Principles of Economics

Twelfth Edition

Chapter 22
Unemployment,
Inflation, and
Long-Run Growth

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Unemployment

Working-age population is the total number of people aged 16 years and over
who are not in a jail, hospital, or some other form of institutional care.

The working-age population is divided into those in the labor force and those
not in the labor force.

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.

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Unemployment

Labor force is the number of people employed plus the number unemployed.

unemployed A person 16 years old (for Türkiye 15 years) 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

employed Any person 16 years old or older :

• who works for pay, either for someone else or in his or her own business for 1
or more hours per week,

• who works without pay for 15 or more hours per week in a family enterprise,
or

• who has a job but has been temporarily absent with or without pay.

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Unemployment

Three Main Labor Market Indicators

• Unemployment rate

• Employment−to-population ratio

• Labor force participation rate

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Unemployment

Unemployment rate is the percentage of people in the labor force who are
unemployed.

The unemployment rate in Unemployed 3.214 million

January 2024 was 9.1% in Türkiye.
Labor force 35.436 million

Unemployment rate

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Unemployment

Employment−popula on ra o is the percentage of the working-age population

who are employed.

In January 2024 , the Employed 32.222 million

employment-to-population ratio
was 49.0%. Working-age 65.726 million
population
Employment-
population ratio

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Unemployment

Labor force participation rate is the percentage of the working-age population

who are members of the labor force.

In January 2024, labor force Labor force 35.436 million

participation rate was 53.9%.
Working-age 65.726 million
population
Labor force 3
participation rate

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Unemployment

Population Labor force

between age participation Unemployment Employment
January, 15 and 64 Labor force rate rate rate
2024 (thousand) (thousand) (%) (%) (%)

Male 32,529 23,274 71.5 7.7 66.0

Female 33,197 12,162 36.6 11.7 32.4

Source: Turkstat, Labor Force Statistics

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Ex: In 2000, the country A’s labor force was measured as 29,500,000, employment
as 28,000,000 and the working-age population as 46,500,000. Calculate the
unemployment rate, labor force participation rate and employment-to-population
ratio.

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Ex: Use the following data to calculate the size of the labor force and the
unemployment rate. Total population: 500; population under 16 years of age:
120; not want to work (not searching for a job): 150; unemployed: 23; part-time
workers looking for full-time jobs: 10.

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Unemployment

The official definition of unemployment omits two types of labor:

• Marginally attached workers

• Part-time workers who want full-time work

A marginally attached worker is a person who does not have a job, is available
and willing to work, has not made specific efforts to find a job within the
previous four weeks, but has looked for work sometime in the recent past.

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Unemployment

Discouraged worker is a marginally attached worker who has not made

specific efforts to find a job within the previous four weeks because
previous unsuccessful attempts were discouraging.

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.

 Unemployment rate that takes into account potential labor force, hence
marginally attached workers, was 26.5% in January 2024. On the other hand,
officially announced rate was 9.1%.

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Unemployment

Involuntary part-time workers

Full-time workers are people who usually work 45 hours or more a week.

Part-time workers are people who usually work less than 45 hours a week.

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Types of Unemployment

There are three categories of unemployment:

Frictional unemployment
Structural unemployment
Cyclical unemployment

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Types of Unemployment

Frictional unemployment is the unemployment that arises from normal labor

turnover—from people entering and leaving the labor force and from the
ongoing creation and destruction of jobs. Used to denote short-run job/skill-
matching problems.

For example, a graduate interviewing for

her first job.

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Types of Unemployment

structural unemployment The portion of unemployment that is as a result of

changes in the structure of the economy that result in a significant loss of jobs
in certain industries (mainly resulting from decrease in aggregate demand,
international competition or change in the technology).

For example, when banks

introduced the automatic teller
machine in the 1970s, many bank-
teller jobs were destroyed.

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Types of Unemployment

cyclical unemployment It is the fluctuating unemployment over the business

cycle that increases during a recession and decreases during an expansion
(recovery).

For example, during the Covid-19 pandemic, many workers are laid off as
business activity has declined.

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Types of Unemployment

“Natural” Unemployment

“Natural” unemployment is the unemployment that arises from frictions and

structural change when there is no cyclical unemployment—when all the
unemployment is frictional and structural. Unemployment that occurs as a
normal part of the functioning of the economy.

Natural unemployment rate is the natural unemployment as a percentage of

the labor force.

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Types of Unemployment

Full employment occurs when the unemployment rate equals the natural
unemployment rate.

At full employment, all the unemployment is frictional or structural—and not

cyclical unemployment.

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Ex: Which of the following situations correspond to cyclical unemployment,
structural unemployment, frictional unemployment and exit from the labor force?

• Some of your friends just graduated from college and have been looking for
jobs for the past four weeks.

• Pınar lost her job as a biologist at a bio-tech company when the whole industry
went into recession.

• Ahmet, who used to be a taxi driver, stopped looking for a job three months
after he lost his job.

• Burak has been working as a craftsman making cotton dolls. Now all kids want
plastic dolls, and he has been out of a job for the past two years.

• Zeynep, a high-tech engineer, just decided to quit her job in a start-up firm;
she’s being interviewed for a better-paid job in a multinational company.

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Inflation and Deflation

The Consumer Price Index

consumer price index (CPI) A price index computed each month by TurkStat
using a bundle that is meant to represent the “market basket” purchased
monthly by the typical urban consumer.

We can use these numbers to compare what a fixed basket of goods costs this
month with what it cost in some previous month.

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Inflation and Deflation

producer price indexes (PPIs) (previously called as wholesale price indexes)

Measures of prices that producers receive for products at all stages in the
production process.

Used as an indicator of future changes in CPI.

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 CPI weights by main expenditure groups (February 2024) (Source: Turkstat)
Miscellaneous goods and
services, 4.3

Education, 1.8 Hotels, cafes and

restaurants, 8.17
Recreation and culture, 3.33

Food and non-alcoholic

Communication, 3.34 beverages, 24.98

Alcoholic beverages and

Transportation, 17.35 tobacco, 3.76

Clothing and
footwear , 6.94

Health, Furnishings,
3.71 household Housing, 14.2
equipment,
8.12

The CPI market basket shows how a typical consumer divides his or her money among various goods
and services.

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Calculation of CPI and inflation rate

The CPI calculation has four steps:

• Determine a base year that will determine the basket of goods and services
bought by the typical household (consumer basket).
• Find the cost of the consumer basket at base period prices.
• Find the cost of the consumer basket at current period prices.
• Calculate the CPI for the base period and the current period.

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Calculation of CPI

Basket of n different products bought in the base year:

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Calculation of CPI

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Inflation and Deflation

Inflation rate is the percentage change in the price level from one year to the
next.

Deflation is a situation in which the inflation rate is negative.

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