Chapter 9

Unemployment
and Stagflation
These slides supplement the
textbook, but should not
replace reading the textbook

What is the
labor force?
All non-institutionalized
individuals 16 years of
age and older who are
either working or
looking for work
2

Who is unemployed?
Anyone 16 years of
age or older who is
actively seeking
employment
3

What is the
unemployment rate?
The number of
unemployed
individuals expressed
as a percentage of the
labor force
4

How do we measure
unemployment?
The number of
unemployed divided by
the labor force
5

Who measures
unemployment?
The Bureau of Labor
Statistics surveys 60,000
households each month
6

What is the current

unemployment rate?
http://www.bls.gov/

What is covered
employment ?
Employment
that qualifies
for full benefits
8

What is a
discouraged worker?
A person who has
dropped out of the labor
force due to a lack of
success in finding a job
9

Are discouraged
workers considered a
part of the labor force?
No, people who quit
looking for work are
not considered a part
of the labor force
10

What about
part-time workers?
Part-time workers are
considered fully
employed
11

What is
underemployment?
A situation in which
workers are
overqualified for their
jobs or work fewer hours
than they would prefer
12

What is the labor force

participation rate?
The ratio of the number
in the labor force to the
adult population

13

What percentage of the

labor force is female?
Almost half

14

What are the types of

unemployment?
Frictional unemployment
Structural unemployment
Seasonal unemployment
Cyclical unemployment
15

What is
frictional unemployment?
Unemployment that arises
because of the time
needed to match job
seekers with job openings
16

Why will people be

looking for work even
in the best of times?
school graduates
job advancement
downsizing
weak markets
17

What is
structural unemployment?
Unemployment that arises
because:
the skills demanded by
employers do not match
those of the unemployed
or the unemployed do not
live where the jobs are
18

What is
seasonal unemployment?
Unemployment caused by
seasonal shifts in labor
supply and demand
19

What is
cyclical unemployment?
Unemployment that
fluctuates with the
business cycle, increasing
during recessions and
decreasing during
expansions
20

What is full
employment?
The level of employment
when there is no
cyclical unemployment
21

What is considered
full employment?
4 to 6% unemployment
is considered full
employment
22

Why 4 to 6%?
Because even in the
best of times some
people are always
looking for work
23

What would make

unemployment
increase beyond 6%
Excessive inventories

24

What is the current

unemployment rate?
http://www.forecast-char
t.com/forecast-unemploym
ent-rate.html

Is the unemployment
rate valid?
Yes, as long as it is
calculated consistently,
we can get an accurate
comparison from one
time period to the next
26

What was the

unemployment rate
at the worst of the
Great Depression?
In 1932 there was
25% unemployment
27

What caused the

buildup of excessive
inventories in the
late 1920s?
Business owners
keeping prices high
and wages low
28

What caused the

severity of
unemployment in 1932?
The Smoot Hawley Tariff
Higher taxes
Decrease of money supply
29

What are the two types

of fiscal policy?
Discretionary
Automatic stabilizers
30

What are failings of

discretionary fiscal policies?
Time lags
Knowing the multiplier
Politics world viewpoint
Structural changes
Accurate forecasting
International events
Ignorance of economics
31

What are some recent

laws that change the
economy structurally?
Health care bill (2700 pgs)
Financial Reform bill (2100 pgs)
Consumer Financial Protection
Bureau
Foreign Account Tax
Compliance Act (FATCA)
32

How does the Health

Care Bill Work?

Must cover everyone who

applies
Everyone must purchase
insurance or pay a fine ($750
individual $2,250 per family)
Companies with 50+
employees must offer health
insurance or $750 per worker
33

How does the

Financial Reform law
protect big business?
Identifies which nonbank
financial institutions might
cause instability if they fail
if so stringent regulation
by the Fed in exchange for
protection
34

Which firms can get

preferential treatment?
Participants in rent seeking
leading to a symbiotic
relationship between
politicians and business
35

What is the Consumer

Financial Protection Bureau?
Established by the Dodd-Frank
Financial Reform law
Under the Fed but not responsible
to the Fed
Impose rules on banks
Not approved by Senate
Receive 10% combined earnings
of the Fed
36

How does FATCA Work?

Foreign banks must identify
Americans and provide
financial information to the
IRS or face a 30% of the
banks U.S. income
37

What affect of big

government on
national debt?
40% of national budget is
borrowed money
70% of federal securities
are purchased by the Fed
38

What are
unemployment benefits?
Cash transfers provided
to unemployed workers
who actively seek
employment and who
meet other qualifications
39

What is the
Phillips Curve?
Shows an inverse
relationship between
inflation and
unemployment
40

What is stagflation?
Unemployment and
inflation increase at
the same time
41

Why is stagflation
a dilemma for
policy makers?
By using typical Keynesian
tools whatever you do to
fight one problem the
other gets worse
42

What is a conflict?
Fiscal and monetary
policies can move in
opposite directions
43

What is the Full

Employment and
Balanced Growth Act
of 1978?
Mandated the Fed to
ensure full employment
and stable prices
44

What is the cycle

imposed by monetary
and fiscal policies?
Choices are made and
then reversed as each
problem gets better
and worse again
45

Decrease in Supply Early 1970s

Higher Prices and More Unemployment

S'

P2
P1
0

S
D

Q2

Q1
46

What caused the

supply curve to shift to
the left in the early
1970s?
OPEC
Unions
47

What is fine tuning and

stable policy settings?
Demand management
Policy rules
48

What is the difference

in opinion concerning
the equilibrium?
Fine tuning less than full
employment equilibrium
Rules full employment
equilibrium
49

What happened
in 1980-1981?
President Reagan lowered
taxes on business
Paul Volcker, chairman of the
Fed, decreased the money
supply for a long time
50

What agreement
between those who
favor rules and a more
active approach?
Attention to lag effects
Policy stability
Long term effects
51

END