Transcript Slide 1

Chapter 6
MONITORING CYCLES, JOBS, AND THE PRICE LEVEL
The business cycle
Measures of labor market activity
Unemployment
Sources
Duration
Groups affected most
Measuring the price level & inflation rate.
Business cycle
 periodic but irregular up-and-down movement in
production and jobs.
NBER defines phases and turning points
 Recession
• significant decline in activity spread across the economy,
• lasts more than a few months
• visible in industrial production, employment, real income, and
wholesale-retail trade.
• begins just after the economy reaches a peak of activity
• ends as the economy reaches its trough.
 Expansion occurs between trough and peak
 Bus. Cycle dates: http://www.nber.org/cycles.html/
Jobs and Wages
Current Population Survey
The U.S. Census Bureau conducts monthly surveys
to determine the status of the labor force in the
United States.
Approximately 60,000 households interviewed
monthly.
Four months in, eight months out, four months in.
Jobs and Wages
To be considered unemployed, a person must
be:
without work and have made specific efforts to
find a job within the past four weeks, or
waiting to be called back to a job from which he or
she was laid off, or
waiting to start a new job within 30 days.
Jobs and Wages
the population
labor force
categories and
the magnitudes
for 2006.
December 2008 Labor Force Statistics
Population
303.8 m.
Working Age Population
(over 16,
Noninstitutionalized)
235.0 m.
Labor Force
154.4 m.
Employed
143.3. m
Out of labor
force
80.6 m.
Unemployed
11.1 m.
Young,
Institutionalized
68.8 m.
Jobs and Wages
unem ployed
unem ploymnt
e rate 
labor force
em ploym ent population ratio 
# em ployed
working age population
labor force
labor force participation rate 
working age population
What was the unemployment rate in Dec 2008? (round
your answer to nearest 10th and don’t use % sign -- e.g.
5.4)
20
What was the labor force participation rate in Dec
2008? (round your answer to nearest 10th and don’t
use % sign -- e.g. 5.4)
20
What was the employment-population ratio
participation rate in Dec 2008? (round your answer to
nearest 10th and don’t use % sign -- e.g. 5.4)
20
Trends in Employment Measures
The unemployment rate is procyclical.
50%
No
50%
Ye
s
1. Yes
2. No
20
The employment-population ratio
is pro-cyclical.
se
50%
Fa
l
50%
Tr
ue
1. True
2. False
20
The labor force participation rate
is pro-cyclical.
se
50%
Fa
l
50%
Tr
ue
1. True
2. False
20
Cyclical behavior of employment
statistics.
Are each of the following, pro- or counter-cyclical?
Unemployment rate
LFPR
• Effect of discouraged workers
Employment-population ratio
Trends in employment statistics
The LFPR
increased from 59% in the 1960s to 67% in the
1990s.
for men has declined, but for women has increased.
fell for older workers since the 1950s, but has
recently begun to rise.
The employment-population ratio
increased from 55% in the early 1960s to 67% in
2000.
declined for men and increased for women.
Jobs and Wages
Aggregate Hours
the total number of hours worked by all workers
during a year.
increased since 1960 but less rapidly than the
total number of workers because the average
workweek has shortened.
Jobs and Wages
Aggregate hours is proc-cylclical.
se
50%
Fa
l
50%
Tr
ue
1. True
2. False
20
Jobs and Wages
Real Wage Rate
the quantity of goods and services that can be
purchased with an hour’s work.
the money wage rate divided by the price level
(more later)
Three measures
 Hourly earnings in manufacturing
 Total wages and salaries per hour
 Total wages, salaries, & supplements per hour
Jobs and Wages
Real Wage Rate
compensation in
2000 dollars per
hour of work.
Unemployment and Full
Employment
Is duration of
unemployment proor counter-cyclical?
As duration increases,
is “pain” more or
less concentrated?
Unemployment and Full Employment
Types of Unemployment
Frictional
Structural
Cyclical
Mary quit her job to move to another city. As she
searches for a new job in her new location, she is
un
e
ly
al
Cy
cli
c
St
ru
ct
ur
all
y
lly
Fr
ict
io
na
33%
u.
..
u.
..
1. Frictionally unemployed
2. Structurally unemployed
3. Cyclically unemployed
33%
.. .
33%
20
Some believe that the U.S. automobile industry
will forever be smaller. If John lost his job as an
auto worker as a result of the down-sizing, John
is:
un
e
ly
al
Cy
cli
c
St
ru
ct
ur
all
y
lly
Fr
ict
io
na
33%
u.
..
u.
..
1. Frictionally unemployed
2. Structurally unemployed
3. Cyclically unemployed
33%
.. .
33%
20
Some believe that the U.S. automobile industry
will eventually return to its original size. If John
lost his job as an auto worker as a result of the
current recession, but expects that he will get his
job back, John is:
un
e
ly
al
Cy
cli
c
St
ru
ct
ur
all
y
lly
Fr
ict
io
na
33%
u.
..
u.
..
1. Frictionally unemployed
2. Structurally unemployed
3. Cyclically unemployed
33%
.. .
33%
20
Unemployment and Full Employment
Full Employment
 no cyclical unemployment
 when all unemployment is frictional or structural.
Natural rate of unemployment.
 unemployment rate at full employment
 estimated to have been around 6 percent on average in
U.S.
 Higher in 1970s, lower in 1990s
• Baby boom
• Women
• UI Generosity
Unemployment and Full Employment
Potential GDP
Quantity of real GDP produced at full
employment.
corresponds to the capacity of the economy to
produce output on a sustained basis;
Actual GDP fluctuates around potential GDP with
the business cycle.
Actual unemployment fluctuates around natural
rate with the business cycle.
When the unemployment rate is above the
natural rate, real GDP will be below potential
GDP.
se
50%
Fa
l
Tr
ue
1. True
2. False
50%
20
The Consumer Price Index
The price level is the “average” level of prices and
is measured by using a price index.
CPI measures the average level of the prices of
goods and services consumed by the average
urban family.
The GDP deflator is another price index, reflecting
the average price of all goods and services
produced.
The Consumer Price Index
Constructing the CPI involves three stages:
 Selecting the CPI basket
 Conducting a monthly price survey
 Using the prices and the basket to calculate the CPI
cost of bundle in year t
CPIt 
100
cost of bundle in base year
The Consumer Price Index
The CPI
basket.
The Consumer Price Index
The CPI basket is based on a Consumer
Expenditure Survey.
The current CPI based on a 1993-95 survey,
although the reference base period is still 198284.
Every month, BLS employees check the prices of
80,000 goods and services in 30 metropolitan
areas.
The CPI is calculated using the prices and the
contents of the basket.
The Consumer Price Index
Item
Quantity
10
Price in
1984
$1.00
Price in
2005
$2.00
Oranges
Apples
5
$2.00
$3.00
If 1984 is base year,
1984 CPI ___________
2005 CPI __________
If 2005 is base year,
1984 CPI ___________
2005 CPI __________
Using 1984 base year, what is the CPI in 1984? (round
answer to nearest 10th – e.g. 103.2)
20
Using 1984 base year, what is the CPI in 2005? (round
answer to nearest 10th – e.g. 103.2)
20
Using 2005 base year, what is the CPI in 1984? (round
answer to nearest 10th – e.g. 103.2)
20
Using 2005 base year, what is the CPI in 2005? (round
answer to nearest 10th – e.g. 103.2)
20
The Consumer Price Index
The inflation rate
 % change in price level between years.
= (CPI now – CPI last year) / CPI last year
= (CPI now / CPI last year) - 1
Avg. annual inflation rate over past t years =
(CPI now / CPI t years ago)1/t -1
Avg. annual growth rate over past t years =
(X now / X t years ago)1/t -1
Adjusting for changes in price level
NominalValue t
Real Value t 
100
PriceIndext
•In base year, how do nominal and real wages
compare?
•Suppose that between 2005 and 2006 nominal
wages rise from $10 to $11 and the CPI rises from
140 to 150
•What was the inflation rate?
•Growth in nominal wages?
•Growth in real wages?
Inflation Questions
Using BLS data on average prices, answer
the following
• Inflation rate between 2004 and 2005.
• Average annual rate of inflation between
1990 and 2005.
• If a person earned $10 per hour in 1990,
how much would they have to earn in
2005 to have the same real wage?
Suppose that between 2005 and 2006 nominal
wages rise from $10 to $11 and the CPI rises from
140 to 150. What was the inflation rate?
(nearest 10th, no % sign; e.g. 4.3).
20
Suppose that between 2005 and 2006 nominal wages
rise from $10 to $11 and the CPI rises from 140 to 150.
What was annual rate of growth in the nominal wage?
(nearest 10th, no % sign; e.g. 4.3).
20
Suppose that between 2005 and 2006 nominal
wages rise from $10 to $11 and the CPI rises from
140 to 150. What was the growth rate in the real
wage? (nearest 10th, no % sign; e.g. 4.3).
20
The Bias in the CPI
A Congressional Advisory Commission estimated that
the CPI overstates inflation by 1.1 percentage points a
year.
Sources of bias:
 New commodities
 Quality improvements
 Commodity substitution bias
 Outlet substitution bias.
•Why is the bias costly?
•Government spending/taxes.
•Social Security proposal
•Private Contracts
•Biases estimates of real
earnings