Chapter_07The Anatomy of Inflation and Unemploymen

7-17-2Chapter7TheAnatomyofInflationandUnemployment•Item•Item•Item•Etc.McGraw-Hill/IrwinMacroeconomics,10e©2008TheMcGraw-HillCompanies,Inc.,AllRightsReserved.7-3Introduction•Sofarhavefocusedonhowvariouseconomicfactorsdetermineoutput,prices,unemployment,andinflationnowexaminetheconsequencesofinflationandunemploymentandthetradeoffbetweenthem•Whatarethe“bigpicture”costsofmoderateinflationandunemploymentrates?•Therearetwomajorcostsofunemployment:1.Lostproduction2.Undesirableeffectsonthedistributionofincome•Thecostsofinflationdependonthetype:UnanticipatedinflationcreatessignificantredistributionofwealthImpactofanticipatedinflation,especiallyofmoderatelevels,issmall7-4Unemployment•Thegreatestsinglecostofunemploymentislostproductionpeoplewhocan’tworkdon’tproduce•Thiscostislarge:arecessioncaneasilycost3-5%ofGDPandhundredsofbillionsofdollars•Okun’slawstatesthat1extrapointofunemploymentcosts2%ofGDP[SeeFigure7-1]•Costsareborneunevenly,andlargelybythosewholosetheirjobs•Workersjustenteringthelaborforceandteenagersareamongstthehardesthit[InsertFigure7-1here]7-5Inflation•Costsofextremelyhighinflationareeasytosee•MlubricatestheeconomyifPincreasedramatically:•moneyisnolongerausefulmediumofexchange•outputcandropsubstantially•Costsoflow,single-digitinflationaremoredifficulttoidentify•Unanticipatedinflationhasadistributionalcost:•debtorsbenefitbyrepayingincheaperdollars•creditorssufferbybeingrepaidincheaperdollars7-6TheAnatomyofUnemployment•ResearchhasrevealedfivekeycharacteristicsofunemploymentintheU.S.1.Therearelargevariationsinunemploymentratesacrossgroupsdefinedbyage,race,orexperience.2.Thereishighturnoverinthelabormarket.Flowsintoandoutofemploymentandunemploymentarehighrelativetothenumbersofemployedorunemployed.3.Asignificantpartofthisturnoveriscyclical:Layoffsandseparationsarehighduringrecessions,andvoluntaryquitsarehighduringbooms.4.Mostpeoplewhobecomeunemployedinanygivenmonthremainunemployedforonlyashorttime.5.MuchoftheU.S.unemploymentconsistsofpeoplewhowillbeunemployedforquitealongtime.7-7TheAnatomyofUnemployment•ThesizeofthelaborforceisdeterminedfromsurveysbytheBLS•Laborforce=unemployed(U)+employed(E)•Unemployedisonewhoisoutofworkandwhoeither1.Hasactivelylookedforworkduringtheprevious4weeksOR2.Iswaitingtoberecalledtoajobafterhavingbeenlaidoff[InsertTable7-2here]7-8TheAnatomyofUnemployment•ThesizeofthelaborforceisdeterminedfromsurveysbytheBLS•Laborforce=unemployed(U)+employed(E)•Employedpersonisonewhoduringthereferenceweek:1.Didatleastonehourofworkforpayinthelastweek2.Workedatleast15hoursasanunpaidworkerforanenterpriseownedbyafamilymemberOR3.Wasnotworking,butonlytemporarilyabsentfromwork(ex.vacationormaturityleave)[InsertTable7-2here]7-9TheUnemploymentPool•Atanypointintimethereisagivennumber,orpool,ofunemployedpeople,andthereareflowsinandoutoftheunemploymentpool.•Apersoncanbecomeunemployedforoneoffourreasons:1.He/shemaybeanewentrantorreentrantintotheLF2.Thepersonmayquitajobinordertolookforotheremploymentandmayregisterasunemployedwhilesearching3.Thepersonmaybelaidoff4.Theworkermayloseajob(firedorfirmcloses)7-10TheUnemploymentPool•Atanypointintimethereisagivennumber,orpool,ofunemployedpeople,andthereareflowsinandoutoftheunemploymentpool.•Therearethreewaysofmovingoutoftheunemploymentpool:1.Apersonmaybehiredintoanewjob2.Someonelaidoffmayberecalled3.Anunemployedpersonmaystoplookingforajob,andthusmoveoutofthelaborforce•Unemploymentisrisingwhenmorepeopleareenteringthepoolthanleaving•Joblossesaccountforhalfofnewunemployment;voluntaryseparations,newentrants,andreentrantsintotheLFaccountfortheotherhalf7-11VariationinUnemploymentAcrossGroups•Theaggregateunemploymentratetellsustheshareofthelaborforcethatisunemployed•Theaggregatenumberconcealswidevariationsacrossvarioussegmentsofthepopulation•Teenagershavemuchhigherunemploymentratesthanolderworkers•Blackunemploymentishigherthanthatoftheirwhitecohorts•Femaleunemploymentwashigherthanmaleunemploymentthroughthe1970s,butcurrentlyapproximatelyequal•Therelationshipbetweentheaggregateunemploymentrate,u,andthatofgroupsis:(1),wherewiarethefractionofthecivilianLFthatfallswithinaspecificgroupnnuwuwuwu...22117-12VariationinUnemploymentAcrossGroups[InsertFigure7-2here]7-13CyclicalandFrictionalUnemployment•Frictionalunemploymentistheunemploymentthatexistswhentheeconomyisatfullemployment•Resultsfromthestructureofthelabormarket,including:ThenatureofjobsintheeconomySocialhabitsLabormarketinstitutionsFrictionalunemploymentrate=naturalrateofunemployment•Cyclicalunemploymentisunemploymentinexcessoffrictionalunemployment•Occurswhenoutputisbelowthefullemploymentlevel•Thepresenceofcyclicalunemploymentindicatesadownturnintheeconomy7-14LaborMarketFlows•Labormarketturnover,flowsintoandoutofunemploymentandemploymentandbetweenjobs,islarge•Table7-3showstheaverageofmonthlyflowsin2005intoandoutofemploymentwithinthemanufacturingsectorAdded2.4individualsper100employeestopayrollsRemoved2.6individualsper100employeesfrompayrolls[InsertTable7-3here]Peoplearetakingandleavingjobs.7-15DurationofUnemployment