macroeconomic chapter measurements, part i: prices and ... · in june 2012, in usa, the employment...

Macroeconomic

Measurements, Part I: Prices

and Unemployment6CHAPTER

Employment and Unemployment

Population Survey

In the U.S., the population is divided into two groups:

The working-age population or civilian noninstitutional

population — the number of people aged 16 years and older

who are not in the armed forces, jail, hospital, or other

institution.

People too young to work (less than 16 years of age) or in the

armed forces or in institutional care.

In Bangladesh working-age population is the number of

people aged 15 years and older.


The working-age population is divided into two groups:

People in the labor force

People not in the labor force

The labor force is the sum of employed and unemployed

workers. This is also known as the “economically active

population.”


To be considered unemployed, a person must be:

without work, available for work and has been actively looking for jobs

within the past four weeks or waiting to be called back to a job from

which they were temporarily laid off.

Actively looking: specific efforts to find a job such as - registration at a

public or private employment agency; application to employers, checking

at work sites; placing or answering newspaper advertisements; seeking

assistance from friends or relatives; arranging for land, machinery or

resources etc. (LFS 2015-16)

Note that ‘work’ here means ‘gainful activity’ – it does not just mean a

‘job for wages,’ it can be self-employment, or working without pay in a

family business.


This Figure shows the labor

force categories. In June

2012 in USA:

Population: 314 million

Working-age population:

243.4 million

Labor force: 155.0 million

Employed: 142.2 million

Unemployed: 12.8 million


Source: LFS 2015-16, Bangladesh Bureau of Statistics

In 2015-16, in Bangladesh


Labor Market Indicators

The unemployment rate is the percentage of the labor

force that is unemployed.

The unemployment rate is:

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑜𝑝𝑙𝑒 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑

𝐿𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒× 100

In June 2012, in USA, the labor force was 155 million and

12.8 million were unemployed, so the unemployment rate

was 8.2 percent.

The unemployment rate increases in a recession and

reaches its peak value after the recession ends.


This Figure shows the unemployment rate in USA: 1980–

2012.

The unemployment rate increases in a recession.



In Bangladesh, according to labour force survey 2016-17, the rate of unemployment

stands at 4.2% which was 4.3% in 2005-06.

Source: LFS 2016-17, Bangladesh Bureau of Statistics.


3.5

4

4.5

5

5.5

6

2005 2007 2009 2011 2013 2015

Bangladesh: Rural-Urban Unemployment Rates

Urban Unemployment Rate Rural Unemployment Rate

Linear (Urban Unemployment Rate) Linear (Rural Unemployment Rate)

Source: Various rounds of labor force survey conducted by BBS


Trends of Unemployment rates in Bangladesh



The employment rate or the employment-to-population ratio

is the percentage of working-age people who have jobs.

The employment-to-population ratio is:

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑜𝑝𝑙𝑒 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑

𝑊𝑜𝑟𝑘𝑖𝑛𝑔−𝑎𝑔𝑒 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛× 100

In June 2012, in USA, the employment was 142.2 million and the

working-age population was 243.4 million. In USA, the

employment-to-population ratio was 58.45%.

In Bangladesh, in 2016-17, this ratio was 55.8%.


Formal vs. Informal Sector in BangladeshInformal sector: The part of an economy that is not taxed or monitored by any

form of government, e.g., household helpers, street vendors, shoe shiners, junk

collectors etc.




The labor force participation rate is the percentage of the

working-age population that is in the labor force.

The labor force participation rate is:

𝐿𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒

𝑊𝑜𝑟𝑘𝑖𝑛𝑔−𝑎𝑔𝑒 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛× 100

In June 2012, in USA, the labor force was 155 million and

the working-age population was 243.4 million.

The labor force participation rate in USA was 63.7%.

In Bangladesh in 2016-17 this ratio was 58.2%.



The labor force participation rate falls during recessions as

discouraged workers—people available and willing to

work but who have not made an effort to find work within

the last four weeks—leave the labor force.

Discouraged workers are not considered unemployed –

• Some economists think that the unemployment rate is

therefore biased downward and underestimates the real

unemployment problem in the society.


This Figure shows that in USA, the labor force participation

rate and the employment-to-population ratio both trended

upward before 2000 and downward after 2000.


The Anatomy of Unemployment

Three types of people become unemployed:

Job losers — workers who have been laid off or fired and

are searching for new jobs.

Job leavers — workers who have voluntarily quit their

jobs to look for new ones. Job leavers are the smallest

fraction of the unemployed.

Entrants and reentrants — people entering the labor

force for the first time or returning to the labor force and

searching for work.


The Anatomy of Unemployment

People end a spell of unemployment for two reasons:

Hired or recalled workers get jobs, or start other gainful

activity such as self-employment.

Discouraged unemployed workers withdraw from the labor

force.


Types of Unemployment

Unemployment can be classified into four conceptual

types:

Frictional

Structural

Seasonal

Cyclical



Frictional unemployment is unemployment that arises from normal labor market turnover. The economy changes constantly, requiring shifts in activity and jobs – new products grow, old ones die. Same with jobs.

The creation and destruction of jobs requires that unemployed workers search for new jobs. People moving from job to job or university graduates looking for jobs fall into this category.

Increases in the number of young people entering the labor force, and increases in unemployment benefit payments [which reduce the opportunity cost of unemployment] tend to raise frictional unemployment.



Structural unemployment is unemployment created by structural changes in the economy i.e. changes in technology, foreign competition, and the structure of production, including skills and experience necessary to perform jobs and the geographic locations of jobs, and the characteristics of the labor force

Seasonal unemployment is unemployment caused by season changes e.g. during Winter, there is a huge increase in employment opportunities in the tourism industry in Thailand and the Caribbean. Lots of jobs in restaurants and clubs, which are unavailable during other seasons.

Cyclical unemployment is the fluctuation in unemployment caused by the business cycle.

Unemployment and Full Employment

Full Employment

Full employment occurs when there is no cyclical unemployment or, equivalently, when all unemployment is frictional, structural or seasonal.

The unemployment rate at full employment is called the natural rate of unemployment (frictional + structural + seasonal)


Real GDP and Unemployment Over the Cycle

Potential GDP is the quantity of real GDP produced at full

employment.

It corresponds to the capacity of the economy to produce

output on a sustained basis. Real GDP minus potential

GDP is the output gap.

Over the business cycle, the output gap fluctuates and the

unemployment rate fluctuates around the natural

unemployment rate.

This Figure shows the

output gap and …

the fluctuations of

unemployment around the

natural rate.

When the output gap is

negative, ...

the unemployment rate

exceeds the natural

unemployment rate.


Price Level and Inflation

The price level is the “average” level of prices and is

measured by using a price index.

The Consumer Price Index, or CPI, measures the average

level of the prices of the average or representative ‘basket’

of goods and services purchased or consumed by a typical

household.

Besides the CPI, another price index is often cited: the GDP

deflator or the GDP implicit price deflator. GDP deflator is

based on all goods and services produced in an economy.

More on the GDP deflator in the next chapter.


Reading the CPI Numbers

The CPI is defined to equal 100 for the reference base

period.

The value of the CPI for any other period is calculated by

taking the ratio of the current cost of the CPI basket of

goods to the cost of the same CPI basket of goods in the

reference base period and multiplying by 100.


Constructing the CPI

Constructing the CPI involves three stages:

Selecting the CPI basket

Conducting a monthly price survey

Every month, BLS (Bureau of Labor statistics) employees check

the prices of the 80,000 goods in the CPI basket in 30

metropolitan areas.

Using the prices and the basket to calculate the CPI


This Figure illustrates the

CPI basket for the USA.

Housing is the largest

component.

Transportation and food

and beverages are the next

largest components.

The remaining components

account for 26 percent of

the basket.


58.8%

6.9%

16.9% 4.2%2.8%

4.1%

2.7%

3.6%

Food

Clothing &Footwear

Gross rent, fuel,Lighting

Transportation

Medical care

Recreation,Education

Furniture,furnishing

Other goodsand services

Figure: Share (weights) of expenditures of different items in the CPI

(National) basket of Bangladesh


For a simple economy that consumes only oranges

and haircuts, we can calculate the CPI.

The CPI basket is 10 oranges and 5 haircuts.

Item Quantity Price Cost of CPI

basket

Oranges 10 $1.00 $10

Haircuts 5 $8.00 $40

Cost of CPI basket at base period prices $50


This table shows the prices in the base period.

The cost of the CPI basket in the base period was $50.


basket

Oranges 10 $1.00 $10

Haircuts 5 $8.00 $40

Cost of CPI basket at base period prices $50



basket

Oranges 10 $2.00 $20

Haircuts 5 $10.00 $50

Cost of CPI basket at current period prices $70

This table shows the prices in the current period.

The cost of the CPI basket in the current period is $70.


The CPI is calculated using the formula:

CPI = (Cost of CPI basket in current period/Cost of CPI

basket in base period) 100.

Using the numbers for the simple example, the CPI is

CPI = ($70/$50) 100 = 140.

The CPI is 40 percent higher in the current period than in

the base period.


Measuring Inflation

The main purpose of the CPI is to measure inflation.

The inflation rate is the percentage change in the price

level from one year to the next.

The inflation formula is:

Inflation rate = [(CPI this year – CPI last year)/CPI last

year] 100.


This Figure shows the relationship between the price level and the inflation rate.

The inflation rate is

High when the price level is rising rapidly and

Low when the price level is rising slowly.

Negative when the price level is falling

Inflation Rate in Bangladesh: 2009 - 2018

Source: The World Bank (http://data.worldbank.org/)

10-year average inflation rate: 6.9%

0.00

2.00

4.00

6.00

8.00

10.00

12.00

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Inflation rate


The Biased CPI

The CPI may overstate the true inflation for at least four

reasons:

New goods bias

Quality change bias

Commodity substitution bias

Outlet substitution bias

Note: The CPI does not reflect the price level any one

household faces anyway, because it averages expenditure for

all urban households – so includes, e.g., both rental and

ownership costs for housing.


New goods bias New goods that were not available in the

base year appear and, if they are more expensive than the

goods they replace, the price level may be biased higher.

Example: iPods, Smart Phones, Tablets, etc.

Quality change bias Quality improvements generally are

neglected, so quality improvements that lead to price hikes

are considered purely inflationary.


Commodity substitution bias The market basket of goods used in

calculating the CPI is fixed and does not take into account consumers’

substitutions away from goods whose relative prices increase e.g. if

the price of beef rises and the price of chicken remains unchanged,

people buy more chicken and less beef. Say, this change is such that

the consumers get same amount of protein and same enjoyment and

their expenditure is same as before. The price of protein has not

changed. But, because it ignores the substitution of chicken for beef,

the CPI says the price of protein has increased.

Outlet substitution bias When confronted with higher prices, people

switch to buying from cheaper sources such as discount stores, but

the CPI, as measured, does not take account of this outlet

substitution.


How big is the bias?

In 1996 a Congressional Advisory Commission chaired by

Michael Boskin, a Stanford Economics professor, tackled

this question.

The result: CPI overstates inflation by 1.1 percentage

points a year, i.e., if the CPI reports that inflation is 3.1% a

year, most likely inflation actually is 2% a year.


Core Inflation

The figure shows the CPI

inflation rate.

The core inflation rate is

the CPI inflation rate

excluding the volatile

elements (of food and fuel).

The core inflation rate

attempts to reveal the

underlying inflation trend.


The Real Variables in Macroeconomics

We can use the price level (usually the GDP deflator) to

deflate nominal variables to find their real values.

For example,

Real wage = (Nominal wage/GDP deflator)

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