Week 6 - Chapter 9 - FA2024 (1) Jacksonville University Econ 201 PDF

Ch. 9 Unemployment & Consumer Price Index Jacksonville University Econ 201 Week 6 (Fall 2024)  Outline Measuring the Unemployment Rate, the Labor Force Participation Rate, and the Employment- Population Ratio Types of Unemployment Explaining...

Ch. 9 Unemployment & Consumer Price Index Jacksonville University Econ 201 Week 6 (Fall 2024)  Outline Measuring the Unemployment Rate, the Labor Force Participation Rate, and the Employment- Population Ratio Types of Unemployment Explaining Unemployment Measuring Inflation Using Price Indexes to Adjust for the Effects of Inflation Nominal Interest Rates versus Real Interest Rates Reading Assignment: Hubbard & O’Brien – Chapter 9 Measuring Labor Market Indicators There around 330 million people in the United States, so monitoring and reporting on their activities regularly would be very difficult and costly, not to mention invasive. Instead, the U.S. Department of Labor reports estimates of employment, unemployment, and other statistics related to the labor force each month. Each month, the U.S. Bureau of the Census conducts the Current Population Survey (a.k.a. the household survey). ~60,000 households selected to be “representative” Household members of “working age” (16+ years old) Asked about employment during “reference week” Also asked about recent job search activities  Measuring Labor Market Indicators Not in the Labor Force: Retirees, full-time students, those on active military service, in prison, or in hospital Discouraged Workers: workers who are available for work, but have not actively looking for a job. Labor force: The sum of employed and unemployed workers in the economy (Employed + Unemployed) Employed 1. Worked > 1 hour as a paid worker > 15 hours as a unpaid worker in family business 2. Temporarily not working due to illness/vacation/strike, but had a job Unemployed 1. Had no employment, were available for work 2. Actively looking for a job Unemployment Rate The most watched labor market indicator is the unemployment rate: Unemployed 100 Unemployment rate. Labor force 6.0million 100 3.6%. 167.0million Other Labor Market Indicators Labor-force participation rate: the percentage of the working-age population  Labor force in the  labor force   100 LFPR  Working  age population  167.0million 100 62.6%. 266.8million Employment-population ratio: the percentage of the working-age  population Employed that  is employed   100 Employment  population ratio  Working  age population   161.0million    100 60.3%.  266.8million  Problems with Measuring the Unemployment Rate The unemployment rate measured by the BLS is not a perfect measure of joblessness. Why? o It may understate unemployment: Distinguishing between people who are unemployed and not in the labor force requires judgment (should we exclude “discouraged workers?’) Only measures employment, not intensity of employment (full-time vs. part-time; some people are underemployed) o It may overstate unemployment: People might claim falsely to be actively looking for work May claim not to be working to evade taxes or keep criminal activity unnoticed (Underground Economy) Some facts about unemployment rate and labor participation… o The labor force participation rate of adult men has declined gradually since 1948, but it has increased significantly for adult women, making the overall rate higher today than it was then. Driven by increase in college education and technological changes (more flexible schedule) LF participation: 60-67%, relatively consistent Unemployment Rates in the United States, June 2023 Unemployment rate is highest among African Americans and high school dropouts How Long Are People Typically Unemployed? Most unemployed workers stay unemployed for less than 6 months, although the time length increased during a recession  During the 2007-2009 recession, the average length of unemployment more than doubled, from 4 months to 10 months.  After the 2020 Covid recession, the average length of unemployment exceeded 6 months. Establishment survey (Payroll Survey) o Establishment survey (Payroll Survey) – Total number of people who are employed and on a payroll. Advantage: Accurate measures of employment (payroll) Drawbacks: 1. No information on the number of self-employed workers 2. Fail to count employed at newly opened firms 3. No information on unemployment 4. Can be significantly revised as data from additional establishments become available Types of Unemployment The three types of unemployment are: Frictional unemployment: Short-term unemployment that arises from the process of matching workers with jobs. Structural unemployment: Unemployment that arises from a persistent mismatch between the skills and attributes of workers and the requirements of jobs. Cyclical unemployment: Unemployment causes by a business cycle recession. We will examine each in turn over the coming slides. Frictional Unemployment Frictional unemployment: Short-term unemployment that arises from the process of matching workers with jobs. Frictional unemployment occurs mostly because of job search: entering or re- entering the labor force or being between jobs. It also occurs because of seasonal unemployment: some jobs fluctuate in availability due to seasonal demand, like ski instructor or farm work. Some frictional unemployment actually increases economic efficiency by allowing for better job matches. Structural Unemployment Structural unemployment: Unemployment that arises from a persistent mismatch between the skills and attributes of workers and the requirements of jobs. Structural unemployment is associated with long-term unemployment since workers must obtain new skills. Workers who are structurally unemployed may require retraining in order to obtain “modern” jobs. Structural unemployment also increases economic efficiency by allowing for better job matches. Cyclical Unemployment and the Natural Rate of Unemployment Cyclical unemployment: Unemployment caused by a business cycle recession. In normal recoveries after a recession, unemployment due to cyclical factors will fall. When all unemployment is due to frictional and structural factors, we say that the economy is at full employment. This means there will always be some unemployment in the economy. Economists call this the natural rate of unemployment: The normal rate of unemployment, consisting of frictional unemployment and structural unemployment. The general consensus of economists is that the U.S. natural rate of unemployment is somewhere between 5 percent and 5.5 percent. The Annual Unemployment Rate in the United States, 1950-2014 *Unemployment rates rise when the economy is faltering and fall when the economy is doing well. But they never fall to zero due to structural and frictional unemployment. Explaining Unemployment: factors that determine the unemployment rate Unemployment insurance/benefits Minimum wage laws Labor Unions Unemployment Insurance Suppose you have just lost your job. You want to find another and have two main options: Take a new low-paying job immediately or Search for a better job If unemployment insurance payments are available to you, you will probably be more likely to choose the second option. In the U.S., unemployment insurance payments are typically not very generous, compared with other high-income countries; and there are relatively short time limits. Unemployment benefits are more generous, and unemployment rates higher, in western European countries. Do you think these facts are related? Minimum Wage Laws and Labor Unions Federal minimum wage law was introduced in 1938: $0.25/hour. In mid-2021, the federal minimum wage was $7.25/hour. Many states and cities have higher minimum wages. Studies suggest a 10 percent increase in the minimum wage reduces teenage employment by about 2 percent. Labor unions are organizations of workers that bargain with employers for higher wages and better working conditions. Unions are probably not a significant cause of unemployment in the United States. While they raise the wage, only about 9 percent of private sector workers are unionized, limiting the effect that unions have on the wider economy. Measuring Inflation In the previous chapter we introduced the idea of the price level: a measure of the average prices of goods and services in the economy. We refer to the percentage increase in the price level from one year to the next as the inflation rate. Last chapter, we used the GDP deflator to measure changes in the price level. By measuring changes in the prices of different baskets of goods, we would come up with different measures. The CPI Market Basket The consumer price index is a measure of the average change over time in the prices a typical urban family of four pays for the goods and services they purchase. The chart shows the composition of the basket of goods used to create the CPI. This basket of goods derives from a survey of 14,000 households by the BLS. Calculating the CPI To calculate the CPI in a given year, we need: A basket of goods The cost to purchase the basket of goods in a base year The prices in the current year The CPI in the current year is the cost to purchase the basket of goods this year, divided by the cost in the base year. By convention, we multiply this by 100, so that the CPI in the base year is 100. Example - A Simple CPI Calculation Blank Blank Base Year Blank Blank (2015) 2024 Blank 2025 Expenditures Expenditures Expenditure (on base-year (on base-year Product Quantity Price s Price quantities) Price quantities) Eye 1 $50.00 $100.00 $85.00 examinations Pizzas 20 10.00 15.00 14.00 Books 20 25.00 25.00 27.50 TOTAL Blank Blank Blank Blank Example - A Simple CPI Calculation Blank Blank Base Year Blank Blank (2015) 2024 Blank 2025 Expenditures Expenditures Expenditure (on base-year (on base-year Product Quantity Price s Price quantities) Price quantities) Eye 1 $50.00 $50.00 $100.00 $100.00 $85.00 $85.00 examinations Pizzas 20 10.00 200.00 15.00 300.00 14.00 280.00 Books 20 25.00 500.00 25.00 500.00 27.50 550.00 TOTAL Blank Blank Blank Example - A Simple CPI Calculation Blank Blank Base Year Blank Blank (2015) 2024 Blank 2025 Expenditures Expenditures Expenditure (on base-year (on base-year Product Quantity Price s Price quantities) Price quantities) Eye 1 $50.00 $50.00 $100.00 $100.00 $85.00 $85.00 examinations Pizzas 20 10.00 200.00 15.00 300.00 14.00 280.00 Books 20 25.00 500.00 25.00 500.00 27.50 550.00 TOTAL Blank Blank $750.00 Blank $900.00 Blank $915.00 Example - A Simple CPI Calculation Blank Blank Base Year Blank Blank (2015) 2024 Blank 2025 Expenditures Expenditures Expenditure (on base-year (on base-year Product Quantity Price s Price quantities) Price quantities) Eye 1 $50.00 $50.00 $100.00 $100.00 $85.00 $85.00 examinations Pizzas 20 10.00 200.00 15.00 300.00 14.00 280.00 Books 20 25.00 500.00 25.00 500.00 27.50 550.00 TOTAL Blank Blank $750.00 Blank $900.00 Blank $915.00 The table above gives the information we need to create the CPI in 2024 and 2025, using the basket Formula of goods from 2015. Applied to 2024 Applied to 2025 C P I = expenditures in the current year over $900 over $750, times 100 $915 over $750, times Expenditures expenditures in thein the year, base current year100 times = 120 100 = 122 CPI= 100 Expenditures in the base year Example - A Simple CPI Calculation Blank Blank Base Year Blank Blank (2015) 2024 Blank 2025 Expenditures Expenditures Expenditure (on base-year (on base-year Product Quantity Price s Price quantities) Price quantities) Eye 1 $50.00 $50.00 $100.00 $100.00 $85.00 $85.00 examinations Pizzas 20 10.00 200.00 15.00 300.00 14.00 280.00 Books 20 25.00 500.00 25.00 500.00 27.50 550.00 TOTAL Blank Blank $750.00 Blank $900.00 Blank $915.00 The table above gives the information we need to create the CPI in 2024 and 2025, using the basket Formula of goods from 2015. Applied to 2024 Applied to 2025 C P I = expenditures in the current year over $900 over $750, times 100 $915 over $750, times Expenditures expenditures in thein the year, base current year100 times $900 = 120  $915= 122  100 CPI= 100  $750  100 120  $750  100 122 Expenditures in the base year     Example - A Simple CPI Calculation Formula Applied to 2024 Applied to 2025 C P I = expenditures in the current year over $900 over $750, times 100 $915 over $750, times Expenditures expenditures inbase in the the current year 100 year, times $900 = 120  $915 100 =122 CPI= 100  $750  100 120  $750  100 122 Expenditures in the base year     Based on these data, the inflation rate from 2024 to 2025 is the percentage change in the CPI:  122  120   120  100 1.7%   Since the CPI measures consumer prices, it is often referred to as the cost-of-living index. CPI-inflation is sometimes used to generate “fair” increases in wages for workers and government benefits. Is the CPI an Accurate Measure of Inflation? Some potential problems with the CPI include: Substitution bias: Consumers may change their purchasing habits away from goods that have increased in price. Is the CPI an Accurate Measure of Inflation? Some potential problems with the CPI include: Substitution bias: Consumers may change their purchasing habits away from goods that have increased in price. Increase in quality bias: Difficult to separate improvement in quality from increase in price, say in cars or computers. Is the CPI an Accurate Measure of Inflation? Some potential problems with the CPI include: Substitution bias: Consumers may change their purchasing habits away from goods that have increased in price. Increase in quality bias: Difficult to separate improvement in quality from increase in price, say in cars or computers. New product bias: The basket of goods changes only every 10 years. There is a delay to including new goods like cell phones. Is the CPI an Accurate Measure of Inflation? Some potential problems with the CPI include: Substitution bias: Consumers may change their purchasing habits away from goods that have increased in price. Increase in quality bias: Difficult to separate improvement in quality from increase in price, say in cars or computers. New product bias: The basket of goods changes only every 10 years. There is a delay to including new goods like cell phones. Outlet bias: CPI uses full retail price, but many people now buy from discount stores or online. *For these reasons, economists believe the CPI overstates true inflation by 0.5 to 1 percentage point. Using Price Indexes to Adjust for the Effects of Inflation Suppose your mother received a salary of $25,000 in 1989 (CPI 124). This would have bought much more than a salary of $25,000 in 2020 (CPI 237). We can use the CPI to estimate the purchasing power of that $25,000 in 2020 dollars: So $25,000 in 1989 would have bought about as much as $48,000 in 2020. Nominal Interest Rates versus Real Interest Rates When you lend money to someone, they typically agree to pay you back with interest. If the interest rate is 6 percent, for example, then a $1,000 loan paid back in a year will be paid back with $1,060. 6 percent is the nominal interest rate: the stated interest rate on a loan. We can adjust for inflation by calculating the real interest rate, equal to the nominal interest rate minus the inflation rate. If prices rise by 2 percent from this year to next, then your real interest rate on the loan is only 4 percent. This more accurately reflects the cost of borrowing and lending money. High inflation would benefit borrowers and hurt lenders since real interest rate would be lower.