Economics of Unemployment Quiz

Monitoring Jobs and Inflation

• The study aims to explain why unemployment and inflation are problems and how related metrics are calculated.

After Studying This Chapter, You Will Be Able To:

• Explain why unemployment is a problem and how unemployment rate and other labor market indicators are measured.
• Explain why unemployment occurs and why even at full employment it is still present.
• Explain why inflation is a problem and how the inflation rate is measured.

Employment and Unemployment - Why Unemployment is a Problem

• Unemployment leads to lost incomes and production.
• Unemployment benefits provide a safety net, but don't fully replace lost wages, and not everyone receives benefits.
• Prolonged unemployment permanently damages job prospects by destroying human capital.

Employment and Unemployment - Labour Force Survey

• Statistics Canada conducts a Labour Force Survey monthly.
• The survey gathers data from 54,000 households.
• The population is divided into working-age (15+) and non-working-age (under 15/retired).

Labour Force Survey (Statistics Canada)

• Population is the sum of:
  • Under 15/Institution
  • Working Age Population (15 and Older)
• Working Age Population (15 and Older) is the sum of:
  • Not in Labour Force
  • Labour Force
• Labour Force is the sum of:
  • Unemployed (precisely defined)
  • Employed (Any Job)
• Employed is the sum of:
  • Full Time
  • Part Time (Counted by FTEs)
• Part Time is the sum of:
  • Voluntary Part Time
  • Involuntary Part Time

Employment and Unemployment

• The working-age population is divided into two groups: people in the labor force and people not in the labor force.
• The labor force consists of employed and unemployed workers.

Employment and Unemployment - To Be Counted As Unemployed:

• On temporary layoff with an expectation of recall.
• Without work but has made specific efforts to find a job within the previous four weeks.
• Has a new job to start within four weeks.

Employment and Unemployment - July 2023 Data:

• Population: 40.11 million
• Working-age population: 32.53 million
• Labour force: 21.33 million
• Employment: 20.17 million
• Unemployment: 1.16 million
• Full-time employment: 16.56 million
• Part-time employment: 3.61 million
• Voluntary part-time employment: 3.33 million
• Involuntary part-time employment: 0.28 million

Employment and Unemployment - Four Labor Market Indicators

• Unemployment rate
• Involuntary part-time rate
• Labour force participation rate
• Employment rate

Employment and Unemployment - Unemployment Rate

• The unemployment rate is the percentage of the labor force that is unemployed.
• Formula: (Number of people unemployed/labor force) x 100
• In July 2023, the unemployment rate was 5.4%.

Employment and Unemployment - Unemployment Rate (1960-2022)

• The unemployment rate increases during recessions and reaches peak after the recession end and then gradually diminishes.

Employment and Unemployment - Involuntary Part-Time Rate

• The involuntary part-time rate is the percentage of the labor force that works part-time but wants full-time jobs.
• Formula: (Involuntary part-time workers + Labor force) x 100
• In July 2023, It was 1.3%.

Employment and Unemployment - Labour Force Participation Rate

• The percentage of the working-age population who are members of the labor force.
• Formula: (Labor force/Working-age population) x 100
• In July 2023, it was 65.6%.

Employment and Unemployment - Employment Rate

• The percentage of the working-age population who have jobs.
• Formula: (Employment/Working-age Population) x 100
• For July 2023, this rate was 62.0%.

Employment and Unemployment - Labour Force Participation and Employment Rates (1960-2023)

• Both rates increased rapidly before 1990 and fluctuate with the business cycle.

Employment and Unemployment - Participation Rate Trends (1960-2023)

• Women's participation rate rose significantly (28% to 62%).
• Increased for several reasons, including:
  • More women pursuing higher education.
  • Flexible work hours due to technological changes in both jobs and home.
  • Families needing a second income to balance budgets.

Employment and Unemployment - Participation Rates of Men and Women (1960-2023)

• Women participation rate increased while men's decreased over time.

Employment and Unemployment - Four Other Definitions of Unemployment

• The purpose of the unemployment rate is to measure underutilization of labor resources, which is imperfect.
• It excludes:
  • Discouraged searchers
  • Long-term future starts
  • Involuntary part-timers

Employment and Unemployment - Discouraged Searchers

• Individuals who are not actively searching for work despite wanting a job, having searched in the past but failed to find one.

Employment and Unemployment - Long-Term Future Starts

• Individuals with a job to start in more than four weeks are not counted as unemployed.

Employment and Unemployment - Part-Time Workers and Unemployment

• Part-time workers who want full-time jobs are not considered unemployed.

Employment and Unemployment - Types of Unemployment

These categories are based on factors that cause unemployment.

• Frictional: Normal labor market turnover, job searching
• Structural: Changes in technology/skills needed, competition
• Cyclical: Business cycle fluctuations, above/below normal unemployment
• Natural: Unemployment that arises due to frictional and structural factors, when there is no cyclical unemployment.

Employment and Unemployment - "Natural" Unemployment and Full Employment

• Natural unemployment results from frictional and structural changes, without cyclical unemployment.
  • Rate is a percentage of the labor force.
• Full employment occurs when the unemployment rate equals the natural unemployment rate.

Employment and Unemployment - Factors Influencing Natural Unemployment Rate

• The age distribution of the population
• The scale of structural changes
• The real wage rate
• Unemployment benefits

Employment and Unemployment - Real GDP and Unemployment Over the Cycle

• Potential GDP is the output at full employment.
• Real GDP minus potential GDP is the output gap.
• Over the business cycle, the output gap fluctuates and the unemployment rate fluctuates around the natural unemployment.

Employment and Unemployment - Output Gap and Unemployment Fluctuations (1980-2023)

• Output gap is Negative:Unemployment rate exceeds the natural rate.

Price Level, Inflation, and Deflation

• Price level is the average price and value of money.
• Inflation is a persistently rising price level.
• Deflation is a persistently falling price level.
• Measuring price level and inflation/deflation rates is important to distinguish between money values and real values of economic variables.

Price Level, Inflation, and Deflation - Why Inflation/Deflation is a Problem

• Unpredictable inflation/deflation is a problem.
• It:
  • Redistributes income and wealth
  • Lowers real GDP and employment
  • Diverts resources from production

Price Level and Inflation - Consumer Price Index (CPI)

• The average price of a 'fixed' basket of consumer goods and services purchased by urban consumers.

Price Level and Inflation - Reading CPI numbers

• Defined as 100 for the base period (2002).
• A CPI reading of 155.3 in March 2023 indicates a 55.3% increase in average prices from the 2002 base period.

Price Level and Inflation - Constructing the CPI

• CPI is constructed in three stages:
  • Selecting the CPI basket
  • Conducting a monthly price survey
  • Calculating CPI

Price Level and Inflation - CPI Basket

• The "fixed" basket is based on consumer expenditure surveys, done infrequently.
• For today, based on dates collected from the 2022 Consumer Expenditure Survey.

Price Level and Inflation - CPI basket Components

• Shelter: largest component.
• Transportation
• Food: followings largest components.
• Remainder: account for 37% of the basket.

Price Level and Inflation - Monthly Price Survey

• Employees collect price data for goods/services in the CPI basket in major cities each month.

Price Level and Inflation - Calculating CPI

• Calculate the cost of CPI basket at base-period and current-period prices and calculate the CPI for the current period.

Price Level and Inflation - CPI Basket example

• Base period 2022.
• The simple economy only consumes oranges and haircuts.
• CPI basket includes 10 oranges/5 haircuts.
• Cost of basket was $50 in 2022.

Price Level and Inflation - CPI Basket cost (2023)

• The current period (2023) cost of the basket is $70.

Price Level and Inflation - Calculating CPI (example)

• CPI Formula: [(Cost of basket in current period/Cost of basket in base period)] x 100
• CPI in 2023 = $70/$50 x 100 =140.
• CPI is 40% higher in 2023 than in the base period of 2002.

Price Level and Inflation - Measuring Inflation Rate

• Inflation rate is the percentage change in the price level from one year to the next.
• Formula: [(CPI this year - CPI last year)/CPI last year] x 100
• Purpose of CPI measurement is to measure inflation

Price Level and Inflation - Biased CPI

• CPI may overstate true inflation due to:
  • New goods bias
  • Quality change bias
  • Commodity substitution bias
  • Outlet substitution bias

Price Level and Inflation - New Goods Bias

• New goods/services that weren't available in the base year, if more expensive, put an upward bias on the calculated CPI value.

Price Level and Inflation - Quality Change Bias

• Quality improvements over time. Part of price changes reflect quality, not just inflation.
• CPI calculates as inflation, overestimating it.

Price Level and Inflation - Commodity Substitution Bias

• CPI basket is fixed. Consumers substitute towards cheaper goods. This is not accounted for by the fixed measure of the CPI.

Price Level and Inflation - Outlet Substitution Bias

• Changes in retail structure. Consumers switch to cheaper stores. Not accounted for in the fixed CPI measure.

Price Level and Inflation - Alternative Price Indexes

• GDP deflator: Broader measure than CPI. Includes all final expenditures on Canadian produced goods/services.
• Chained price index for consumption (CPIP): Another alternative measure.

Price Level and Inflation - Core Inflation Rate

• Excludes volatile prices in an attempt to better view the inflation trend.

Price Level and Inflation - CPI Inflation Rate (2023)

• The bank of Canada uses the CPI-trim measure to better assess core inflation and measure the rate.
• Removing wide fluctuations in the overall CPI inflation rate.

Price Level and Inflation - Real Variables in Macroeconomics

• Use GDP deflator to deflate nominal variables (eg. wage rate) to get real values.