Economic ChallengesEconomic Challenges

Chapter 13Chapter 13

UnemploymentUnemployment

Chapter 13, Section 1Chapter 13, Section 1

UnemploymentUnemployment

Economists characterize Economists characterize unemployment in four categoriesunemployment in four categories– FrictionalFrictional– SeasonalSeasonal– StructuralStructural– Cyclical (Demand Deficient)Cyclical (Demand Deficient)

Frictional UnemploymentFrictional Unemployment

Unemployment that occurs when Unemployment that occurs when people take time to find a jobpeople take time to find a job– Switching jobsSwitching jobs– Just finished schoolJust finished school– Left labor force and trying to returnLeft labor force and trying to return

Seasonal UnemploymentSeasonal Unemployment

Unemployment that occurs due to Unemployment that occurs due to seasonsseasons– Growing seasonsGrowing seasons– ConstructionConstruction– Vacation or resort industriesVacation or resort industries

Structural UnemploymentStructural Unemployment

Workers skills do not match the jobs Workers skills do not match the jobs availableavailable– 5 causes of structural unemployment5 causes of structural unemployment

Development of new technologyDevelopment of new technology

Discovery of new resourcesDiscovery of new resources

Changes in consumer demandChanges in consumer demand

GlobalizationGlobalization

Lack of educationLack of education

Cyclical UnemploymentCyclical Unemployment

Unemployment that changes with Unemployment that changes with business cyclesbusiness cycles– People lose jobs with decrease in People lose jobs with decrease in

productionproduction

Measuring EmploymentMeasuring Employment

Unemployment is an important Unemployment is an important indicator in the economyindicator in the economy

BLS (Bureau of Labor Statistics) polls BLS (Bureau of Labor Statistics) polls the population and reports on the population and reports on unemploymentunemployment– This computes the unemployment rateThis computes the unemployment rate

Represents the % of people unemployedRepresents the % of people unemployed

Determining Unemployment RateDetermining Unemployment Rate

Divides the total number Divides the total number unemployed by the labor forceunemployed by the labor force

Monthly rates are seasonally Monthly rates are seasonally adjustedadjusted

Full EmploymentFull EmploymentAlthough it seems desirable, full Although it seems desirable, full employment is not a characteristic of employment is not a characteristic of a strong economya strong economyFull employment will lead to some Full employment will lead to some inefficiencyinefficiencyA strong economy exhibits an A strong economy exhibits an unemployment rate of 4-6 percent…unemployment rate of 4-6 percent…the natural rate of unemploymentthe natural rate of unemploymentEconomies will always experience Economies will always experience cyclical unemploymentcyclical unemployment

Underemployment and Underemployment and Discouraged WorkersDiscouraged Workers

In various cases, people may have a In various cases, people may have a job but be overqualified for that job but be overqualified for that position. This is position. This is underemployment.underemployment.

Discouraged Workers are those who Discouraged Workers are those who have stopped looking for a jobhave stopped looking for a job– They do not appear in the They do not appear in the

unemployment rateunemployment rate

Unemployment that is too low??Unemployment that is too low??

Very low unemployment can lead:Very low unemployment can lead:– to unneeded positionsto unneeded positions– High competition by companies to find High competition by companies to find

workersworkersHigher wagesHigher wages

Higher prices (inflation)Higher prices (inflation)

ReviewReview1. Unemployment that occurs when workers’ skills 1. Unemployment that occurs when workers’ skills

do not match the jobs that are available is known do not match the jobs that are available is known asas– (a)(a) frictional unemployment. frictional unemployment.– (b)(b) structural unemployment. structural unemployment.– (c)(c) seasonal unemployment. seasonal unemployment.– (d) (d) cyclical unemployment.cyclical unemployment.

2. The unemployment rate2. The unemployment rate– (a)(a) is the percentage of the labor force that is unemployed. is the percentage of the labor force that is unemployed.– (b)(b) is the number of people who are unemployed. is the number of people who are unemployed.– (c)(c) includes only discouraged workers. includes only discouraged workers.– (d) (d) is the percentage of the labor force that is underemployed.is the percentage of the labor force that is underemployed.

InflationInflation

Chapter 13, Section 2Chapter 13, Section 2

InflationInflationInflation is the term used to describe Inflation is the term used to describe a general increase in pricesa general increase in prices– It does not always mean that things It does not always mean that things

have become more expensive. If wages have become more expensive. If wages increase with inflation, the change in increase with inflation, the change in prices is not felt.prices is not felt.

Purchasing Power is the power to Purchasing Power is the power to purchase goods and services. If purchase goods and services. If prices increases and wages do not, prices increases and wages do not, one loses purchasing powerone loses purchasing power

Price IndexesPrice IndexesPrice indexes are measurements that Price indexes are measurements that show the average price of a show the average price of a collection of goodscollection of goodsConsumer Price Index (CPI)Consumer Price Index (CPI)– best known price indexbest known price index– Calculated monthly and focuses on Calculated monthly and focuses on

consumer goodsconsumer goods– Uses the market basketUses the market basket

The market basket is a collection of The market basket is a collection of representative goodsrepresentative goods

Market BasketMarket BasketUpdated every 10 yearsUpdated every 10 yearsInclude products in categories (pg 339)Include products in categories (pg 339)– Food and drinkFood and drink– HousingHousing– ApparelApparel– TransportationTransportation– Medical careMedical care– EntertainmentEntertainment– EducationEducation– Other servicesOther services

Inflation RateInflation Rate

Inflation rate measures the percent Inflation rate measures the percent in price changes over timein price changes over time

Calculation:Calculation:– CPI for year A minus CPI for year B / CPI CPI for year A minus CPI for year B / CPI

for year B x 100for year B x 100

Types of InflationTypes of InflationCreeping inflation...low inflation rate (1-3% Creeping inflation...low inflation rate (1-3% per year) for a long period of time. per year) for a long period of time. – not harmful to the economynot harmful to the economy

Chronic Inflation...steady accelerating Chronic Inflation...steady accelerating inflation over a period of timeinflation over a period of time– Hard on an economy (things are unpredictable)Hard on an economy (things are unpredictable)

Hyper Inflation...out of control inflation Hyper Inflation...out of control inflation (100-500%)(100-500%)– Extremely hard on the economyExtremely hard on the economy

Causes of InflationCauses of InflationMany factors can cause a rise in Many factors can cause a rise in prices.prices.– Quantity Theory...too much money Quantity Theory...too much money

causes inflationcauses inflation– Demand-Pull Theory...there is higher Demand-Pull Theory...there is higher

demand and prices risedemand and prices rise– Cost-Push Theory...cost of production Cost-Push Theory...cost of production

goes up so prices rise (wage increases goes up so prices rise (wage increases caused by low unemployment, raw caused by low unemployment, raw materials)materials)

Wage-Price SpiralWage-Price Spiral

Occurs when higher wages cause Occurs when higher wages cause higher prices and higher prices cause higher prices and higher prices cause higher wageshigher wages

Effects of InflationEffects of Inflation

High inflation can cause many High inflation can cause many problems for an economy. With high problems for an economy. With high inflation, it is hard to predict the inflation, it is hard to predict the futurefuture

Purchasing Power...the dollar loses Purchasing Power...the dollar loses value and one cannot buy as muchvalue and one cannot buy as much

Effects of InflationEffects of Inflation

Income...if prices increase but wages Income...if prices increase but wages do not, one’s disposable income do not, one’s disposable income decreases (troublesome for those on decreases (troublesome for those on a fixed income)a fixed income)

Interest Rates...if inflation increase Interest Rates...if inflation increase faster than interest rates, my savings faster than interest rates, my savings and investments may lose moneyand investments may lose money

ReviewReview1. Inflation is1. Inflation is

– (a)(a) the process by which rising wages cause higher the process by which rising wages cause higher prices.prices.

– (b)(b) the price increase of a typical group of goods. the price increase of a typical group of goods.– (c)(c) a general increase in prices. a general increase in prices.– (d) (d) the ability to purchase goods and services.the ability to purchase goods and services.

2. Chronic inflation occurs when the 2. Chronic inflation occurs when the inflation rateinflation rate– (a)(a) drops to zero. drops to zero.– (b)(b) remains low for a long time. remains low for a long time.– (c)(c) grows out of control. grows out of control.– (d) (d) rises steadily over an extended period.rises steadily over an extended period.

PovertyPoverty

Chapter 13, Section 3Chapter 13, Section 3

PovertyPoverty

Poverty Threshold...income level that Poverty Threshold...income level that is too low to support a familyis too low to support a family

Poverty rate...percentage of Poverty rate...percentage of households below the poverty linehouseholds below the poverty line

Causes of PovertyCauses of Poverty

Lack of EducationLack of Education

LocationLocation

Racial and Gender DiscriminationRacial and Gender Discrimination

Economic Shifts...layoffs etc...last Economic Shifts...layoffs etc...last hired, first firedhired, first fired

Family Structure...single parent Family Structure...single parent families etc...families etc...

Income distributionIncome distribution

Median income for US...$43,318, yet Median income for US...$43,318, yet millions live in povertymillions live in poverty– This is due to uneven income This is due to uneven income

distributiondistribution– 20% of US households make 50% of the 20% of US households make 50% of the

income (80% of the wealth)income (80% of the wealth)– Lorenz Curve represents the distribution Lorenz Curve represents the distribution

of income in US economyof income in US economy

Antipoverty PoliciesAntipoverty Policies

Enterprise zones...companies are Enterprise zones...companies are encouraged to locate in areas and encouraged to locate in areas and received incentives to do soreceived incentives to do so

Employment Assistance...Employment Assistance...– programs to place workersprograms to place workers– Minimum wageMinimum wage

Antipoverty PoliciesAntipoverty Policies

Welfare ReformWelfare Reform– Personal Responsibility and Work Personal Responsibility and Work

Opportunity Reconciliation ActOpportunity Reconciliation ActAimed at reducing reliance on welfare Aimed at reducing reliance on welfare assistanceassistance

Set a 5 year limit on benefitsSet a 5 year limit on benefits

Sent responsibility to the statesSent responsibility to the states– Block grants...money to the states for distribution Block grants...money to the states for distribution

rather than directly to the peoplerather than directly to the people– Workfare...exchange of work for assistanceWorkfare...exchange of work for assistance

ReviewReview1. An income level below which income is 1. An income level below which income is

insufficient to support a family or household is insufficient to support a family or household is known as theknown as the– (a)(a) income gap. income gap.– (b)(b) poverty rate. poverty rate.– (c)(c) poverty threshold. poverty threshold.– (d) (d) income inequality.income inequality.

2. The Personal Responsibility and Work 2. The Personal Responsibility and Work Opportunity Act of 1996Opportunity Act of 1996– (a)(a) provides lump sums of money to poor families. provides lump sums of money to poor families.– (b)(b) provides federal payments to poor families to supplement provides federal payments to poor families to supplement

state payments.state payments.– (c)(c) set a 5-year limit on receipt of benefits. set a 5-year limit on receipt of benefits.– (d) (d) provides direct cash payments to poor families.provides direct cash payments to poor families.