Economics of Unemployment Quiz
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Questions and Answers

What is one consequence of unemployment related to human capital?

  • Permanent damage to job prospects (correct)
  • Increase in job opportunities
  • Higher overall wages
  • Improvement of skills through training

    • What is required for a person to be classified as unemployed?

  • They must have worked at least one day in the last month
  • They must have made specific efforts to find a job within the last four weeks (correct)
  • They must be actively seeking a job for at least six months
  • They must be receiving unemployment benefits

    • What defines the labour force in the Labour Force Survey conducted by Statistics Canada?

  • Only full-time employed individuals
  • Individuals who are retired or underage
  • All employed and unemployed workers (correct)
  • All individuals aged 15 and above

    • Which of the following groups is NOT part of the working-age population?

    <p>People too young to work</p> Signup and view all the answers

    Why is unemployment considered a significant problem for the economy?

    <p>It results in lost incomes and production</p> Signup and view all the answers

    Which of the following factors influences unemployment rates?

    <p>The age distribution of the population</p> Signup and view all the answers

    What does the term 'output gap' refer to?

    <p>The difference between total economic output and potential output</p> Signup and view all the answers

    What is a negative output gap indicative of?

    <p>Unemployment exceeds the natural unemployment rate</p> Signup and view all the answers

    Which of the following describes inflation?

    <p>A consistently increasing average price level</p> Signup and view all the answers

    What is a major consequence of unpredictable inflation?

    <p>It redistributes income and wealth</p> Signup and view all the answers

    What is the purpose of the Consumer Price Index (CPI)?

    <p>To measure the average prices paid for a fixed basket of goods and services</p> Signup and view all the answers

    What is frictional unemployment primarily caused by?

    <p>Normal labor market turnover</p> Signup and view all the answers

    Why is it important to distinguish between money values and real values?

    <p>To assess the real growth of the economy</p> Signup and view all the answers

    Which type of unemployment is likely to last longer?

    <p>Structural unemployment</p> Signup and view all the answers

    At what point is the Consumer Price Index (CPI) defined to equal 100?

    <p>In the reference base period</p> Signup and view all the answers

    What characterizes cyclical unemployment?

    <p>It is linked to the fluctuations of the business cycle</p> Signup and view all the answers

    What is the definition of natural unemployment?

    <p>The combination of frictional and structural unemployment with no cyclical component</p> Signup and view all the answers

    Which of the following factors can increase frictional unemployment?

    <p>Increases in unemployment benefits</p> Signup and view all the answers

    What does full employment mean in economic terms?

    <p>The unemployment rate matches the natural unemployment rate</p> Signup and view all the answers

    Which scenario illustrates frictional unemployment?

    <p>A recent graduate looking for their first job</p> Signup and view all the answers

    What can cause structural unemployment?

    <p>Changes in workforce skills required for jobs</p> Signup and view all the answers

    What formula is used to calculate the inflation rate?

    <p>[(CPI this year – CPI last year) ÷ CPI last year] × 100</p> Signup and view all the answers

    Which of the following is NOT a reason for the CPI potentially overstating true inflation?

    <p>Consumer sentiment bias</p> Signup and view all the answers

    What does the GDP deflator measure compared to the CPI?

    <p>A broader measure of final expenditure</p> Signup and view all the answers

    What is the primary purpose of the core inflation rate?

    <p>To focus on long-term inflation trends</p> Signup and view all the answers

    Which bias relates to the introduction of new goods affecting the CPI?

    <p>New goods bias</p> Signup and view all the answers

    What is not included in the CPI's market basket?

    <p>Goods that consumers switch to in response to price changes</p> Signup and view all the answers

    What is the primary function of the CPI-trim measure utilized by the Bank of Canada?

    <p>To assess core inflation by removing extreme price swings</p> Signup and view all the answers

    How is the change in price level indicated by the inflation rate calculated?

    <p>By comparing last year's CPI with this year's</p> Signup and view all the answers

    What is the CPI in March 2023 compared to the reference base period of 2002?

    <p>155.3</p> Signup and view all the answers

    Which component of the CPI basket is the largest?

    <p>Shelter</p> Signup and view all the answers

    What is the first step in constructing the CPI?

    <p>Selecting the CPI basket</p> Signup and view all the answers

    If the cost of the CPI basket at current prices is $70 and at base prices it is $50, what is the CPI?

    <p>140</p> Signup and view all the answers

    How is the CPI basket currently valued?

    <p>At prices from March 2022</p> Signup and view all the answers

    What percentage of the CPI basket do the remaining components account for?

    <p>37 percent</p> Signup and view all the answers

    What does a CPI of 140 signify in terms of price changes?

    <p>Prices have increased by 40% since the base period.</p> Signup and view all the answers

    How often does Statistics Canada conduct a price survey for the CPI basket?

    <p>Monthly</p> Signup and view all the answers

    What was the unemployment rate in July 2023?

    <p>5.4 percent</p> Signup and view all the answers

    How is the involuntary part-time rate calculated?

    <p>(Number of involuntary part-time workers ÷ Labour force) × 100</p> Signup and view all the answers

    What was the labour force participation rate in July 2023?

    <p>65.6 percent</p> Signup and view all the answers

    What was the number of workers employed full-time in July 2023?

    <p>16.56 million</p> Signup and view all the answers

    What category of employment does involuntary part-time fall into?

    <p>Those who work part-time but want full-time jobs</p> Signup and view all the answers

    If 1.16 million were unemployed and the labour force was 21.33 million, how many were employed?

    <p>20.17 million</p> Signup and view all the answers

    How many involuntary part-time workers were there in July 2023?

    <p>277,000</p> Signup and view all the answers

    Study Notes

    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.

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