Principles of Economics
Global Edition
Chapter 22
Unemployment,
Inflation, and
Long-Run Growth
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Chapter Outline and Learning Objectives (1 of 2)
22.1 Unemployment
• Explain how unemployment is measured.
22.2 Inflation and Deflation
• Describe the tools used to measure inflation and
discuss the costs and effects of inflation.
22.3 Long-Run Growth
• Discuss the components and implications of long-run
growth.
• Looking Ahead
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Chapter 22 Unemployment, Inflation, and
Long-Run Growth
• The unemployment rate and inflation are key
macroeconomic variables.
• Each month the U.S. Bureau of Labor statistics (BLS)
announces the previous month’s unemployment rate
and the consumer price index (CPI).
• Although much of macroeconomics is concerned with
business cycles, long-run growth is also a major
concern.
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Unemployment
Measuring 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
Measuring Unemployment
Unemployed: A person;
• 16 years old or older
• who is not working
• who is available for work,
• and who has made specific efforts to find work during
the previous 4 weeks.
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Measuring Unemployment (1 of 2)
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.
*does not want
*given up looking
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Measuring Unemployment (1 of 2)
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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Measuring Unemployment (2 of 2)
Unemployment rate: The ratio of the number of people
unemployed to the total number of people in the labor
force.
unemployed
unemployment rate =
employed + unemployed
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Measuring Unemployment (2 of 2)
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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Economics In Practice (1 of 4)
Time Use for the Unemployed in a Recession
During the recession of 2008–2009,
aggregate market work hours in the
United States decreased substantially.
Economists found that only 2%–6% of
the lost market hours went to job
search. The rest went to:
• Activities tied to longer job
placement, education, etc. (12%)
• Nonmarket work, e.g., cleaning,
child care (35%)
• Leisure activities, e.g., sleeping
(about 50%)
CRITICAL THINKING
How would you expect the time use of the unemployed to differ in a boom
time?
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Table 22.1 Employed, Unemployed, and the
Labor Force, 1950–2017
Blank (1) (2) (3) (4) (5) (6)
Population Labor Employed Unemployed Labor Force Unemployment
16 Years Force (Millions) (Millions) Participation Rate
Old or Over (Millions) Rate (Percentage
(Millions) (Percentage Points)
Points)
1950 105.0 62.2 58.9 3.3 59.2 5.3
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
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
2010 237.8 153.9 139.1 14.8 64.7 9.6
2017 255.1 160.3 153.3 7.0 62.9 4.4
Note: Figures are civilian only (Military excluded).
Source: Economic Report of the President, 2018 and U.S. Bureau of Labor Statistics.
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Components of the Unemployment Rate (1 of 3)
Unemployment Rates for Different Demographic Group
Table 22.2 Unemployment Rates by Demographic Group, 1982 and 2018
Blank Years November 1982 February 2018
Total Blank 10.8 4.1
White Blank 9.6 3.7
Men 20+ 9.0 3.4
Women 20+ 8.1 3.3
Both sexes 16-19 21.3 12.6
African American Blank 20.2 6.9
Men 20+ 19.3 5.9
Women 20+ 16.5 6.2
Both sexes 16-19 49.5 27.2
Source: U.S. Bureau of Labor Statistics. Data are seasonally adjusted.
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Components of the Unemployment Rate (2 of 3)
Discouraged-Worker Effects
• 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.
*discouraged
*stop looking
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Components of the Unemployment Rate (3 of 3)
Discouraged-Worker Effects
• If a BLS survey respondent cites inability to find
employment as the sole reason for not searching for
work, that person might be classified as a discouraged
worker.
• Some economists argue that including the number of
discouraged workers as unemployed gives a better
picture of the unemployment situation.
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Economics In Practice (2 of 4)
Female Labor Force Participation and Economic
Development
There is evidence of positive correlations
between the increased presence of women in
labor markets and accelerated economic
growth.
Economic growth, rising wages, decline in
fertility and improvement in health are factors
that help increase female labor force
participation.
Despite the presence of these factors, this
trend has not been observed in urban India
over the past thirty years. It is an example
that highlights some of the challenges
associated with efforts to boost female labor
force participation.
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The Duration of Unemployment
Table 22.3 Average Duration of Unemployment, 1970-2017
lank Weeks Blank Weeks Blank Weeks
1970 8.6 1986 15.0 2002 16.6
1971 11.3 1987 14.5 2003 19.2
1972 12.0 1988 13.5 2004 19.6
1973 10.0 1989 11.9 2005 18.4
1974 9.8 1990 12.0 2006 16.8
1975 14.2 1991 13.7 2007 16.8
1976 15.8 1992 17.7 2008 17.9
1977 14.3 1993 18.0 2009 24.4
1978 11.9 1994 18.8 2010 33.0
1979 10.8 1995 16.6 2011 39.3
1980 11.9 1996 16.7 2012 39.4
1981 13.7 1997 15.8 2013 36.5
1982 15.6 1998 14.5 2014 33.7
1983 20.0 1999 13.4 2015 29.2
1984 18.2 2000 12.7 2016 27.5
1985 15.6 2001 13.1 2017 25.0
Source: U.S. Bureau of Labor Statistics
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Economics In Practice (3 of 4)
The Consequences of Unemployment Persist
Throughout the recession of 2008–
2009 and the slow recovery afterward,
many young college graduates found
themselves unemployed for a number
of months.
Even 15 years following the recession
in 1979–1982, wage rates of those
with post-college unemployment
lagged substantially (remained
constant)
CRITICAL THINKING
Describe a mechanism that might help explain the persistence of wage
effects from a recession.
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The Costs of Unemployment (1 of 4)
• There are three categories of unemployment:
– Frictional unemployment
– Structural unemployment
– Cyclical unemployment
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The Costs of Unemployment (2 of 4)
Frictional, Structural, and Cyclical Unemployment
• Frictional unemployment: The portion of
unemployment that is as a result of the normal turnover
in the labor market; used to denote short-run job/skill-
matching problems.
• 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.
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The Costs of Unemployment (3 of 4)
Frictional, Structural, and Cyclical Unemployment
• natural rate of unemployment The unemployment rate
that occurs as a normal part of the functioning of the
economy. Sometimes taken as the sum of the frictional
unemployment rate and the structural unemployment
rate.
• cyclical unemployment Unemployment that is above
frictional plus structural unemployment.
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The Costs of Unemployment (4 of 4)
Social Consequences
• The costs of unemployment are neither evenly distributed
across the population nor easily quantified.
• The social consequences of the Depression of the 1930s are
perhaps the hardest to comprehend:
– At the bottom were the poor and the fully unemployed,
about 25% of the labor force.
– Even those who kept their jobs found themselves
working part time.
– Many people lost all or part of their savings as the stock
market crashed and thousands of banks failed.
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Inflation and Deflation
The Consumer Price Index
• 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.
• producer price indexes (PPIs) Measures of prices that
producers receive for products at all stages in the
production process.
• Once called wholesale price indexes, PPIs are
calculated separately for various stages in the
production process.
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Figure 22.1 The CPI Market Basket
Source: The Bureau of Labor Statistics.
• 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.
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Table 22.4 The CPI, 1950–2017
Percentage Percentage Percentage
Blank Change in CPI Blank Change in CPI Blank Change in CPI
CPI CPI CPI
1950 1.3 24.1 1973 6.2 44.4 1996 3.0 156.9
1951 7.9 26.0 1974 11.0 49.3 1997 2.3 160.5
1952 1.9 26.5 1975 9.1 53.8 1998 1.6 163.0
1953 0.8 26.7 1976 5.8 56.9 1999 2.2 166.6
1954 0.7 26.9 1977 6.5 6.6 2000 3.4 172.2
1955 -0.4 26.8 1978 7.6 70.6 2001 2.8 177.1
1956 1.5 27.2 1979 11.3 65.2 2002 1.6 179.9
1957 3.3 28.1 1980 13.5 82.4 2003 2.3 184.0
1958 2.8 28.9 1981 10.3 90.9 2004 2.7 188.9
1959 0.7 29.1 1982 6.2 96.5 2005 3.4 195.3
1960 1.7 29.6 1983 3.2 99.6 2006 3.2 201.6
1961 1.0 29.9 1984 4.3 103.9 2007 2.8 207.3
1962 1.0 30.2 1985 3.6 107.6 2008 3.9 215.3
1963 1.3 30.6 1986 1.9 109.6 2009 -0.4 214.5
1964 1.3 31.0 1987 3.6 113.6 2010 1.7 218.1
1965 1.6 31.5 1988 4.1 118.3 2011 3.1 224.9
1966 2.9 32.4 1989 4.8 124.0 2012 2.1 229.6
1967 3.1 33.4 1990 5.4 130.7 2013 1.5 233.0
1968 4.2 34.8 1991 4.2 136.2 2014 1.6 236.7
1969 5.5 36.7 1992 3.0 140.3 2015 1.3 237.0
1970 5.7 38.8 1993 3.0 144.5 2016 1.3 240.0
1971 4.4 40.5 1994 2.6 148.2 2017 2.1 245.1
1972 3.2 41.6 1995 2.8 152.4 Blank Blank Blank
Sources: U.S. Bureau of Labor Statistics.
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The Costs of Inflation (1 of 3)
• During inflations, most prices—including input prices
like wages—tend to rise together, and input prices
determine both the incomes of workers and the incomes
of owners of capital and land.
• So inflation by itself does not necessarily reduce one’s
purchasing power.
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The Costs of Inflation (2 of 3)
Inflation May Change the Distribution of Income
• The effects of anticipated inflation on the distribution of
income are likely to be fairly small, since people and
institutions will adjust to the anticipated inflation.
• Unanticipated inflation may have large effects,
depending, among other things, on the amount of
indexing to inflation.
• Real interest rate: The difference between the interest
rate on a loan and the inflation rate.
• Actual inflation that is higher (lower) than anticipated
benefits debtors (creditors).
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The Costs of Inflation (3 of 3)
Administrative Costs and Inefficiencies
• There may be costs associated even with anticipated
inflation, such as the administrative cost associated with
simply keeping up.
• Interest rates tend to rise with anticipated inflation.
When interest rates are high, the opportunity costs of
holding cash outside banks is high.
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Economics In Practice (4 of 4)
Chain-Linked Consumer Price Index in the News
The fixed-weight version of the consumer
price index (CPI) is the one that is used to
adjust social security benefits and veteran
benefits to price changes.
If the chain-linked CPI were used instead,
benefits would tend to increase more
slowly because of product substitution.
The Congressional Budget Office
estimated that if the chain-linked CPI
were adopted, it would save the federal
government about $145 billion over a 10-
year period from the lower benefits.
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What about Deflation?
• In 2017 most of the developed world experienced very
little inflation, so some governments began to worry
about deflation.
• If falling prices are unanticipated, borrowers will gain
at the expense of lenders, and those on fixed
pensions will gain at the expense of governments and
firms paying those pensions.
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Long-Run Growth
• Output growth: The growth rate of the output of the
entire economy.
• 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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Output and Productivity Growth
Figure 22.2 Output per Worker Hour (Productivity), 1952 I–2017 IV
• Productivity grew much faster in the 1950s and 1960s than it has
since.
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Figure 22.3 Capital per Worker, 1952 I–2017 IV
• Capital per worker grew until about 1980 and then leveled off
somewhat.
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Looking Ahead
• This ends our introduction to the basic concepts and
problems of macroeconomics.
• The first chapter of this part introduced the field; the
second chapter discussed the measurement of
national product and national income; and this chapter
discussed unemployment, inflation, and long-run
growth.
• We are now ready to begin the analysis of how the
macroeconomy works.
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Review Terms and Concepts (1 of 2)
• consumer price index (CPI) • output growth
• cyclical unemployment • per-capita output growth
• discouraged-worker effect • producer price indexes
• employed (PPIs)
• frictional unemployment • productivity growth
• real interest rate
• labor force
• structural unemployment
• labor force participation rate
• unemployed
• natural rate of unemployment
• unemployment rate
• not in the labor force
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Review Terms and Concepts (2 of 2)
Equations:
labor force = employed + unemployed
population = labor force + not in labor force
unemployed
unemployment rate =
employed + unemployed
labor force
labor force participation rate =
population
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