UNEMPLOYMENT 1 OUT OF WORK 2

UNEMPLOYMENT 1. ) OUT OF WORK 2. ) ACTIVELY LOOKING THERE IS A LOT OF SOCIAL IMPORTANCE IN WORK. FIRST THING THAT PEOPLE ASK AFTER YOUR NAME, IS “WHAT DO YOU DO? ”

THERE ARE 320 MILLION PEOPLE IN THE U. S. (2014) THEY AREN’T ALL EITHER EMPLOYED OR UNEMPLOYED APPROXIMATELY 160 MILLION IN THE LABOR FORCE = EMPLOYED + UNEMPLOYED SO WHERE DO THE REST OF THE U. S. CITIZENS COUNT?

SEVEN GROUPS OF PEOPLE THAT DO NOT COUNT IN LABOR FORCE AUTOMATICALLY EXCLUDED BY CHOICE 1. ) YOUNG – UNDER 16 4. ) HOME MAKERS 2. ) MILITARY – NOT AVAILABLE AS RESOURCES 5. ) STUDENTS 3. ) INSTITUTIONALIZED – PRISON & MENTAL HOSPITAL 7. ) MARGINAL WORKERS – AREN’T SEEKING WORK 6. ) ELDERLY

In Maxville, 42 are unemployed & 658 are employed. The unemployment rate is 6 %. __ One mil. are unemployed & 19 mil. are employed. The unemploy. rate is __%. 5 41. If the total population is 280 million, and the civilian labor force includes 129, 558, 000 with jobs & 6, 739, 000 unemployed but looking 4. 9 for jobs, then the unemployment rate would be ____%. [6, 739, 000/136, 297, 000 x 100 = 4. 9%]

Negative/Positive GDP Gaps Inflationary GDP Gap AS AD 3 Recessionary GDP Gap AD 1 AD 2 11% 6% 1% YR Y*F Yi YA Y P YA $9 T $10 T $11 T “Natural Rate of Unemployment” [4 -6%]

Four Types of Unemployment 1. Frictional – “temporary”, “transitional”, “short-term. ” (“between jobs” or “search” unemployment) Examples: 1. People who get “fired” or “quit” to look for a better one. 2. “Graduates” from high school or college who are looking for a job. These are qualified workers “transferable” skills.

2. SEASONAL “Seasonal” or weather-dependent jobs such as “agricultural”, “construction”, “retail”, or “agricultural” “construction” “retail” “tourism” [lifeguards, resort workers, Santas, & migrant workers. ] Frictional and Seasonal unemployment signals that “new jobs” are available and reflects “freedom of choice”.

3. Structural Unemployment Structural – “technological” or “long term”. There are basic changes in the “structure” of the labor force which make certain “skills obsolete”. Automation may result in job losses. Consumer taste may make a good “obsolete”. The auto reduced the need for carriage makers. Farm machinery reduced the need for farm laborers. “Creative destruction” means as jobs are created, other jobs are lost. Jobs of the future destroy jobs of today. Frictional and Structural make up the “natural rate of unemployment”. “These jobs do not come back. ” “Non-transferable skills” – choice is prolonged unemployment or retraining.

4. Cyclical Unemployment Cyclical – “economic downturns” in the business cycle. “Cyclical fluctuations” caused by “deficient AD” “Durable goods jobs” are impacted the most. These can be postponed because they can be repaired “Cyclical unemployment” is “real unemployment”. “These jobs do come back. ”

“FULL” EMPLOYMENT There is no such thing as “EVERYONE” working FULL EMPLOYMENT – HISTORICALLY %4 -%6 Specifically refers to CYCLICAL Unemployment FRICTIONAL, STRUCTURAL, SEASONAL are all regular parts of the economy. CYCLICAL is something that can be manipulated by governmental policy.

Old Survey on Unemployment BLS calls 60, 000 households every month. They ask three questions: 1. Are you working? If the answer is no, no 2. Did you work at all this month-even 1 day? You are a member of the LF if “yes” on 1 or 2. 3. Did you look for work during the last month? [agency, resume, interview] A “yes” counts you as part of the LF. A “no” means you are not counted. LF counted You are a “discouraged worker. ” The labor force consists of the employed and unemployed

NEW ACTUAL QUESTIONS Does anyone in this household have a business or a farm? Last week, did you do any work for (either) pay (or profit)? If the answer to question 1 is "yes" and the answer to question 2 is "no, " the next question is: Last week, did you do any unpaid work in the family business or farm? For those who reply "no" to both questions 2 and 3, the next key questions used to determine employment status are: Last week, (in addition to the business) did you have a job, either full or part time? Include any job from which you were temporarily absent.

Last week, were you on layoff from a job? What was the main reason you were absent from work last week? For those who respond "yes" to question 5 about being on layoff, the following questions are asked: Has your employer given you a date to return to work? If "no, " the next question is: Have you been given any indication that you will be recalled to work within the next 6 months? If the responses to either question 7 or 8 indicate that the person expects to be recalled from layoff, he or she is counted as unemployed. For those who were reported as having no job or business from which they were absent or on layoff, the next question is:

Have you been doing anything to find work during the last 4 weeks? For those who say "yes, " the next question is: What are all of the things you have done to find work during the last 4 weeks? If an active method of looking for work, such as those listed at the beginning of this section, is mentioned, the following question is asked: Last week, could you have started a job if one had been offered? If there is no reason, except temporary illness, that the person could not take a job, he or she is considered to be not only looking but also available for work and is counted as unemployed.

A. Frictional Unemployment Quiz B. Structural C. Seasonal D. Cyclical 1. A man working for Ford Motor Company is replaced by a robot. 2. A homebuilder loses his job during the recession because houses are not selling. 3. A person who has worked his way through medical school (he has now graduated) has quit his job as a cook at Mc. Donald’s and is interviewing to become a brain surgeon. 4. Automation has cost Alexandria her office job. . 5. Now that the economy has improved from a business contraction, Rick is looking to get his old job back at Ford. 6. A California citrus picker is temporarily unemployed because of the weather. 7. A bank teller loses her job to an ATM machine. 8. Santa lost his job after Christmas. 9. A Lynch student graduates after 7 years in high school (had to repeat econ 4 times) & is trying to get her first job at Arby’s. 10. Joel is fired at Wendy’s but is interviewing at Mc. Donald’s. 1. B 2. D 3. A 4. B 5. D 6. A 7. B 8. C 9. A 10. A

NS 15 -21 15. The business cycle is defined as the upturns _______ and downturns in business activity. _______ A. EXPANSION B ___ A ___ D A ___ B ___ C ___ 16. 17. 18. 19. 20. 21. B. PEAK C. CONTRACTION D. TROUGH High point of expansion Period of growth (GDP increases) increases “Bottoming out” of business activity Laid off workers are called back Near or at full employment (4 -6%) Have averaged 11 months since W. W. II.

31. (Frictional/Structural/Cyclical) is “temporary”, “short-term” unemployment. 32. (Frictional/Structural/Cyclical) is technological, “long-term” unemployment. 33. (Frictional/Structural/Cyclical) is unemployment resulting from recessions A. FRICTIONAL B. STRUCTURAL C. CYCLICAL D. SEASONAL ___ 34. Michael lost his job due to the recession [business cycle downturn]. C ___ 35. College graduate is searching for his first job. A ___ 36. Amanda is quitting Wendy’s to work at Mc. Donald’s. A ___ 37. There are job losses at Ford due to a decrease in AD. AD C ___ 38. Lifeguards in the winter and Santas during the spring. D ___ 39. The auto replaces carriage makers B ___ 40. ATM machines replace bank tellers B 45. The cost of unemployment can be measured by the amount by which (potential/actual) GDP exceeds (potential/actual) GDP. 46. If the unemployment rate is 8%, we can infer that the (potential/actual) GDP is in excess of (potential/actual) GDP. 47. (Inflation/Disinflation/Deflation) is a general increase in prices 48. (Inflation/Disinflation/Deflation) is a decline in prices 49. (Inflation/Disinflation/Deflation) is a decrease in the rate of inflation

OKUN’S LAW • For every one percentage point by which the actual unemployment rate exceeds the "natural" rate of unemployment, real gross domestic product is reduced by 2% to 3%. That is, unemployment above the inflation -threshold unemployment rate reduces GDP below potential output, and for every 1% excess of the natural unemployment rate, a 2% to 3% reduction in GDP is predicted. The difference between actual and potential GDP is called the GDP gap. It may be expressed as a percentage or an absolute amount.

GDP Gap (Okun’s Law) Unemployment Rate above 6% x 2 Okun’s Law GDP Gap = Unemployment Rate over 6% x 2 7. 5% unemployment, so 1. 5 x 2% = 3%. [$3 bil. GDP Gap($100 Bil. nominal GDPx 3%; or $100 B x. 03 =$3 B. ) 1. Unemployment is 7%; Nominal GDP is $200 billion. 1 2 4 Real unemp. is __%. The % gap is __%. Y being forgone is $__ B. 2. Unemployment is 8%; Nominal GDP is $500 billion. 2 4 20 Real unemp. is __%. The % gap is __%. Y being forgone is $__ B. 3. Unemployment is 10%; Nominal GDP is $100 billion. 8 8 4 Real unemp. is __%. The % gap is __%. Y being forgone is $__ B. NS 43 & 44 43. Unemployment is 17%. Nominal GDP is $200 billion. 44 What % is the GDP gap? 22 __% What output is forgone? $___ 44. Unemployment is 16%. Nominal GDP is $300 billion. 60 What % is the GDP gap? 20 __% What output is forgone? $___

Figuring Inflation [Change/Original X 100 = inflation] (2006 -later year) (2005 -earlier year) Current year’s index – last year’s index Last year’s index(earlier year) x 100; 130. 7 -124. 0(6. 7) 116 -120(-4) 124. 0 x 100 = ____ -3. 3% 5. 4% 120 x 100 = ____ 199. 1 – 192. 7 [6. 4] 192. 7 x 100 = 3. 3% 333 -300(33) 11% 300 x 100 = ____ 50. The CPI was 166. 6 in 1999 and 172. 2 in 2000. Therefore, the rate of inflation for 2000 was (2. 7/3. 4/4. 2)% [5. 6/166. 6 x 100 = 3. 4%] 51. If the CPI falls from 160 to 149 in a particular year, the economy has experienced (inflation/deflation) of (5/-4. 9/-6. 9)%. [-11/160 x 100 = -6. 9%] 52. If CPI rises from 160. 5 to 163. 0 in a particular year, the rate of inflation for that year is (1. 6/2. 0/4. 0)%.

Consumers in this economy buy only two goods–hot dogs & hamburgers. Step 1. Fix the basket. What percent of income is spent on each. Consumers in this economy buy a basket of: 4 hot dogs and 2 hamburgers Step 2. Find the prices of each good in each year. Year Price of Hot Dogs Price of Hamburgers 2001 $1 $2 2002 $2 $3 Step 3. Compute the basket cost for each year. 2001 ($1 per hot dog x 4 = $4) + ($2 per hamburger x 2 = $4), so $8 2002 ($2 per hot dog x 4 = $8) + ($3 per hamburger x 2 = $6), so $14 Step 4. Choose one year as a base year (2001) and compute the CPI 2001 ($8/$8) x 100 = 100 2002 (14/$8) x 100 = 175 Step 5. Use the CPI to compute the inflation rate from previous year 2002 (175/100 x 100 = 175%) or to get actual % (175 -100)/100 x 100 =75%

(42%) 18. Suppose that a typical consumer buys the following quantities of these three commodities in 2000 and 2001 Commodity Food Clothing Shelter Quantity 5 units 2 units 3 units 2000 per Unit Price $6. 00 $7. 00 $12. 00 2001 per Unit Price $5. 00 $9. 00 $19. 00 Which of the following can be concluded about the CPI for this individual from 2000 to 2001? 2001 a. It remained unchanged. c. it decreased by 20% b. It decreased by 25%. d. It increased by 20% e. It increased by 25%. (Answer) Year 1 [2000]: [5 food x $6 = $30; 2 clothing x $7 = $14; 3 shelters x $12 = $36, for dollar value of $80. CPI = 100 ($80/$80 x 100 = 100 for 2000)] Year 2 [2001]: [5 food x $5 = $25; 2 clothing x $9 = $18; 3 shelters x $19 = $57, for value of $100. CPI =125 ($100/$80 x 100 = 125% for 2001)] So, the CPI increased by 25%.

“Rule of 70” 70 _____________ “Rule of 70” = % annual rate of increase (3%) = 23 years [Inflation (prices to double)] 70 70 70 [Investments to double] 8 years 6 years 9 = _____ [GDP (standard of living) to double] 7 years 10 = ______ 12 = _____ 70

[Nominal income – inflation rate = Real Income] 16% Nominal Income 6% Inflation Premium = 10% Real Income

“Real Income” measures the amount of goods/services nominal income will buy. [% change in real income = % change in nominal income - % change in PL. ] PL 5% 10% 5% Nominal income rose by 10%, PL increased by 4% - then real income rose by ___%. 6 15 Nominal income rose by 20%, PL increased by 5% - then real income rose by ___%. “You will get a 10% raise”

Inflation Since 1954 Above about 3. 0% inflation is considered too much. [2. 5% in 2016 -2017] Up in 2004 Tomatoes 50% Fuel Oil 40% Butter 28% Gasoline 26% Home gas 16% Chicken 8% Col. Tuition 9% Sausage 7% Sports tickets 7% Take some money out of circulation to make it more valuable. Down in 2004 Eggs -20% PCs -14% Photos -14% TVs -12% Lettuce -8% Toys -6% Cars -4% Girls cloth -1% 47. Inflation – overall increase in prices 48. Deflation – decrease in prices (1954) 49. Disinflation – decrease in inflation(1980 -83)

(Measures of Inflation PPI) 2003 PPI was 5. 4 in 2005, highest since 1990. The “core PPI” [no volatile food and energy] was only 1. 7%. Prices at the wholesale or production level which are early indicators of inflation. The 2, 800 items include prices for raw materials, intermediate goods, materials goods and finished goods. The PPI goods does not include services

Consumer Price Index (CPI) [CPI measures cost of living relative to a base year[100] The CPI is a market basket of 364 items at 21, 000 establishments in 91 cities that the typical householder buys. It does not include exports because we do not buy exports but does include imports. About 55% of the CPI is services

The “Market Basket” What’s in the CPI’s Basket? Clothing 6. 6% Household Alcohol Health 10. 0% 4. 5% 4. 3% Recreation 10. 4% Food 18. 0% Transportation 18. 3% Shelter 27. 9%

PPI and CPI in March 2005

What’s the highest grossing movie of all time? [Mr. Index Goes To Hollywood] Worldwide Box Inflation-Adjusted Receipts Office Receipts Movie Year Receipts(mil. ) Movie Receipts (mil. ) 1. Gone with the Wind 1939 $1, 757 1. Avatar $2, 788 2. Titanic 2, 186 3. Star Wars VII 2, 068 4. Jurassic World 1, 670 5. Avengers 1, 519 6. Furious 7 1, 516 7. Avengers 2 1, 405 8. Harry Potter DH 2 1, 341 9. Frozen 1, 276 10. Iron Man 3 1, 215 11. Minions 1, 159 12. Cap A. : Civil War 1, 153 2. Star Wars 3. Sound of Music 4. ET 5. Titanic 6. Ten Commandments 7. JAWS 8. Doc. Zhivago 9. The Exorcist 10. Snow White 1977 1965 1982 1997 1956 1975 1965 1973 1937 1, 549 1, 234 1, 178 1, 139 1, 114 1, 079 962 948

History of Inflation, 1860 -2004 $21 $7 2007 $1. 50 $11

1962 Prices v. 2015 Prices • Tuition at Harvard - $900 • Starting salary - $6, 000 [college graduate] • FICA of 3. 125 of $4, 800 [$150 maximum] • Top marginal tax rate of 91% of incomes over $200, 000. • New house for $10 -15, 000 [2. 5 times the income of a new college graduate] • Coke - 10 cents • Movies -. 50 • Gas, a gallon - $. 29 • 1962 Chevy - $1, 500 62 Corvette $2, 995 • Tuition at Harvard - $58, 607 • Starting salary - $48, 700 [college graduate] • FICA of 6. 2 of $118, 500 [$7, 254 maximum] • Top marginal tax rate of 39. 6% of incomes over $400, 000 • New median house price is $188, 900 [3. 88 times the income of today’s college grads] • Coke - $1. 60 • Movies - $8. 38 • Gas, a gallon - $2. 31 • 2015 Chevy - $27, 060 2015 Corvette $54, 000

Unemployment 1900 -1990

Unemployment, Inflation, & Business Cycles Inflation – “too many dollars chasing too few goods. ” Deflation – “too few dollars chasing too many goods. ”

Downturns in the Business Cycle .

Hard/Soft Good Price/Production Drops

Indicators of the Business Cycle [“The leading indicators have predicted 11 of the last 15 recessions”] “Barometer Of The Future” [6 -9 months] “Where we are heading” Leading Indicators Ave. work week Credit New orders New businesses Stock prices New orders Had a recession in 2001 Building permits Delivery times A drop for three straight Inventories months usually indicates Materials prices a recession is coming. Money supply Unemployment claims

Indicators of the Business Cycle “Where we are now” Coincident Indicators 1. 2. 3. 4. Personal income minus transfer payments Nonagricultural payrolls Industrial production Manufacturing and trade sales

Indicators of the Business Cycle “Where we have been” Lagging Indicators Labor cost, unemployment rate & duration, prime rates, CPI for services, commercial loans, etc.

Full Employment = 4 -6% unemployment Wish I had not dropped out of school. Will Work For Food Discouraged workers – those who have given up. Unemployed workers - those who are actively looking. Part-time workers – half employed, half unemployed, but counted as fully employed. Employed workers – those who work for even one hour per week for wages or 15 hours a week if not getting paid. We have full employment when cyclical unemployment is “ 0”. In Europe, full employment is 8 -10%. Europe 8 -10%

22. During a recession, jobs relating to recession NS 22 -30 (durable/nondurable) goods are affected the most because they are postponable and have monopoly power (few sellers). 23. (Leading/Coincident/Lagging) indicators – statistics that illustrate the direction the economy is heading in 6 -9 months. 24. (Leading/Coincident/Lagging) indicators – snapshot of the economy “at this time” 25. (Leading/Coincident/Lagging) indicators – statistics that tell where the economy has been 4 -6 26. Full employment occurs when we have ______% unemployment. The current unemployment rate is ____%. 5 27. (Discouraged workers/Temporary unemployed workers) are those who have given up looking for a job. 28. The presence of discouraged workers & counting part-time workers as fully employed results in the official rate being (understated/overstated). 29. If 2 million out of 8 million unemployed workers become “discouraged” & quit looking for work, the official rate would (incr/decr/be unchanged). 30. If 3 million part time workers switch to full time work, the official rate work will (fall/rise/remain unchanged).

Demand-Pull & Cost-Push Inflation Demand-Pull Inflation – increase in AD. [“Too many dollars chasing too few goods”] Originates from “buyers side of the market” D 1 D 2 S P 2 P 1 “Demand-pull” PL 2 PL 1 D S 2 S 1 Cost-Push Inflation – 3 things may cause “cost-push” inflation. “Cost-push” 1. Wage-push – strong labor unions 2. Profit-push – companies increase prices when their costs increase. “Wage-price” 3. Supply-side cost shocks – unanticipated Spiral increase in raw materials such as oil.

Who wins/loses with 20% Unanticipated Inflation? [Creditors, Debtors, Savers] The debtor wins with 20% unanticipated inflation (some examples) 1. In 1914, total German mortgage debt was $10 billion marks In 1923, $10 billion marks was worth 1 cent. All debt was wiped out. cent out 2. Signed union contracts agreeing to 3% raises for next 3 years (A $30, 000 salary would increase to $32, 782 but it would take $51, 840 to buy what $30, 000 would buy 3 years before) 3. Signed union contracts agreeing to COLAs for next 3 years. (So a $30, 000 salary of 3 years ago would now pay $51, 840 which would buy what $30, 000 would buy 3 years ago. 4. Your Econ teacher buys a $300, 000 CD from the 1 st Econ Bank which pays him 5% interest for the next 3 years. [Saver] Saver Mr. Econ would earn $47, 288 in interest at 5%, however at 5% 20%, he could earn $218, 400. ] So the saver looses here. $218, 400 here

Inflation • Who is Hurt by Inflation? – Fixed-Income Receivers – Savers – Creditors • Who is Unaffected by Inflation? – Flexible-Income Receivers • Cost-of-Living Adjustments (COLAs) – Debtors – Helped by Inflation?

The End