
What is hyper inflation?
Extremely rapid increases in the general price level.
Money loses value so rapidly that firms and households try to avoid holding it.
Often associated with political instability and is usually accompanies by a severe recession and economic and political turmoil
What is deflation?
A decline in the general price level in the economy.
Problems with deflation include
- increases debt burdens
- reduces asset values and wealth
- gains to consumers from falling prices may be negated by falling wages
- real interest rate rises above the nominal interest rate, discouraging business borrowing and reducing the effectiveness of monetary policy
- long-term deflation can severely erode economic growth
