GWARTNEY STROUP SOBEL MACPHERSON Economic Fluctuations Unemployment and
GWARTNEY – STROUP – SOBEL – MACPHERSON Economic Fluctuations, Unemployment, and Inflation Full Length Text — Part: 3 Macro Only Text — Part: 3 Chapter: 8 To Accompany: “Economics: Private and Public Choice, 15 th ed. ” James Gwartney, Richard Stroup, Russell Sobel, & David Macpherson Slides authored animated by: James Gwartney & Charles Skipton Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Swings in the Economic Pendulum 15 th edition Gwartney-Stroup Sobel-Macpherson Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Instability in the Growth of Real GDP: 1960 -2013 15 th edition Gwartney-Stroup Sobel-Macpherson Annual Rate of Growth in Real GDP • Although real GDP in the United States has grown at an average rate of approximately 3%, the growth has been characterized by economic ups-and-downs. Note: periods of recession are indicated with shading. (long-run growth rate approximately 3%) 8% 6% 4% 2% 0% -2% -4% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2013 Source: Economic Report of the President, various issues. Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
15 th edition The Hypothetical Business Cycle Business peak Trend line ion Business peak ans • In contrast with the business cycle represented here, as the previous exhibit illustrated, real world business cycles are characterized by expansions and contractions of varying duration and magnitude. Real GDP Contract ion Recessionary trough Exp • The four phases of the hypothetical business cycle are expansion, peak, contraction, and recessionary trough. Gwartney-Stroup Sobel-Macpherson Recessionary trough Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. Time First page
Economic Fluctuations and the Labor Market 15 th edition Gwartney-Stroup Sobel-Macpherson Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Labor Market Classifications 15 th edition Gwartney-Stroup Sobel-Macpherson • Employed – a person (16 years old or over) who is: • working for pay at least one hour per week, • self employed, or, • working 15 hours or more each week without pay in a family-operated enterprise. • Unemployed – a person not currently employed who is: • actively seeking a job, or, • waiting to begin a job, or, • on layoff, waiting to return to a previous job. Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Labor Market Classifications 15 th edition Gwartney-Stroup Sobel-Macpherson • Civilian Labor force – civilians (16 years & older) who are: • either employed or unemployed. • Not in the labor force – persons (16 years & older) who are: • neither employed nor unemployed (like retirees, students, homemakers, or disabled persons). Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Labor Market Indicators 15 th edition Gwartney-Stroup Sobel-Macpherson • The non-institutional civilian adult population is grouped into two broad categories: • Persons not in the labor force, and, • persons in the labor force (this group includes both the employed and unemployed). Labor Force Participation Rate = Recall the Labor Force = # in the Labor Force Civilian population (16+) Employed + Unemployed Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
U. S. Population, Employment, and Unemployment: April 2013 245. 2 million Civilian population 16 and over 89. 9 million Not in the labor force • Household workers • Students • Retirees • Disabled 143. 6 million Labor Force Participation Rate Employment / Population Ratio Rate of Unemployment 15 th edition Gwartney-Stroup Sobel-Macpherson 155. 2 million Civilian labor force 11. 7 million Unemployed Employed • Employees • Self-employed workers • New entrants • Reentrants • Lost last job • Quit last job • Laid off = Civilian labor force Civilian population (16+) = 155. 2 245. 2 = 63. 3% = Number employed Civilian population (16+) = 143. 6 245. 2 = 58. 6% = Number unemployed Civilian labor force = 11. 7 155. 2 = 7. 5% Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Labor Force Participation Rate of Men and Women, 1948 -2012 15 th edition Gwartney-Stroup Sobel-Macpherson Labor Force Participation Rate of Men and Women • The labor force participation rate of women has been steadily increasing for several decades. 87 % 83% 78 % 76 % 70 % 57. 5 % 57. 7 % • During the same period the rate of men has been falling. 33 % 38 % 46 % 1948 1960 1975 1990 2012 –––––– Women ––––––– Men ––––––– Source: www. bls. gov. Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Labor Force Participation Rate and Employment-Population Ratio: 1980 -2013 • Both the labor force participation rate and the employment-population ratio trended upward from 1980 -2000, but have been declining since. • Both figures fell sharply during the 2008 -2009 recession. Each has had a weak rebound during the recovery phase of this business cycle. In 2013, both were still below their 2007 levels. 15 th edition Gwartney-Stroup Sobel-Macpherson Labor Force Participation Rate 68 % 66 % 64 % 62 % Employment-Population Ratio 60 % 58 % 56 % 1980 1985 1990 1995 2000 2005 20102013 Sources: Willem Van Zandweghe, “Interpreting the Recent Decline in Labor Force Participation, ” Federal Reserve Bank of Kansas Economic Review (Quarter 1, 2012): 5 -34; and Daniel Aaronson, Jonathan Davis, and Loujia Hu, “Explaining the Decline in the U. S. Labor Force Participation Rate, ” Chicago Fed Letter, no. 296, (March 2012): 1 -4. Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Composition of the Unemployed by Reason in 2013 (April) 15 th edition Gwartney-Stroup Sobel-Macpherson Breakdown of Unemployed 2013 (April) • There are various reasons why persons were unemployed in April of 2013. Job leavers 7. 4% New entrants 10. 9% • Nearly one-half (44. 8%) of the unemployed were dismissed from their previous jobs. • More than a third (37. 8%) of the unemployed were either new entrants or reentrants into the labor force. Reentrants 26. 9% 44. 8% Dismissed from Previous Job 10% On Layoff Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
The Unemployment Rate By Age and Gender: April 2013 • In 2013, the unemployment rate for men was 7. 7%, compared to only 7. 3% for women. • The observed differential between male and female workers was higher with younger workers. • The unemployment rate itself was also much higher for those under the age of 25 than for those over the age of 25. 15 th edition Gwartney-Stroup Sobel-Macpherson Civilian Rates of Unemployment (April 2013) 26. 2% 22. 1% 14. 0% 12. 3% 6. 3% 16 -19 20 -24 25+ –– Men aged –– 7. 7% 7. 5% 7. 3% 5. 9% All Both All 16 -19 20 -24 25+ men women –– Women aged –– Source: www. bls. gov. Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Questions for Thought: 15 th edition Gwartney-Stroup Sobel-Macpherson 1. Classify the following as employed, unemployed, or not in labor force: a) person who is not working but applied for a job at Target last week b) person working part-time and searching diligently for a full-time job c) auto worker vacationing in Florida during a layoff at a General Motors plant who expects to be recalled in a couple of weeks d) 17 -year-old who works 6 hours per week as a throwing newspapers e) homemaker working 70 hours a week preparing meals and performing other household services f) college student who spends between 50 and 60 hours per week attending classes and studying g) a retired Social Security recipient Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Questions for Thought: 15 th edition Gwartney-Stroup Sobel-Macpherson 2. The following are for the U. S. in 2011 (in millions) Population 311. 3 Civilian pop. (age 16 and over) 239. 1 Employed 139. 7 Unemployed 13. 7 a) Calculate the unemployment rate b) Calculate the labor force participation rate c) Calculate the employment / population ratio Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Three Types of Unemployment 15 th edition Gwartney-Stroup Sobel-Macpherson Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Three Types of Unemployment 15 th edition Gwartney-Stroup Sobel-Macpherson • Frictional Unemployment: • Caused by imperfect information. • Occurs because: • employers are not aware of all available workers and their qualifications, and, • available workers are not fully aware of all the jobs being offered by employers. Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Three Types of Unemployment 15 th edition Gwartney-Stroup Sobel-Macpherson • Structural Unemployment: • Reflects an imperfect match of employee skills to skill requirements of the available jobs. • Also reflects structural and demographic characteristics of the labor market. • Cyclical Unemployment: • Reflects business cycle conditions • When there is a general downturn in business activity, cyclical unemployment increases. Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Employment Fluctuations: The Historical Record 15 th edition Gwartney-Stroup Sobel-Macpherson Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Unemployment and Output Are Linked Over the Business Cycle 15 th edition Gwartney-Stroup Sobel-Macpherson • The unemployment rate from 1960 -2013 is illustrated here. • As expected, unemployment rose rapidly during each of the eight recessions (the shaded years indicate periods of recession). • In contrast, after each recession ended, the unemployment rate began to decline as the economy moved into an expansionary phase of the business cycle. • Note that the actual rate of unemployment was greater than the natural rate during and immediately following each recession. Unemployment Rate (U. S) 1960 - 2013 Actual rate of unemployment 12% 10% 8% 6% 4% Natural rate of unemployment 2% 0% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2013 Sources : http: //www. bls. gov/ and, Robert J. Gordon, Macroeconomics (Boston: Addison-Wesley, 2012). Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
The Concept of Full Employment 15 th edition Gwartney-Stroup Sobel-Macpherson • Full Employment: Level of employment resulting when the rate of unemployment is normal, considering both frictional and structural factors. • Full employment is closely related to the concept of the natural rate of unemployment. • Natural Rate of Unemployment: Level of unemployment that reflects “job shopping” in an economy of imperfect information and dynamic change. Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
The Concept of the Natural Rate of Employment 15 th edition Gwartney-Stroup Sobel-Macpherson • The natural rate of unemployment is: • neither a temporary high nor temporary low. • a rate that is both achievable and sustainable. • the level of unemployment accompanying an economy’s “maximum sustainable rate of output. ” • Both demographic factors (e. g. young workers as a share of the labor force) and public policy (e. g. the level of unemployment benefits) influence the natural rate of unemployment. • Actual rate of unemployment generally rises above natural rate during a recession and falls below the natural rate during a boom. Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Actual and Potential GDP 15 th edition Gwartney-Stroup Sobel-Macpherson Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Actual and Potential GDP 15 th edition Gwartney-Stroup Sobel-Macpherson • Potential output: Maximum sustainable output level consistent with the economy’s resource base, given its institutional arrangements. • Actual and potential output will be equal when the economy is at full employment. Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
15 th edition Actual and Potential GDP, 1960 -2013 Gwartney-Stroup Sobel-Macpherson Real GDP (billions of 2005 $) 16, 000 • Here we illustrate both actual GDP & potential GDP. • Note the gap between actual and potential GDP during periods of recession. 14, 000 Actual GDP 12, 000 1990 -91 recession 10, 000 8, 000 6, 000 1970 recession 1960 recession 2008 -10 recession 1982 recession 4, 000 1974 -75 recession 2, 000 1960 2001 recession Potential GDP 1965 1970 1975 1980 recession 1985 1990 1995 2000 2005 2013 Source: http: //www. bls. gov Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Questions for Thought: 15 th edition Gwartney-Stroup Sobel-Macpherson 1. During a recession, which of the following will be true? a. Actual rate of unemployment will be lower than the natural rate. b. Actual GDP will be lower than potential GDP. c. Actual employment will exceed what is considered as full employment. 2. How will increased usage of the Internet by employers and employees influence the job search process? Will it tend to increase or decrease the natural rate of unemployment? 3. (True or false) When full employment is present the rate of unemployment will be zero. Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Questions for Thought: 15 th edition Gwartney-Stroup Sobel-Macpherson 4. What is the relationship between full employment and the natural rate of unemployment? Why might the natural rate change? 5. Frictional unemployment is a result of: (a) not enough jobs for everyone to be employed (b) unemployed workers’ skills not matching those needed for available jobs (c) a decline in the demand for labor, such as during a recession (d) imperfect information & temporary periods of unemployment while workers change jobs Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
The Effects of Inflation 15 th edition Gwartney-Stroup Sobel-Macpherson Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Inflation 15 th edition Gwartney-Stroup Sobel-Macpherson • Inflation is a change in the general level of prices as measured by a price index such as the GDP deflator or the consumer price index. • Inflation is generally measured at an annual rate. • When inflation is high, the year-to-year changes in the inflation rate are nearly always highly variable, making them difficult to predict. Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
15 th edition The Inflation Rate, 1956 -2013 • Between 1956 and 1965, the general price level increased at an average annual rate of only 1. 6%. • In contrast, the inflation rate averaged 9. 2% from 1973 to 1981, reaching double-digits during several years. Gwartney-Stroup Sobel-Macpherson 1956 -1965 average inflation rate = 1. 6 % 15% 10% 1973 -1981 average inflation rate = 9. 2 % 1983 -2013 average inflation rate = 2. 9 % 5% 0% • Since 1982, the average rate of inflation has been lower (2. 9% -5% 1956 1960 from 1983 -2013) and more stable. 1965 1970 1975 1980 1985 1990 1995 2000 2005 Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. 2013 First page
Inflation Rates Across Economies: 2006 -2012 15 th edition Gwartney-Stroup Sobel-Macpherson • The rate of inflation varies widely among countries. • For Canada, Germany, Switzerland, and the U. S. the annual inflation rates for the 2006 -12 period were below 4% -and- variations (year to year) were no more than 1 or 2%. • In contrast, both the annual inflation rate and the change between years was much greater for Bolivia, Iceland, Russia, and Venezuela. • High rates of inflation are almost always associated with substantial year-to-year swings in the inflation rate. Annual Inflation Rates Low Inflation (%) 2006 2007 2008 2009 2010 2011 2012 Canada 2. 0 2. 1 2. 4 0. 3 1. 8 2. 9 1. 5 Germany 1. 8 2. 3 2. 6 0. 3 1. 1 2. 0 Switzerland 1. 1 0. 7 2. 4 -0. 5 0. 7 0. 2 -0. 7 United States 3. 2 2. 9 3. 8 -0. 4 1. 6 3. 2 2. 1 High Inflation (%) Bolivia 6. 6 4. 8 7. 8 5. 6 6. 1 5. 8 3. 3 Iceland 6. 7 5. 1 12. 7 12. 0 5. 4 4. 0 5. 2 Russia 9. 7 9. 0 14. 1 11. 7 6. 9 8. 4 5. 0 Venezuela 13. 7 18. 7 31. 4 28. 6 29. 1 27. 2 21. 1 Source: International Monetary Fund; http: //www. IMF. org Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Unanticipated and Anticipated Inflation 15 th edition Gwartney-Stroup Sobel-Macpherson • There are two different kinds of inflation: • Unanticipated inflation: An increase in the price level that comes as a surprise, at least for most individuals. • Anticipated inflation: A widely expected change in the price level. Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Effects of Inflation 15 th edition Gwartney-Stroup Sobel-Macpherson • High and variable rates of inflation are harmful for several reasons: • Because unanticipated inflation alters the outcomes of long-term projects like the purchase of a machine or operation of a business, it will both increase the risks and retard the level of such productive activities. • Inflation distorts the information delivered by prices. • People will respond to high and variable rates of inflation by spending less time producing and more time trying to protect their wealth and income from the uncertainty created by inflation. Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
What Causes Inflation? 15 th edition Gwartney-Stroup Sobel-Macpherson • Nearly all economists believe that rapid expansion in the money supply is the primary cause of inflation. Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Questions for Thought: 15 th edition Gwartney-Stroup Sobel-Macpherson 1. Suppose that the CPI was 150 at the end of last year and 157. 5 at the end of this year. What was the inflation rate during the year? 2. If decision makers anticipate an inflation rate of 3% at the start of a year and prices rise by 7% during the year, this is an example of a. anticipated inflation. b. an inflation rate higher than the anticipated. c. an inflation rate lower than the anticipated. 3. (True or false) When the inflation rate is high and variable, decision makers will generally be able to anticipate year-toyear changes in inflation quite accurately. Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Questions for Thought: 15 th edition Gwartney-Stroup Sobel-Macpherson 4. How would an unanticipated jump in inflation impact the wealth of: a. Joe, who has a 30 -yr home mortgage at a fixed interest rate b. The Mc. Coy's, who hold most of their wealth in long-term fixed yield bonds c. Hanna, a retiree drawing a pension of a fixed dollar amount d. Jose, a heavily indebted small-business owner. e. Mike, the owner of an apartment complex with substantial debt at a fixed interest rate f. Tina, a worker whose wages are determined by a 3 -year union contract ratified three months ago Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
Questions for Thought: 15 th edition Gwartney-Stroup Sobel-Macpherson 5. What impact will high and variable rates of inflation have on the economy? How will they influence the risk accompanying long-term contracts and related business decisions? 6. Compared to the United States, labor markets in France, Italy, and Spain are characterized by more generous unemployment benefits. Other things constant, how will this influence the unemployment rate in in these countries compared to that in the U. S. ? Explain. Check your answers to see if your response is correct. . Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
End of Chapter 8 Copyright © 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page
- Slides: 38