Unemployment Inflation NAIRU Unemployment n Civilian labor force

Unemployment, Inflation, NAIRU

Unemployment n Civilian labor force: worked 1 hour for pay in last week unless sick/vacation/strike n n Not military, not students, not retired, not discouraged workers # unemployed / civilian labor force x 100= unemployment rate

Types of Unemployment n n n Frictional: looking for better job (good thing) Seasonal: it’s raining Structural: skills no longer useful n New tech, new resources, loss of old resources, changes in demand, globalization, lack of education n “creative destruction” Cyclical: changes in biz cycle unemployment Underemployed: overqualified or part-time when want full-time

Full/Natural Rate Unemployment n n n Impossible (undesirable) 0% unemployment Elimination of cyclical unemployment full employment/natural rate Potential output

Economic Costs Unemployment n n n Okun’s Law: every 1% actual U > natural rate GDP gap (actual less than potential) of 2% Unequal burdens: occupation, age, race, gender, education, duration Noneconomic costs: depression, political impacts, cultural n William Julius Wilson, When Work Disappears: The World of the New Urban Poor

Inflation n n Rising price level (average) Consumer Price Index: “prices of a market basket of some 300 consumer goods and services purchased by a typical urban consumer” Hasn’t been updated in 30+ years; undercounts housing + medical n Producer Price Index n n Reduces purchasing power

Types n n Inflation Hyperinflation Deflation Disinflation

Causes n 1) Demand-pull (AD up): “too much spending chasing too few goods” n n 2) Cost-push (AS down): increase cost production n Wage-price spiral Problem: which is it? DP indefinite, CP self-limiting ( recession eventually costs back down recovery) Stagflation: stagnation + inflation 3) Quantity theory: too many dollar bills (more later)

Redistribution Effects n n n Anticipated inflation: less important offset w/ interest rates or wage raise Unanticipated is problem 1) Fixed-nominal-income receivers (fixed income) n n n COLA: Cost Of Living Adjustment 2) Savers/holders of currency (inflation tax) 3) Debtors vs. Creditors n Nominal interest rate= Real interest + inflation (expected/actual) “Inflation premium” Including Gov really want to control inflation? n n 4) Economy: risk + uncertainty inefficient use resources 5) Investment: a) expected rate of return – inflation rate = real return; b) inflation premium: interest rates rises more expensive borrow to invest less investment less capital less growth

Relationship U and I? n NAIRU: Non-Accelerating Inflation Rate of Unemployment Essentially = natural rate of unemployment n Level of U at which I won’t change ∆I = (NAIRU - Unemployment Rate)/Sacrifice Ratio Say NAIRU = 5 and U is at 7% So: 5 -7/2= -1 Inflation falls 5% 4

Shifts in NAIRU n n Policies/trends that increase movement workers from one job to another lower NAIRU Trends that make wages downwardly flexible (union decline, globalization, etc. ) lower NAIRU

Phillips Curve Inflation Rate U Rate

Neo-Classical n Rational Expectations no trade-off U and I in long-run, just choice of what level of inflation PClr = Natural. Inflation Rate rate U PCsr UR