Chapter 5 - TBP PDF

MONITORING JOBS 5 AND INFLATION After studying this chapter, you will be able to: ◆ Explain why unemployment is a problem and how we measure the unemployment rate and other labour market indicators ◆ Explain why unemployment occurs and why it is present even at full employment...

MONITORING JOBS 5 AND INFLATION After studying this chapter, you will be able to: ◆ Explain why unemployment is a problem and how we measure the unemployment rate and other labour market indicators ◆ Explain why unemployment occurs and why it is present even at full employment ◆ Explain why inflation is a problem and how we measure the inflation rate  Employment and Unemployment Why Unemployment Is a Problem Unemployment results in ▪ Lost incomes and production: Unemployment benefits create a safety net but don’t fully replace lost wages, and not everyone receives benefits. ▪ Lost human capital: Prolonged unemployment permanently damages a person’s job prospects by destroying human capital. © 2025 Pearson Canada  Employment and Unemployment Labour Force Survey Every month, Statistics Canada conducts a Labour Force Survey in which it asks 54,000 households. The population is divided into two groups: 1. The working-age population—the total number of people aged 15 years and over 2. People too young to work (under 15 years of age) or retired © 2025 Pearson Canada Labour Force Survey (Statistics Canada) © 2025 Pearson Canada  Employment and Unemployment The working-age population is divided into two groups: 1. People in the labour force 2. People not in the labour force The labour force is the sum of employed and unemployed workers. © 2025 Pearson Canada  Employment and Unemployment To be counted as unemployed, a person must be in one of the following three categories: 1. On temporary layoff with an expectation of recall 2. Without work but has made specific efforts to find a job within the previous four weeks 3. Has a new job to start within four weeks © 2025 Pearson Canada  Employment and Unemployment Figure 5.1 shows the labour force categories. In July 2023: 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: 3.61 million Voluntary part time: 3.33 million Involuntary part time: 0.28 million © 2025 Pearson Canada  Employment and Unemployment Four Labour Market Indicators ▪ The unemployment rate ▪ Involuntary part-time rate ▪ The labour force participation rate ▪ The employment rate © 2025 Pearson Canada  Employment and Unemployment The Unemployment Rate The unemployment rate is the percentage of the labour force that is unemployed. The unemployment rate is (Number of people unemployed ÷ labour force)  100. In July 2023, the labour force was 21.33 million and 1.16 million were unemployed, so the unemployment rate was 5.4 percent. The unemployment rate increases in a recession and reaches its peak value after the recession ends. © 2025 Pearson Canada  Employment and Unemployment Figure 5.2 shows the unemployment rate: 1960–2022. The unemployment rate increases in a recession. © 2025 Pearson Canada  Employment and Unemployment The 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. The involuntary part-time rate is (Number of involuntary part-time workers ÷ Labour force)  100. In July 2023, there were 277,000 involuntary part-time workers and a labour force of 21.33 million. The involuntary part-time rate was 1.3 percent. © 2025 Pearson Canada  Employment and Unemployment The Labour Force Participation Rate The labour force participation rate is the percentage of the working-age population who are members of the labour force. The labour force participation rate is (Labour force ÷ Working-age population)  100. In July 2023, the labor force was 21.33 million, and the working-age population was 32.53 million. The labour force participation rate was 65.6 percent. © 2025 Pearson Canada  Employment and Unemployment The Employment Rate The employment rate is the percentage of the working- age population who have jobs. The employment rate is (Employment ÷ Working-age population)  100. In July 2023, 20.17 million were employed and the working-age population was 32.53 million. The employment rate was 62.0 percent. © 2025 Pearson Canada  Employment and Unemployment Figure 5.3 shows the labour force participation rate and employment rate. Both increased rapidly before 1990 and fluctuate with the business cycle. © 2025 Pearson Canada  Employment and Unemployment Participation Rate Trends From 1960 to 2023, the participation rate of women increased from 28 percent to 62 percent. This increase is spread across women of all age groups and occurred for four main reasons: ▪ More women pursued a college education ▪ Technological change created jobs with flexible work hours ▪Technological change in the home increased the time available for paid employment ▪ Families looked for second income to balance tight budgets © 2025 Pearson Canada  Employment and Unemployment Figure 5.4 shows the increased participation rate of women and the decreasing participation rate of men. © 2025 Pearson Canada  Employment and Unemployment Four Other Definitions of Unemployment The purpose of the unemployment rate is to measure the underutilization of labour resources. Statistics Canada believes that the unemployment rate gives a correct measure. But the official measure is an imperfect measure because it excludes ▪ Discouraged searchers ▪ Long-term future starts ▪ Involuntary part-timers © 2025 Pearson Canada  Employment and Unemployment Discouraged Searchers ❑ A discouraged searcher is a person who: ❑ currently is neither working nor looking for work ❑ but has indicated that he or she wants and is available for a job and ❑ has looked for work sometime in the recent past but has stopped looking because of repeated failure. Long-Term Future Starts ❑ A person with a job to start in more than four weeks is not counted as unemployed. © 2025 Pearson Canada  Employment and Unemployment Part-Time Workers Who Want Full-Time Jobs (Involuntary Part-timers) ❑ Part-time workers who want full-time jobs and can’t find them are not counted as unemployed. Most Costly Unemployment All unemployment is costly, but the most costly is long- term unemployment that results from job loss. Question: Are students unemployed? © 2025 Pearson Canada  Unemployment and Full Employment Unemployment can be classified into three types: ❑ Frictional unemployment: arises from normal labour market turnover, job creation, labour force (re)entry ❑ Structural unemployment: created by changes in technology and foreign competition that change the skills needed to perform jobs or the locations of jobs. ❑ Cyclical unemployment: due to business cycle movements (higher than normal unemployment at a business cycle trough and lower than normal unemployment at a business cycle peak) © 2025 Pearson Canada  Unemployment and Full Employment Frictional Unemployment Frictional unemployment is unemployment that arises from normal labour market turnover. The creation and destruction of jobs requires that unemployed workers search for new jobs. Increases in the number of people entering and reentering the labour force and increases in unemployment benefits raise frictional unemployment. Frictional unemployment is a permanent and healthy phenomenon of a growing economy. © 2025 Pearson Canada  Unemployment and Full Employment Structural Unemployment Structural unemployment is unemployment created by changes in technology and foreign competition that change the skills needed to perform jobs or the locations of jobs. Structural unemployment lasts longer than frictional unemployment. © 2025 Pearson Canada  Unemployment and Full Employment Cyclical Unemployment Cyclical unemployment is the higher than normal unemployment at a business cycle trough and lower than normal unemployment at a business cycle peak. A worker laid off because the economy is in a recession and is then rehired when the expansion begins experiences cycle unemployment. © 2025 Pearson Canada  Unemployment and Full Employment “Natural” Unemployment ❑ Natural unemployment: ❑ is the unemployment that arises from frictions and structural change (frictional and structural unemployment) and there is no cyclical unemployment. ❑ The natural unemployment rate is natural unemployment as a percentage of labour force. ❑ Full employment is defined as the situation in which the unemployment rate equals the natural unemployment rate. © 2025 Pearson Canada  Unemployment and Full Employment The natural unemployment rate changes over time and is influenced by many factors. Key factors are ▪ The age distribution of the population ▪ The scale of structural change ▪ The real wage rate ▪ Unemployment benefits © 2025 Pearson Canada  Unemployment and Full Employment Real GDP and Unemployment Over the Cycle Potential GDP is the quantity of real GDP produced at full employment. Potential GDP corresponds to the capacity of the economy to produce output on a sustained basis. 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 rate. © 2025 Pearson Canada  Unemployment and Full Employment Real GDP and Unemployment Over the Cycle ❑ Potential GDP is the quantity of real GDP produced at full employment. ❑ Potential GDP corresponds to the capacity of the economy to produce output on a sustained basis. ❑ Output gap = Real GDP minus potential GDP ❑ Over the business cycle, the output gap fluctuates and the unemployment rate fluctuates around the natural unemployment rate. © 2025 Pearson Canada  Unemployment and Full Employment Figure 5.6 shows the output gap and unemployment fluctuations around the natural rate. When the output gap is negative, unemployment exceeds the natural unemployment rate. © 2025 Pearson Canada  Price Level, Inflation, and Deflation ▪ The price level is the average level of prices and the value of money. A persistently rising price level is called inflation. A persistently falling price level is called deflation. ▪ We are interested in the price level because we want to 1. Measure the inflation rate or the deflation rate 2. Distinguish between money values and real values of economic variables. © 2025 Pearson Canada  Price Level, Inflation, and Deflation Why Inflation and Deflation Are Problems ▪ Low, steady, and anticipated inflation or deflation is not a problem. ▪ Unpredictable inflation or deflation is a problem because it ▪ Redistributes income and wealth ▪ Lowers real GDP and employment ▪ Diverts resources from production © 2025 Pearson Canada  Price Level, Inflation, and Deflation The Consumer Price Index The Consumer Price Index, or CPI, measures the average of the prices paid by urban consumers for a “fixed” basket of consumer goods and services. © 2025 Pearson Canada  Price Level, Inflation, and Deflation Reading the CPI Numbers The CPI is defined to equal 100 for the reference base period. Currently, the reference base period is 2002. In March 2023, the CPI was 155.3. This means that the average price paid by urban consumers for a fixed basket of goods in March 2023 was 55.3 percent higher than it was in 2002. © 2025 Pearson Canada  Price Level, Inflation, and Deflation Constructing the CPI Constructing the CPI involves three stages: ▪ Selecting the CPI basket ▪ Conducting a monthly price survey ▪ Calculating the CPI © 2025 Pearson Canada  Price Level, Inflation, and Deflation The CPI Basket The CPI basket is based on a consumer expenditure survey conducted by Statistics Canada, which is undertaken infrequently. Today’s CPI basket is based on data collected in the Consumer Expenditure Survey of 2022 and valued at prices in March 2022. © 2025 Pearson Canada  Price Level, Inflation, and Deflation Figure 5.7 illustrates the CPI basket. Shelter is the largest component. Transportation and food are the following largest components. The remaining components account for 37 percent of the basket. © 2025 Pearson Canada  Price Level, Inflation, and Deflation The Monthly Price Survey Every month, Statistics Canada employees check the prices of the goods and services in the CPI basket in the major cities. Calculating the CPI 1. Find the cost of the CPI basket at base-period prices. 2. Find the cost of the CPI basket at current-period prices. 3. Calculate the CPI for the current period. © 2025 Pearson Canada  Price Level, Inflation, and Deflation Example: In a simple economy, people consume only oranges and haircuts. The CPI basket is 10 oranges and 5 haircuts. The table shows the prices in the base period 2022. The cost of the CPI basket in the base period was $50. © 2025 Pearson Canada  Price Level, Inflation, and Deflation Table 5.1(b) shows the fixed CPI basket of goods. It also shows the prices in the current period, 2023. The cost of the CPI basket at current-period prices is $70. © 2025 Pearson Canada  Price Level, Inflation, and Deflation The CPI is calculated using the formula: CPI = (Cost of the basket at current-period prices ÷ Cost of the basket at base-period prices)  100. Using the numbers for the simple example, CPI = ($70 ÷ $50)  100 = 140. In the current period, the CPI is 40 percent higher than it was in the base period. © 2025 Pearson Canada  Price Level, Inflation, and Deflation Measuring the Inflation Rate The major purpose of the CPI is to measure inflation. The inflation rate is the percentage change in the price level from one year to the next. The inflation rate equals: [(CPI this year – CPI last year) ÷ CPI last year]  100. © 2025 Pearson Canada  Price Level, Inflation, and Deflation The Biased CPI The CPI might overstate the true inflation for four reasons: ▪ New goods bias ▪ Quality change bias ▪ Commodity substitution bias ▪ Outlet substitution bias © 2025 Pearson Canada  Price Level, Inflation, and Deflation New Goods Bias New goods that were not available in the base year appear and, if they are more expensive than the goods they replace, they put an upward bias into the CPI. Quality Change Bias Quality improvements occur every year. Part of the rise in the price is payment for improved quality and is not inflation. The CPI counts all the price rise as inflation. © 2025 Pearson Canada  Price Level, Inflation, and Deflation Commodity Substitution Bias The market basket of goods used in calculating the CPI is fixed and does not take into account consumers’ substitutions away from goods whose relative prices increase. Outlet Substitution Bias As the structure of retailing changes, people switch to buying from cheaper sources, but the CPI, as measured, does not take account of this outlet substitution. © 2025 Pearson Canada  Price Level, Inflation, and Deflation Alternative Price Indexes Alternative measures of the price level are ▪ GDP deflator ▪ Chained price index for consumption (CPIP) © 2025 Pearson Canada  Price Level, Inflation, and Deflation GDP Deflator The GDP deflator equals (Nominal GDP ÷ Real GDP)  100 GDP deflator is a broader measure of the price level than the CPI because it includes all final expenditure on Canadian produced goods and services. © 2025 Pearson Canada  Price Level, Inflation, and Deflation Core Inflation Rate The core inflation rate excludes the volatile prices of the CPI basket in an attempt to reveal the inflation trend. © 2025 Pearson Canada  Price Level, Inflation, and Deflation Figure 5.9 shows the CPI inflation rate. The Bank of Canada uses the CPI-trim measure to measure core inflation. The core inflation rate removes most of the wide swings in the CPI inflation rate. © 2025 Pearson Canada  Price Level, Inflation, and Deflation The Real Variables in Macroeconomics ❑ We can use the GDP deflator to deflate nominal variables to find their real values. ❑ For example: 𝑅𝑒𝑎𝑙 𝑤𝑎𝑔𝑒 𝑟𝑎𝑡𝑒 = (𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝑤𝑎𝑔𝑒 𝑟𝑎𝑡𝑒 ÷ 𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟) × 100 But not the real interest rate! It is different. © 2025 Pearson Canada