Other Measures of Total Production and Total Income
The Division of Income
FIGURE 7-5
The Division of Income
Measuring the Unemployment Rate
and the Labor Force Participation Rate
The Household Survey
Labor force The sum of employed and unemployed workers
in the economy.
Employed can be in any job -- part-time, underemployed
Unemployment rate The percentage of the labor force
that is unemployed: not working and looking.
Discouraged workers: Available for work but haven’t
looked for a job (for the past four weeks) because they
believe no jobs are available for them.
The Employment Status of the Civilian
Working-Age Population, April 2007
Measuring the Unemployment Rate
and the Labor Force Participation Rate
The Employment Status of
the Civilian Working-Age
Population, July 2009
In July 2009, the working-age
population of the United States was
235.9 million.
The working-age population is
divided into those in the labor force
(154.5 million) and those not in the
labor force (81.4 million).
The labor force is divided into the
employed (140.0 million) and the
unemployed (14.5 million).
Those not in the labor force are
divided into those not available for
work (75.0 million) and those
available for work but not currently
working (6.4 million).
Finally, those available for work but
not in the labor force are divided
into discouraged workers (0.8
million) and those not currently
looking for work for other reasons
(5.6 million).
The Household Survey
• Unemployment
rate: the percentage of the labor force
that is unemployed … not working and looking.
Number of unemployed
100  Unemployment rate
Labor force
• Labor
force participation rate: the percentage of the
working-age civilian population in the labor force.
Labor force
100  Labor force participation rate
Working-age population
Measuring the Unemployment Rate
and the Labor Force Participation Rate
Trends in Labor Force Participation
Trends in the Labor Force
Participation Rates of Adult
Men and Women Since 1948
The Establishment Survey: Another Measure of Employment
Household and
Establishment Survey Data
for March and April 2007
HOUSEHOLD SURVEY
MARCH
EMPLOYED
UNEMPLOYED
LABOR FORCE
UNEMPLOYMENT RATE
ESTABLISHMENT SURVEY
APRIL
CHANGE
146,254,000 145,786,000 −468,000
6,724,000
6,801,000
+77,000
152,979,000 152,587,000 −392,000
4.4%
4.5%
+0.1%
MARCH
137,596,000
APRIL
CHANGE
137,684,000 +88,000
Types of Unemployment
Frictional Unemployment and Job Search
Frictional unemployment Short-term
unemployment that arises from the process of
matching workers with jobs.
Structural Unemployment
Structural unemployment Unemployment because of
persistent mismatch between worker skills and characteristics
and job requirements.
•Declining industries and regions / Expanding industries and regions
Cyclical Unemployment
Cyclical unemployment Unemployment caused by a
business cycle recession.
Full Employment and “Natural” Rate of Unemployment
Natural rate of unemployment
A normal rate of unemployment, consisting of frictional plus
structural unemployment.
Government Policies and the Unemployment Rate
Average Unemployment
Rates in the United States,
Canada, Japan, and
Europe, 1997–2006
Explaining Unemployment
Unemployment Insurance and Other Payments to the
Unemployed
Minimum Wage Laws
Seniority / Probation Periods
Labor Unions / Work Rules
Efficiency Wages: higher-than-market wage that a firm
pays to increase worker productivity  wait unemployment.
•Reduce hiring costs, turnover, monitoring costs, shirking
•Increase morale
Measuring Inflation
Price level (= P) A measure of the average
prices of goods and services in the economy.
Inflation rate (= π) The percentage increase
in the price level from one year to the next.
Π = 100 x (Pt - Pt-1 ) / Pt-1
Price Indices of Note
•GDP Deflator
•Consumer Price Index
•Core CPI: CPI excluding energy and food
•Producer Price Index
Measuring Inflation
The Consumer Price Index
The CPI Market
Basket,
December 2006
The Consumer Price Index
Consumer price index (CPI) An average of the prices of the
goods and services purchased by the typical urban family of four.
BASE YEAR (1999)
PRODUCT
Eye exams
QUANTITY
PRICE
EXPENDITURES
2008
2009
EXPENDITURE
S
(ON BASEYEAR
PRICE QUANTITIES)
PRICE
EXPENDITU
RES (ON
BASE-YEAR
QUANTITIES)
1
$50
$50
$100
$100
$85
$85
Pizzas
20
10
200
15
300
14
280
Books
20
25
500.00
25
500
27.50
550
Total
$750
$900
$915
The Consumer Price Index
APPLIED TO 2008
Expenditur es in the current year
CPI = Expenditur es in the base year  100
 $900 

  100  120
 $750 
APPLIED TO 2009
 $915 

  100  122
 $750 
2008 - 2009 Inflation Rate = Π = 100 x (P2009 - P2008 ) / P2008
Π=
 122  120 

  100  1.7%
120


Is the CPI Accurate?
• Substitution bias.
• Increase in quality bias.
• New product bias.
• Outlet bias.
CPI inflation overstates the increase in the “Cost of Living”
Calculating Real Average Hourly Earnings
NOMINAL AVERAGE
HOURLY EARNINGS
YEAR
CPI
(1982-1984 = 100)
2006
$16.76
201.6
2007
17.43
207.3
2008
18.08
215.3
YEAR
NOMINAL AVERAGE
HOURLY EARNINGS
CPI
(1982-1984 = 100)
REAL AVERAGE
HOURLY EARNINGS
(1982-1984 DOLLARS)
2006
$16.76
201.6
$8.31
2007
17.43
207.3
8.41
2008
18.08
215.3
8.40
Real versus Nominal Interest Rates
Nominal interest rate The stated interest rate on a loan.
Real interest rate The nominal interest rate minus the
inflation rate.
Real interest rate = Nominal interest rate − Inflation rate
Deflation A decline in the price level.
Real versus Nominal Interest Rates
The real interest rate is equal to
the nominal interest rate minus
the inflation rate.
The real interest rate provides a
better measure of the true cost
of borrowing and the true return
on lending than does the
nominal interest rate.
The nominal interest rate in the
figure is the interest rate on
three-month U.S. Treasury bills.
The inflation rate is measured
by the percentage change in the
CPI from the same quarter
during the previous year.
Does Inflation Impose Costs on the Economy?
The Problem with Anticipated Inflation
Menu costs The costs to firms of changing prices.
Price Uncertainty  fear  Stagnation
The Problem with Unanticipated Inflation
Inflation Affects the Distribution of Income
– Arbitrary redistribution
• Debtors gain / Creditors lose  disincentive to save
• Pensioners lose
Deflation: Debtors Lose ... Creditors Lose ... Vicious Downward Spiral
Key Terms
Consumer price index (CPI)
Natural rate of unemployment
Cyclical unemployment
Nominal interest rate
Deflation
Price level
Discouraged workers
Producer price index (PPI)
Efficiency wage
Real interest rate
Frictional unemployment
Structural unemployment
Inflation rate
Unemployment rate
Labor force
Labor force participation rate
Menu costs