Fluctuations in Economic Output, Unemployment, and Inflation.

Fluctuations in Economic Output,

Unemployment,

and Inflation

The Business Cycle• The phases of the business cycle are:

• Recovery or Expansion,• Peak or Boom (shaded green)• Recession or Contraction• trough or Depression (blue shaded areas).

Time

Real GDP

Business peak

Depressionor trough

Recession Rec

over

y

Business peak

Depression or trough

Trend line

• Ups and downs characterize business activity.• There has been an upward trend in real GDP in the

United States and other industrial nations.

The Business Cycle• Cycles are irregular

•Source: Economic Report of the President, various issues.

•Annual growth rate of real GDP

•6

•8

•4

•2

•0

•- 2

•1960 •1965 •1970 •1975 •1980 •1985 •1990 •1995 •2000 •2005

•Long-run growth rate(approx. 3%)

Economic Fluctuations

and the Labor Market

4 Labor Market Classifications

1. Employed – a person (16 years old or over) who is• working for pay at least one hour per week,• self employed, or,• working 15 hours or more each week without

pay in a family-operated enterprise.2. Unemployed

– a person not currently employed who is either• actively seeking a job, or,• waiting to begin or return to a job.

3. Civilian Labor force – civilians (16 years and older) who are either employed or unemployed.

4. Not in the labor force – persons (16 years and older) who are neither employed nor unemployed (like retirees, students, homemakers, or disabled persons).

Labor ForceParticipation Rate =

# in the Labor ForceCivilian population (16+)

Economic Fluctuations and the Labor Market

• The non-institutional civilian adult population is grouped into two broad categories: • Persons not in the labor force, and,• persons in the labor force.

Employed + UnemployedRecall the Labor Force =

• To be classified as unemployed, one must either be on layoff or actively seeking work.

Rate ofUnemployment =

# Unemployed# in the Labor Force

• The definition of unemployed involves some subjectivity.

• Some argue the employment/population ratio is a better indicator of job availability than the unemployment rate.

Unemployment and Measurement Problems

Employment / Population Ratio =

# employedCivilian population (16+)

U.S. Population, Employment,and Unemployment: 2001

Civilian population 16 and over

Civilian labor force

Employed• Employees • Self-employed

workers

Unemployed

• New entrants • Reentrants • Lost last job • Quit last job • Laid off

Not in the labor force

• Household workers • Students • Retirees • Disabled

Labor Force Participation Rate =

Civilian labor forceCivilian population (16+) = 66.9%


Number employedCivilian population (16+) = 63.8%


Number unemployed

Civilian labor force = 4.8%

141.8 million

135.1 million

70.1 million

211.9 million

6.7 million

U.S. Population, Employment,and Unemployment: 2004

Civilian population 16 and over

Civilian labor force

Employed• Employees • Self-employed

workers

Unemployed


Not in the labor force







Number unemployedCivilian labor force = 5.5%

147.4 million

139.3 million

76.0 million

223.4 million

8.1 million

147.4223.4 =

139.3223.4 =

8.1147.4 =

• U.S. Population, Employment,• and Unemployment: 2006

•Civilian population •16 and over

•Civilian •labor force

•Employed• Employees • Self-employed •workers

• •Unemployed


•Not in the •labor force


•Labor Force Participation Rate

• = •Civilian labor force•Civilian population (16+)

• = •66.4%

•Employment / Population Ratio

•= •Number employed•Civilian population (16+)

•= •63.2%

•Rate ofUnemployment

•= •Number unemployed•Civilian labor force

• = •4.6%

•151.8 million

•144.4 million

•77.4 million

•228.6 million

•7.0 million

•151.8•228.6

• =

•144.4

•228.6•=

•7.0•151.8

• =






Number unemployedCivilian labor force = 4.8%






Number unemployed

Civilian labor force = 5.5%

147.4223.4 =

139.3223.4 =

8.1

147.4 =

•Labor Force Participation Rate

• = •Civilian labor force•Civilian population (16+)

• = •66.4%

•Employment / Population Ratio

•= •Number employed•Civilian population (16+)

•= •63.2%

•Rate ofUnemployment

•= •Number unemployed•Civilian labor force

• = •4.6%

•151.8•228.6

• =

•144.4

•228.6•=

•7.0•151.8

• =

141.8211.9 =

135.1211.9 =

6.7

141.8 =

•2001

•2003

•2006

• The labor force participation rate of women has been steadily increasing for several decades.

• During the same period the rate of men has been falling.

Labor Force Participation Rateof Men and Women: 1948-

2003

•Labor Force Participation Rate of Men and Women

•Source: www.bls.gov.

•2006•1975•1948 •1960

•87 % •83%•74 %

•33 % •38 %

•46 %

• 58 %

•––––––– Men ––––––– •–––––– Women ––––––•1990 •2006•1975•1948 •1960 •1990

•78 % •76 %

•59 %

• In 2006, there was little difference in the rate of unemployment between men and women.

• Notice how the unemployment rate for persons under age 25 (of each gender) is much higher than for those older.

•Unemployment Rate, 2006


•Allworkers

•16.9 %

• 8.7 %

•4.6 % •4.6 %

•13.8 %

•7.6 %

•25+•16-19 •20-24•–– Men aged ––

• The Unemployment Rate• By Age and Gender: 2006

•Allmen

•Allwomen •–– Women aged ––

•25+•16-19 •20-24

•3.5 % •4.6 % •3.7 %

• The unemployment rate for men in 2003 was 6.3%, for women 5.7%, and for all workers 6.0%.

• Notice how the unemployment rate for persons under age 25 (of each gender) is much higher than for those older.

Unemployment Rate, 2003

Source: www.bls.gov.

Allworkers

19.3 %

10.6 %

6.0 % 5.7 %

15.6 %

9.3 %

25+16-19 20-24–– Men aged ––

The Unemployment RateBy Age and Gender: 2003

Allmen

Allwomen –– Women aged ––

25+16-19 20-24

5.0 %6.3 %

4.6 %

Source: www.bls.gov.

Composition of the Unemployed by Reason

• There are various reasons why persons were unemployed in 2003.• A little more than two-fifths

(42.4%) of the unemployed were dismissed from their previous jobs.

• 35.5% of the unemployed were either new entrants or reentrants into the labor force.

Dismissed from previous jobs

42.4%

Jobleavers9.3 %

Newentrants7.3%

Reentrants28.2%

Onlayoff12.8%


Composition of the Unemployed by Reason

• There are various reasons why persons were unemployed in 2006.• A little less than two-fifths (39.1%)

of the unemployed were dismissed

from their previous jobs.• 43.6% of the unemployed were either new entrants or reentrants

into the labor force.

•Newentrants9.5%

a. a person who is not working but applied for a job at Wal-Mart last week

b. a person working part-time who is searching diligently for a full-time job

c. an auto worker vacationing in Florida during a layoff at a General Motors plant who expects to be recalled in a couple of weeks

d. a 17-year-old who works six hours per week as a route person for the local newspaper

e. homemaker working 70 hours a week preparing meals and performing other household services

f. a college student who spends between 50 and 60 hours per week attending classes and studying

g.a retired Social Security recipient

Classify each of the following as (a) employed, (b) unemployed, or (c) not in the labor force:

2. The figures below (in millions) are for the U.S. during the year 2006.

Population (age 16 and over) 299.8Civilian pop. (age 16 and over) 228.6Employed 144.4Unemployed 7.0

c. Calculate the employment/ population ratio

b. Calculate the labor force participation rate.

a. Calculate the unemployment rate.

•7.0

•7.0

•7.0

• 144.4

• 144.4

• 144.4

•228.6

•228.6

1. Frictional1. Frictional

2. Structural2. Structural

3. Cyclical3. Cyclical

4. Seasonal4. Seasonaltemporary job

less business

job replaced

between jobs

1. Frictional?

1. Frictional?2. Structural?2. Structural?

3. Cyclical?3. Cyclical?

Deals with which type?

Deals with which type?

1. A student who decides at mid-semester to devote the rest of the term

to studying quits her part-time job

2. A graphic artist who is out of work because a computer now does her job.

3. A waiter who quits his job and is applying for the same type of work in a

restaurant where morale is better.

4. The son of a local farmer who works 20-hour weeks without pay on the farm

while waiting for a job at a nearby factory.5. A travel agent who is laid off because

the economy is in a slump and vacation travel is at a minimum.

6. A plumber who works 5 hours per week for his church (on a paid basis) until he

can get a full-time job

1. Frictional1. Frictional2. Structural2. Structural

but no Cyclical

but no Cyclical

At full employment there will still be some:

At full employment there will still be some:

actual unemployment may only get as low as

actual unemployment may only get as low as

4 – 5 %

4 – 5 %

• Ups and downs characterize business activity.• There has been an upward trend in real GDP in the

United States and other industrial nations.

The Business Cycle• Cycles are irregular

•Share of labor force unemployed

•10

•8

•6

•4

•2

•1960 •1965 •1970 •1975 •1980 •1985 •1990 •1995 •2000 •2005

•2008

•Natural rate ofunemployment

•Actual rate ofunemployment

Unemployment Across Economies• Recently, the unemployment rate in the U.S. and Japan has been

lower than in major European economies.• Higher unemployment benefits, less flexible bargaining, and

more regulated labor markets of Europe explain this.

5.8 %

8.2 %

11.2 %

3.1 %

7.5 %

10.6 %

19.9 %Spain

Italy

Germany

Japan

Average Unemployment Rate(1990-1999)

France

U.K.

U.S.

Source: Economic Outlook, OECD (Dec. 2000).

http://www.usflags.com/ProductDetail.asp?ItemID=480&CategoryID=6&p=2&psize=50






5.8 %

8.2 %

11.2 %

3.1 %

7.5 %

10.6 %

19.9 %Spain

Italy

Germany

Japan


France

U.K.

U.S.

Source: Economic Outlook, OECD (Dec. 2000).

5.1 %

8.6 %

10.6 %

4.2 %

6.5 %

10.5 %

14.6 %Spain

Italy

Germany

Japan


France

U.K.

U.S.

Source: Economic Outlook, OECD (June 2004).

Unemployment Across Economies

Unemployment Across Economies

• U.S. and Japan lower than major European economies. • Higher unemployment benefits, less flexible collective

bargaining, and more regulated labor markets in Europe.

•4.9 %

•8.5 %

•9.7 %

•4.6 %

•5.4 %

•9.2 %

•11.6 %•Spain

•France

•U.K.

•Japan

•Average Unemployment Rate•(1997-2006)

•Italy

•Germany

•U.S.

•Source: Economic Outlook, OECD (June 2007).

Actual and Potential GDP• Potential output :

Maximum sustainable output level consistent with the economy’s resources, (on the production possibilities curve.)

• Actual and potential output will be equal when the economy is at full employment.

• Here we illustrate both actual and potential GDP.

• Note the gap (shaded area) between actual and potential GDP during periods of recession.

Historically Speaking

•Real GDP(billions of 2000 $)

•1970recession

•1974-75recession

•1980recession

•1982recession

•1990-91recession

•2001recession

•1960recession

•8,000

•6,000

•4,000

•2,000

•1960 •1965 •1970 •1975 •1980 •1985 •1990 •1995 •2000 •2005

•10,000

•PotentialGDP

•12,000

•ActualGDP

• The Rate of Inflation is calculated as:

Inflationrate =

Last year’sprice index

This year’s price index

Last year’s price index-

* 100

• Inflation is an increase in the general level of prices.

• Between 1956 and 1965, the general price level increased at an average annual rate of only 1.3%.

• In contrast, the inflation rate averaged 9.2% from 1973 to 1981, reaching double-digits during several years.

• Since 1982, the average rate of inflation has been lower (3.1% from 1983-2006) and more stable.

The Inflation Rate, 1956-2006

•1983-2006 averageinflation rate = 3.1 %

•Inflation rate

•1956•1960 •1965 •1970 •1975 •1980 •1985 •1990 •2000•1995

•10

•5

•0

•15

•2005



There are 2 Kinds of Inflation

1. Anticipated inflation: A widely expected change in the price level.

2. Unanticipated inflation: An increase in the price level that comes as a surprise, at least for most individuals.

1. Hyperinflation1. Hyperinflation

2. Money loses value

2. Money loses value

1. Savings1. Savings

2. Loans2. Loans

3. Wealth3. Wealth

4. Politics4. PoliticsMay cause changes

May increase

Are easier to repay

Lose value

• Nearly all economists believe that rapid expansion in the money supply is the primary cause of inflation.

1. Demand-Pull

1. Demand-Pull

2. Cost-Push2. Cost-Push

1. Demand-Pull

1. Demand-Pull

buyers demands greater than producers supply

Price

Quantity

P2

P1

Q1

D1

S1

Q2

New price and output

D2(increase in demand)

Orig. price and output

2. Cost Push2. Cost Push

sellers’ costs are passed on to buyers

Price

Quantity/time

P2

P1

Q1

D

S1(initial equilibrium)

Q2

S2(new equilibrium)

Questions for Thought:1. Suppose that the CPI was 150 at the end of

last year and 157.5 at the end of this year. What was the inflation rate during the year?

2. If decision makers anticipate an inflation rate of 3% at the start of a year and prices during the year rise by 7%, this is an example of a. anticipated inflation. b. an inflation rate higher than anticipated. c. an inflation rate lower than anticipated.

3. True or false: when the inflation rate is high and variable, decision makers will generally be able to anticipate year-to-year changes in inflation quite accurately.

• 4. How would an unanticipated 5 percent jump in inflation impact the wealth of:

• a. Joe, who has a 30-year home mortgage at a fixed interest rate

• b. The McCoy's, who hold most of their wealth in long-term fixed yield bonds

• c. Hanna, a retiree drawing a pension of a fixed dollar amount

• d. Jose, a heavily indebted small-business owner. • e. Mike, the owner of an apartment complex with substantial debt at a fixed interest rate• f. Tina, a worker whose wages are determined

by a 3-year union contract ratified three months

ago

Fluctuations in Economic Output, Unemployment, and Inflation.

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