PRINCIPLES OF

MACROECONOMICS

PART II Concepts and Problems in Macroeconomics

TENTH EDITION

CASE FAIR OSTER

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Prepared by: Fernando Quijano & Shelly

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PART II Concepts and Problems in Macroeconomics

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Unemployment,
Inflation, and
Long-Run Growth

7
CHAPTER OUTLINE
Unemployment
Measuring Unemployment
Components of the Unemployment Rate
The Costs of Unemployment

PART II Concepts and Problems in Macroeconomics

Inflation

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The Consumer Price Index

The Costs of Inflation

Long-Run Growth
Output and Productivity Growth

Looking Ahead

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Unemployment
Measuring Unemployment

PART II Concepts and Problems in Macroeconomics

employed Any person 16 years old or older (1) who works for
pay, either for someone else or in his or her own business for 1
or more hours per week, (2) who works without pay for 15 or
more hours per week in a family enterprise, or (3) who has a
job but has been temporarily absent with or without pay.
unemployed A person 16 years old or older who is not
working, is available for work, and has made specific efforts to
find work during the previous 4 weeks.

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Unemployment
Measuring Unemployment
not in the labor force A person who is not looking for work
because he or she does not want a job or has given up looking.

PART II Concepts and Problems in Macroeconomics

labor force The number of people employed plus the number

of unemployed.

labor force = employed + unemployed

population = labor force + not in labor force

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Unemployment
Measuring Unemployment
unemployment rate The ratio of the number of people
unemployed to the total number of people in the labor force.

PART II Concepts and Problems in Macroeconomics

unemployment rate =

unemployed
employed + unemployed

labor force participation rate The ratio of the labor force to

the total population 16 years old or older.

labor force participation rate =

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labor force
population

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Unemployment
Measuring Unemployment
TABLE 7.1 Employed, Unemployed, and the Labor Force, 19502009
(1)

PART II Concepts and Problems in Macroeconomics

Population
16 Years
Old or Over
(Millions)

(2)

Labor
Force
(Millions)

(3)

(4)

(5)

(6)

Employed
(Millions)

Unemployed
(Millions)

Labor Force
Participation
Rate
(Percentage
Points)

Unemployment
Rate
(Percentage
Points)

1950

105.0

62.2

58.9

3.3

59.2

5.3

1960

117.2

69.6

65.8

3.9

59.4

5.5

1970

137.1

82.8

78.7

4.1

60.4

4.9

1980

167.7

106.9

99.3

7.6

63.8

7.1

1990

189.2

125.8

118.8

7.0

66.5

5.6

2000

212.6

142.6

136.9

5.7

67.1

4.0

2009

235.8

154.1

139.9

14.3

65.4

9.3

Note: Figures are civilian only (military excluded).

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Unemployment
Components of the Unemployment Rate
Unemployment Rates for Different Demographic Groups

TABLE 7.2 Unemployment Rates by Demographic Group, 1982 and 2010

PART II Concepts and Problems in Macroeconomics

Years
Total
White
Men
Women
Both sexes
African American
Men
Women
Both sexes

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November 1982

June 2010

20+
20+
1619

10.8
9.6
9.0
8.1
21.3

9.5
8.6
8.9
7.1
23.2

20+
20+
1619

20.2
19.3
16.5
49.5

15.4
17.4
11.8
39.9

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Unemployment
Components of the Unemployment Rate
Unemployment Rates in States and Regions

PART II Concepts and Problems in Macroeconomics

TABLE 7.3 Regional Differences in Unemployment, 1975, 1982, 1991, 2003 and 2010

U.S. avg.
Cal.
Fla.
Ill.
Mass.
Mich.
N.J.
N.Y.
N.C.
Ohio
Tex.

1975

1982

1991

2003

2010

8.5
9.9
10.7
7.1
11.2
12.5
10.2
9.5
8.6
9.1
5.6

9.7
9.9
8.2
11.3
7.9
15.5
9.0
8.6
9.0
12.5
6.9

6.7
7.5
7.3
7.1
9.0
9.2
6.6
7.2
5.8
6.4
6.6

6.0
6.7
5.1
6.7
5.8
7.3
5.9
6.3
6.5
6.1
6.8

9.7
12.4
11.7
10.8
9.2
13.6
9.7
8.3
10.3
10.7
8.3

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Unemployment
Components of the Unemployment Rate

PART II Concepts and Problems in Macroeconomics

Discouraged-Worker Effects
discouraged-worker effect The decline in the measured
unemployment rate that results when people who want to work
but cannot find jobs grow discouraged and stop looking, thus
dropping out of the ranks of the unemployed and the labor force.

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EC ON OMIC S IN PRACTICE

A Quiet Revolution: Women Join the Labor Force

PART II Concepts and Problems in Macroeconomics

As women began joining the

labor force in greater numbers
in the 1970s and 1980s, their
wages relative to mens wages
actually fell.
Most economists attribute this
decline to the fact that less
experienced women were
entering the labor force,
pointing out the importance of
correcting for factors such as
experience and education when we analyze labor markets.
If you are interested in learning more about the economic history of American
women, read the book Understanding the Gender Gap: An Economic History
of American Women by Harvard University economist Claudia Goldin.

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Unemployment
Components of the Unemployment Rate
The Duration of Unemployment
TABLE 7.4 Average Duration of Unemployment, 19702009

PART II Concepts and Problems in Macroeconomics

Weeks
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983

8.6
11.3
12.0
10.0
9.8
14.2
15.8
14.3
11.9
10.8
11.9
13.7
15.6
20.0

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Weeks
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996

18.2
15.6
15.0
14.5
13.5
11.9
12.0
13.7
17.7
18.0
18.8
16.6
16.7

Weeks
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

15.8
14.5
13.4
12.6
13.1
16.6
19.2
19.6
18.4
16.8
16.8
17.9
24.4

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Unemployment
The Costs of Unemployment
Some Unemployment Is Inevitable

PART II Concepts and Problems in Macroeconomics

When we consider the various costs of unemployment, it is

useful to categorize unemployment into three types:

Frictional unemployment
Structural unemployment
Cyclical unemployment

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Unemployment
The Costs of Unemployment
Frictional, Structural, and Cyclical Unemployment

PART II Concepts and Problems in Macroeconomics

frictional unemployment The portion of unemployment that

is due to the normal turnover in the labor market; used to
denote short-run job/skill matching problems.

structural unemployment The portion of unemployment

that is due to changes in the structure of the economy that
result in a significant loss of jobs in certain industries.
natural rate of unemployment The unemployment rate that
occurs as a normal part of the functioning of the economy.
Sometimes taken as the sum of frictional unemployment rate
and structural unemployment rate.
cyclical unemployment Unemployment that is above
frictional plus structural unemployment.

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Unemployment
The Costs of Unemployment
Social Consequences

PART II Concepts and Problems in Macroeconomics

The costs of unemployment are neither evenly distributed

across the population nor easily quantified.
The social consequences of the Depression of the 1930s are
perhaps the hardest to comprehend. Few emerged from this
period unscathed.
At the bottom were the poor and the fully unemployed, about
25 percent of the labor force. Even those who kept their jobs
found themselves working part-time.
Many people lost all or part of their savings as the stock
market crashed and thousands of banks failed.

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Inflation
The Consumer Price Index

PART II Concepts and Problems in Macroeconomics

consumer price index (CPI) A price index computed each

month by the Bureau of Labor Statistics using a bundle that
is meant to represent the market basket purchased monthly
by the typical urban consumer.

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Inflation

PART II Concepts and Problems in Macroeconomics

The Consumer Price Index

FIGURE 7.1 The CPI Market Basket

The CPI market basket shows how a typical consumer divides his or her money among various goods
and services.
Most of a consumers money goes toward housing, transportation, and food and beverages.

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Inflation
The Consumer Price Index

PART II Concepts and Problems in Macroeconomics

TABLE 7.5 The CPI, 19502009

1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

Percentage
Change
in CPI
1.3
7.9
1.9
0.8
0.7
-0.4
1.5
3.3
2.8
0.7
1.7
1.0
1.0
1.3
1.3
1.6
2.9
3.1
4.2
5.5

CPI
24.1
26.0
26.5
26.7
26.9
26.8
27.2
28.1
28.9
29.1
29.6
29.9
30.2
30.6
31.0
31.5
32.4
33.4
34.8
36.7

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1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

Percentage
Change
in CPI
5.7
4.4
3.2
6.2
11.0
9.1
5.8
6.5
7.6
11.3
13.5
10.3
6.2
3.2
4.3
3.6
1.9
3.6
4.1
4.8

CPI
38.8
40.5
41.8
44.4
49.3
53.8
56.9
60.6
72.6
65.2
82.4
90.9
96.5
99.6
103.9
107.6
109.6
113.6
118.3
124.0

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

Percentage
Change
in CPI
5.4
4.2
3.0
3.0
2.6
2.8
3.0
2.3
1.6
2.2
3.4
2.8
1.6
2.3
2.7
3.4
3.2
2.8
3.9
-0.4

CPI
130.7
136.2
140.3
144.5
148.2
152.4
156.9
160.5
163.0
166.6
172.2
177.1
179.9
184.0
188.9
195.3
201.6
207.3
215.3
214.5
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Inflation
The Consumer Price Index
producer price indexes (PPIs) Measures of prices that producers
receive for products at all stages in the production process.

PART II Concepts and Problems in Macroeconomics

The indexes are calculated separately for various stages in the

production process.
The three main categories are finished goods, intermediate materials,
and crude materials, although there are subcategories within each of
these categories.

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Inflation
The Costs of Inflation
During inflations, most pricesincluding input prices like wagestend
to rise together, and input prices determine both the incomes of
workers and the incomes of owners of capital and land.

PART II Concepts and Problems in Macroeconomics

So inflation by itself does not necessarily reduce ones purchasing

power.

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EC ON OMIC S IN PRACTICE

The Politics of Cost-of-Living Adjustments

PART II Concepts and Problems in Macroeconomics

In the last few years many

state governments in the
United States have begun to
see the costs associated with
retiring state workers
escalate as the number of
retirees has grown.
For many of these publicsector retirees, pensions
have been tied to the cost of
living.

No Cost-of-Living Increase for State Retirees in July

The Baltimore Sun

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Inflation
The Costs of Inflation
Inflation May Change the Distribution of Income

PART II Concepts and Problems in Macroeconomics

real interest rate The difference between the interest rate

on a loan and the inflation rate.

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Inflation
The Costs of Inflation
Administrative Costs and Inefficiencies

PART II Concepts and Problems in Macroeconomics

There may be costs associated even with anticipated

inflation. One is the administrative cost associated with
simply keeping up.

Public Enemy Number One?

Economists have debated the seriousness of the costs of
inflation for decades.

No matter what the real economic cost of inflation, people do

not like it.

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Long-Run Growth

output growth The growth rate of the output of the entire economy.

PART II Concepts and Problems in Macroeconomics

per-capita output growth The growth rate of output per person in

the economy.

productivity growth The growth rate of output per worker.

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Long-Run Growth

PART II Concepts and Problems in Macroeconomics

Output and Productivity Growth

FIGURE 7.2 Output per Worker Hour (Productivity), 1952 I2010 I

Productivity grew much faster in the 1950s and 1960s than since.

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Long-Run Growth

PART II Concepts and Problems in Macroeconomics

Output and Productivity Growth

FIGURE 7.3 Capital per Worker, 1952 I2010 I

Capital per worker grew until about 1980 and then leveled off somewhat.

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Looking Ahead

PART II Concepts and Problems in Macroeconomics

This ends our introduction to the basic concepts and problems of

macroeconomics.
The first chapter of this part introduced the field; the second chapter discussed
the measurement of national product and national income; and this chapter
discussed unemployment, inflation, and long-run growth.
We are now ready to begin the analysis of how the macroeconomy works.

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PART II Concepts and Problems in Macroeconomics

REVIEW TERMS AND CONCEPTS

consumer price index (CPI)

producer price indexes (PPIs)

cyclical unemployment

productivity growth

discouraged-worker effect

real interest rate

employed

structural unemployment

frictional unemployment

unemployed

labor force

unemployment rate

labor force participation rate

1. labor force = employed + unemployed

natural rate of unemployment

2. population = labor force + not in labor force

not in the labor force

3. unemployme nt rate

unemployed
employed unemployed

output growth
per-capita output growth

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4. labor force participat ion rate

labor force
population

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