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Flashcards in Unemployment and Inflation Deck (46):
1

Answer questions at beginning of slides

Unemployment, natural rate of unemployment, why does unemployment exist?, how is unemployment affected by unions and minimum wage laws, efficiency wages

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Groups in Labor Stats

Employed, Unemployed, Not in the Labor Force

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Employed

paid employees, self-employed, unpaid workers in family business

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Unemployed

people not working who have looked for work during previous 4 weeks

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Not in the Labor Force

everyone else (not working and not looking for work)

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Labor Force

The labor force is the total number of workers (adjust population: 16 years or older), including the employed and unemployed

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Unemployment Rate ("u-rate")

% of the labor force that is unemployed

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Unemployment Rate Equation

u-rate = 100 x number of employed/ labor force

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Labor Force Participation Rate

% of the labor force that is in the labor force

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Labor Force Equation

labor force participation rate: = 100 x (labor force/ adult population)

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Natural Rate

"Normal Rate" of unemployment around which the actual unemployment rate fluctuates. Unemployment rate that would exist in a growing and healthy economy from the combination of economic, social, and political factors that exist at a time

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Cyclical Unemployment (Short Run)

Deviation of unemployment from its natural rate. It is closely linked to the business cycle, like higher unemployment during a recession

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Explaining Natural Unemployment (Terms)

Frictional unemployment, Structural Unemployment

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Frictional unemployment

Occurs when workers spend time searching for the job that best suis their skills and tastes; when workers move between jobs - short term

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Structural Unemployment

Occurs when there are fewer jobs than workers - long term

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Unemployment Insurance

Government program that partially protects workers' incomes when they become unemployed

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Structural Unemployment

Occurs when wage is kept above equilibrium wage. Wages are "sticky downward" because of institutions or economics

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Structural Unemployment - Minimum Wage Laws

Minimum wage works just like a price floor. It may exceed the equilibrium wage for the least skilled or experienced workers, causing structural unemployment - small group cannot explain unemployment

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Structural Unemployment - Unions

Raise the equilibrium of wage: Insiders (who remain employed) are better off;
Outsiders (workers who lose their jobs) are worse off

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Structural Unemployment - Efficiency Wages

Firms voluntarily pay above-equilibrium wages to boost worker productivity (either individually or as a group)

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Benefits of Wage Theory in Practice

Worker health: paying higher wages allows workers to eat better, healthier, more productive
Worker Turnover: minimize cost of high turnover by giving a stronger incentive to stay
Worker quality: Higher wages attracts better job applicants, increases quality of the firm's workforce

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Implicit Contracts

An unwritten agreement in the labor market that the employer will try to keep wages from falling when the economy is weak or the business is having trouble, and the employee will not expect huge salary increases when the economy or the busines is strong

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Why implicit contracts?

Wage-setting behavior acts like a form of insurance
First will be hesitant to cut wages to avoid worker's negative reactions (work less hard, leave the firm; see efficiency wages)

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Natural Rate of Unemployment - Summary

Frictional Unemployment- time to search for the right job
Structural Unemployment - above equilibrium = not enough jobs
due to minimum wage, labor unions, efficiency wages, implicit contracts

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Inflation

A general and ongoing rise in the level of prices in the economy

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General Inflation

prices do not increase by the same amount; pressure for price increases reach across most markets

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Ongoing Inflation

price increases in the microeconomic supply - demand model are one time events

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Basket of Goods and Services

Hypothetical group of different items, with specified quantities or each one, used as a basis for calculating how the price level changes over time

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Index Number

on arbitrary year is chosen to equal 100, and then values in all other years are set proportionally equal to that base year.

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Measure of Inflation

CPI - Consumer price index - measures the typical consumer's cost of living

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CPI Equation

100 x cost of basket in current year/cost of basket in base year

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Inflation Rate

(CPI this year - CPI last year) / CPI last year) x 100%

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Core Inflation

Represents a long run trend in price levels. Transitory price changes are excluded

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Deflation

Negative Inflation

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Hyper Inflation

Extremely high rates of inflation

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Substitution Bias

Inflation rate calculated using a fixed basket of goods over time tends to overstate the true cost of living because it does not take into account that the person can substitute away from goods whose prices rise a lot.

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Quality/New Good Bias

Inflation calculate using a fixed basket of goods over time tends to overstate the true rising cost of living, because it does not take into account improvements in the quality of existing goods or the invention of new goods

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Alternative Price Indicies

Producer Price Index, International Price Index, Employment Cost Index, GDP Deflator

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GDP Deflator

A measure of the price level calculated as the ration of nominal GDP to real GDP times 100

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GDP Deflator Equation

GDP deflator = Nominal GDP/Real GDP x 100

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Inflation Rate Equation

Inflation Rate = ((GDP deflator this year - GDP deflator last year) / GDP deflator last year) x 100

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Converting Equation

Amount in Today's dollars = amount in year T dollars x (Price level today/Price Level in year T)

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Indexation

Dollar amount is indexed for inflation if it is automatically corrected for inflation by law or in a contract

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Correcting Variables for Inflation - terms

Nominal Interest Rate, Real Interest Rate

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Nominal Interest Rate

Interest rate not corrected for inflation
Rate of growth in the dollar value of a deposit or debt

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Real Interest Rate

-Corrected for inflation
-Rate of growth in the purchasing power of a deposit or debt
-Equal to the nominal interest rate minus the inflation rate