Natural Rate of Unemployment Full Employment is not

Natural Rate of Unemployment Full Employment is not zero

Cyclical Structural 4 -Types of Unemployment Seasonal Frictional

Natural Rate of Unemployment • What: Unemployment that does not go away in long run – Also called “Full Employment” (know this!) – Rate without cyclical unemployment – Also, total of frictional & structural (seasonal is adjusted out)

Calculating the Natural Rate • Economists debate actual level – Was considered to be 5 -6% before the 1990’s – 2006 considered 4 -5% We will use 5% for Natural rate (Full Employment) Critical Thinking: Why is it lower today? Many Reasons: • • • Improved Job. Info on internet Temporary Work Agencies New Welfare Laws

Unemployment Rate vs. Natural Rate When is the economy clearly strong below? Percent of Labor Force 10 Unemployment rate 8 6 Natural rate of unemployment 4 If unemployment rate is less than Full Employment, things are good! 2 0 1965 1970 1975 1980 1985 BUT!---inflationary pressures rise 1990 1995 2000 2005

2 -Types of Inflation • Demand-Pull Inflation: – Too many dollars chasing too few goods – Spending increases faster than production – Demand Side Inflation • Cost-Push Inflation – Increase in cost of any factors of production (input prices) – examples: price of oil, labor, steel, etc…. ) – Supply Side Inflation

Low Unemployment & Inflation As unemployment rate falls Below full employment Business competes for workers Wages begin to increase => The cost of doing business rises Leads to “cost push” inflation

Labor Force Participation: Men versus Women Labor-Force Participation Rate (in percent) 100 80 Men 60 40 Women 20 0 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Labor-Market Participation

Economic History 1970 -2007 • Analyze GDP, Unemployment & CPI data