PowerPoint Lectures for

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth

Principles of
Macroeconomics, 9e
; ; By
Karl E. Case,
Ray C. Fair &
Sharon M. Oster

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CHAPTER 7 Unemployment, Inflation, and Long-Run Growth

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 PART II CONCEPTS AND PROBLEMS
IN MACROECONOMICS

Unemployment,
Inflation, and
7
Long-Run Growth

Prepared by:
Fernando & Yvonn Quijano

© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster
 PART II CONCEPTS AND PROBLEMS
IN MACROECONOMICS

Unemployment,
Inflation, and
11
7
Long-Run Growth
CHAPTER 7 Unemployment, Inflation, and Long-Run Growth

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

Inflation
The Consumer Price Index
The Costs of Inflation

Long-Run Growth
Output and Productivity Growth

Looking Ahead

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 Unemployment
Measuring Unemployment

employed Any person 16 years old or older (1)

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth

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

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth

looking for work because he or she does not want

a job or has given up looking.

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

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth

people unemployed to the total number of people

in the labor force.

unemployed
unemployment rate =
employed + unemployed

labor force participation rate The ratio of the

labor force to the total population 16 years old or
older.

labor force
labor force participation rate =
population

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 Unemployment
Measuring Unemployment

TABLE 7.1 Employed, Unemployed, and the Labor Force, 1953–2007

(1) (2) (3) (4) (5) (6)
CHAPTER 7 Unemployment, Inflation, and Long-Run Growth

Labor Force
Population Participation Unemployment
16 Years Labor Rate Rate
Old Or Over Force Employed Unemployed (Percentage (Percentage
(Millions) (Millions) (Millions) (Millions) Points) Points)
1953 107.1 63.0 61.2 1.8 58.9 2.9
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
1982 172.3 110.2 99.5 10.7 64.0 9.7
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
2007 231.9 153.1 146.0 7.1 66.0 4.6
Note: Figures are civilian only (military excluded).
Source: Economic Report of the President, 2008, Table B-35.

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 Unemployment
Components of the Unemployment Rate

Unemployment Rates for Different Demographic Groups

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth

TABLE 7.2 Unemployment Rates by Demographic Group, 1982 and 2008

Years Nov. 1982 March 2008

Total 10.8 5.2
White 9.6 4.5
Men 20+ 9.0 4.1
Women 20+ 8.1 4.1
Both sexes 16–19 21.3 13.2
African-American 20.2 9.0
Men 20+ 19.3 8.4
Women 20+ 16.5 7.5
Both sexes 16–19 49.5 31.3
Source: U.S. Department of Labor, Bureau of Labor Statistics. Data are not seasonally adjusted.

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 Unemployment
Components of the Unemployment Rate

Unemployment Rates in States and Regions

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth

TABLE 7.3 Regional Differences in Unemployment, 1975, 1982, 1991, and 2003
1975 1982 1991 2003
U.S. avg. 8.5 9.7 6.7 6.0
Cal. 9.9 9.9 7.5 6.7
Fla. 10.7 8.2 7.3 5.1
Ill. 7.1 11.3 7.1 6.7
Mass. 11.2 7.9 9.0 5.8
Mich. 12.5 15.5 9.2 7.3
N.J. 10.2 9.0 6.6 5.9
N.Y. 9.5 8.6 7.2 6.3
N.C. 8.6 9.0 5.8 6.5
Ohio 9.1 12.5 6.4 6.1
Tex. 5.6 6.9 6.6 6.8
Sources: Statistical Abstract of the United States, various editions.

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 Unemployment
Components of the Unemployment Rate

Unemployment Rates in States and Regions

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth

A Quiet Revolution:
Women Join the Labor
Force
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

Discouraged-Worker Effects
CHAPTER 7 Unemployment, Inflation, and Long-Run Growth

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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 Unemployment
Components of the Unemployment Rate

The Duration of Unemployment

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth

TABLE 7.4 Average Duration of Unemployment, 1979–2007

Weeks Weeks
1979 10.8 1993 18.0
1980 11.9 1994 18.8
1981 13.7 1995 16.6
1982 15.6 1996 16.7
1983 20.0 1997 15.8
1984 18.2 1998 14.5
1985 15.6 1999 13.4
1986 15.0 2000 12.6
1987 14.5 2001 13.1
1988 13.5 2002 16.6
1989 11.9 2003 19.2
1990 12.0 2004 19.6
1991 13.7 2005 18.4
1992 17.7 2006 16.8
2007 16.8
Sources: U.S. Department of Labor, Bureau of Labor Statistics.
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 Unemployment
The Costs of Unemployment

Some Unemployment Is Inevitable

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth

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

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth

frictional unemployment The portion of

unemployment that is due to the normal working of
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.

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 Unemployment
The Costs of Unemployment

Frictional, Structural, and Cyclical Unemployment

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth

natural rate of unemployment The

unemployment that occurs as a normal part of the
functioning of the economy. Sometimes taken as
the sum of frictional unemployment and structural
unemployment.

cyclical unemployment The increase in

unemployment that occurs during recessions and
depressions.

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 Unemployment
The Costs of Unemployment

Social Consequences
CHAPTER 7 Unemployment, Inflation, and Long-Run Growth

In addition to economic hardship, prolonged

unemployment may also bring with it social and
personal ills: anxiety, depression, deterioration of
physical and psychological health, drug abuse
(including alcoholism), and suicide.

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 Inflation
The Consumer Price Index
CHAPTER 7 Unemployment, Inflation, and Long-Run Growth

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
The Consumer Price Index
CHAPTER 7 Unemployment, Inflation, and Long-Run Growth

 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 consumer’s money goes toward housing, transportation, and food and beverages.
Source: The Bureau of Labor Statistics

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 Inflation
The Consumer Price Index
TABLE 7.5 The CPI, 1950–2007
Percentage Percentage Percentage
Change Change Change
CHAPTER 7 Unemployment, Inflation, and Long-Run Growth

in CPI CPI in CPI CPI in CPI CPI

1950 1.3 24.1 1969 5.5 36.7 1988 4.1 118.3
1951 7.9 26.0 1970 5.7 38.8 1989 4.8 124.0
1952 1.9 26.5 1971 4.4 40.5 1990 5.4 130.7
1953 0.8 26.7 1972 3.2 41.8 1991 4.2 136.2
1954 0.7 26.9 1973 6.2 44.4 1992 3.0 140.3
1955 -0.4 26.8 1974 11.0 49.3 1993 3.0 144.5
1956 1.5 27.2 1975 9.1 53.8 1994 2.6 148.2
1957 3.3 28.1 1976 5.8 56.9 1995 2.8 152.4
1958 2.8 28.9 1977 6.5 60.6 1996 3.0 156.9
1959 0.7 29.1 1978 7.6 65.2 1997 2.3 160.5
1960 1.7 29.6 1979 11.3 72.6 1998 1.6 163.0
1961 1.0 29.9 1980 13.5 82.4 1999 2.2 166.6
1962 1.0 30.2 1981 10.3 90.9 2000 3.4 172.2
1963 1.3 30.6 1982 6.2 96.5 2001 2.8 177.1
1964 1.3 31.0 1983 3.2 99.6 2002 1.6 179.9
1965 1.6 31.5 1984 4.3 103.9 2003 2.3 184.0
1966 2.9 32.4 1985 3.6 107.6 2004 2.7 188.9
1967 3.1 33.4 1986 1.9 109.6 2005 3.4 195.3
1968 4.2 34.8 1987 3.6 113.6 2006 3.2 201.6
2007 2.8 207.3
Sources: Bureau of Labor Statistics, U.S. Department of Labor.
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 Inflation
The Consumer Price Index
CHAPTER 7 Unemployment, Inflation, and Long-Run Growth

producer price indexes (PPIs) Measures of

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

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

Inflation May Change the Distribution of Income

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth

real interest rate The difference between the

interest rate on a loan and the inflation rate.

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

Administrative Costs and Inefficiencies

CHAPTER 7 Unemployment, Inflation, and Long-Run Growth

There may also 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.
CHAPTER 7 Unemployment, Inflation, and Long-Run Growth

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
Output and Productivity Growth
CHAPTER 7 Unemployment, Inflation, and Long-Run Growth

 FIGURE 7.2 Output per Worker Hour (Productivity), 1952 I–2007 IV

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

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 Long-Run Growth
Output and Productivity Growth
CHAPTER 7 Unemployment, Inflation, and Long-Run Growth

 FIGURE 7.3 Capital per Worker, 1952 I–2007 IV

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

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 REVIEW TERMS AND CONCEPTS
consumer price index (CPI)
cyclical unemployment
CHAPTER 7 Unemployment, Inflation, and Long-Run Growth
discouraged-worker effect
employed
frictional unemployment
labor force
labor force participation rate
natural rate of unemployment
not in the labor force
output growth
per-capita output growth
© 2009 Pearson Education, Inc. Publishing as Prentice Hall
producer price indexes (PPIs)
productivity growth
real interest rate
structural unemployment
unemployed
unemployment rate
1. Labor force = employed + unemployed
2. Population = labor force + not in labor force
unemployed
3. Unemployme nt rate 
employed  unemployed
4. Labor force participation rate  labor force
population
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