Parkinmacro5 1300
Parkinmacro5 1300
Parkinmacro5 1300
C h a p t e r
5 MONITORING JOBS
AND INFLATION**
7. How does the unemployment rate fluctuate over the business cycle?
During a recession the unemployment rate is generally rising. During an expansion the
unemployment rate is generally falling.
7. Are workers who cannot find jobs because of mismatching in the labor market counted as part
of the economy’s structural unemployment or part of cyclical unemployment?
These workers are unemployed as the result of a mismatch between their skills and the skills
required for the available jobs. The mismatch means that these workers are part of the economy’s
structural unemployment.
Use the following information to work Problems 8 and 9.
The people on Coral Island buy only juice and cloth. The CPI basket contains the quantities bought
in 2013. The average household spent $60 on juice and $30 on cloth in 2013 when the price of juice
was $2 a bottle and the price of cloth was $5 a yard. In 2014, juice is $4 a bottle and cloth is $6 a
yard.
8. Calculate the CPI basket and the percentage of the household’s budget spent on juice in 2013.
The CPI basket is 30 bottles of juice and 6 yards of cloth. The total amount spent on the CPI
basket in 2012 was $90 and of that $60 was spent on juice. The percentage of the household’s
budget spent on juice was ($60/$90) × 100, which is 66.7 percent.
9. Calculate the CPI and the inflation rate in 2014.
The CPI in 2014 is 173.3. To calculate the CPI, divide the value of the CPI basket in 2014 prices
by the base-year value of the CPI basket and then multiply the resulting number by100. The value
of the CPI basket in 2014 prices is: ($4 30) + ($6 6) = $156. The value in base-year prices is
$60 + $30 (provided in the question), which equals $90. So the CPI is ($156/$90) 100 = 173.3.
The inflation rate in the 2014 is 73.3 percent. The inflation rate equals the CPI in 2014 year minus
the CPI in the base year expressed as a percentage of the base-year CPI. Because the base-year
CPI is 100, the inflation rate is [(173.3 – 100)/ 100] × 100 = 73.3 percent.
Use the following data to work Problems 10 to 11.
The BLS reported the following CPI data:
June 2014 238.3
June 2015 238.6
June 2016 241.0
10. Calculate the inflation rates for the years ended June 2015 and June 2016. How did the
inflation rate change in 2016?
The inflation rate for the year ended June 2015 is 0.1 percent; the inflation rate for the year ended
June 2016 is 1.0 percent.
The inflation rate is the percentage change in the price level. It is equal to [(Pthis year – Plast year)/
Plast year] 100. For the year ended in June 2015 the inflation rate is [(238.6 – 238.3)/238.3] 100,
which is 0.1 percent. For the year ended in June 2016 the inflation rate is [(241.0 – 238.6)/238.6]
100, which is 1.0 percent. The inflation rate increased in 2016.
11. Why might these CPI numbers be biased? How can alternative price indexes avoid this bias?
The CPI numbers might be biased because of the new goods bias, the quality change bias, the
commodity substitution bias, and the outlet substitution bias. The new goods bias is that new
goods are often more expensive than the older goods that they replace. The quality change bias is
that increases in the quality of a good are often accompanied by increases in the good’s price. The
commodity substitution bias reflects the point that consumers will buy less of a good whose price
increased and more of a good whose price has not changed. Finally the outlet substitution bias
points out that when prices rise, consumers shop more frequently at stores with cheaper prices.
Each of the alternative price indexes attempts to overcome some of the bias in the CPI numbers.
The chained CPI uses prices and quantities from the previous period and the current period. The
chaining process overcomes the commodity substitution process. And because it contains current
period quantities, it also does not suffer from the new goods bias. The personal consumption
expenditure deflator contains goods and services omitted from the CPI. It is calculated from the
nominal and real consumption expenditure data and so it, too, is computed using a chaining
procedure. Because the personal consumption expenditure deflator is calculated using a chaining
procedure, it does not suffer from the commodity substitution bias or the new goods bias. The
GDP deflator is calculated from nominal and real GDP data. It is broader than the personal
consumption expenditure deflator because it contains goods and services in consumption
expenditure, investment, government expenditure, and net exports. The GDP deflator is calculated
using a chaining procedure and so it also avoids the commodity substitution bias and new goods
bias.
b. If all the newly hired people had previously given up on their job search, how would the
labor force participation rate and unemployment rate have changed?
The labor force would have increased, so labor force participation rate would have risen. The
number of people unemployed would not have changed but the increase in the labor force means
that the unemployment rate would have fallen.
15. The BLS reported that in the second quarter of 2016, employment increased by 100,000 to
150,959,000 and the unemployment rate fell from 5 percent to 4.9 percent. About 1.3 million
people were marginally attached workers and 0.6 million of them were discouraged.
a. Calculate the change in unemployment in the second quarter of 2016.
At the start of the second quarter employment was 150,959,000 − 100,000 = 150,859,000. The
unemployment rate, which at the start of the second quarter was 5.0 percent, equals
(Unemployment/[Unemployment + Employment]) × 100. Using the data for the start of the second
quarter gives the result that 0.050 = (Unemployment/[Unemployment + 150,859,000]). Solving for
the amount of unemployment shows that unemployment at the start of the second quarter was
7,939,947 workers. Similar calculations show that at the end of the second quarter the amount of
unemployment was 7,778,118 workers. Unemployment decreased in the second quarter by
161,829 workers.
b. With 1.3 million marginally attached workers and 0.6 million of them discouraged workers,
what are the characteristics of the other 0.7 million marginally attached workers?
The other 0.7 million marginally attached workers would like a job but have stopped looking for
work. Because they are not discouraged workers, these 0.7 million workers have stopped looking
for reasons other than their inability to find a job. For example, a stay-at-home spouse might
prefer working in the job market but have quit looking to undertake some home repairs.
16. A high unemployment rate tells us that a large percentage of the labor force is unemployed but
not why the unemployment rate is high. What unemployment measure tells us if (i) people are
searching longer than usual to find a job, (ii) more people are economic part-time workers, or
(iii) more unemployed people are job losers?
U-1 measures long-term unemployment of 15 weeks or more. If U-1 exceeds its normal value,
then people are taking longer than usual to find a job. U-6 equals U-5 plus part-time workers who
want full-time jobs as unemployed, so the difference between U-6 and U-5 is the result of part-
time workers who want a full-time job. If this difference is unusually large, then more workers
than normal are working at part-time jobs. U-2 measures unemployment resulting from people
losing their jobs. If U-2 is larger than normal, then more unemployment than normal results from
people losing their jobs.
17. U.S. Job Openings Rise but Hiring Slips
U.S. job openings increased to 5.8 million in April but the number of workers hired decreased
to a bit below 5.1 million.
Source: The Globe and Mail, June 9, 2016
a. Using the information in the news clip, how do you predict the labor force participation rate,
employment-to-population ratio, and unemployment rate changed?
Because job openings increased, the labor force participation rate probably increased as more
discouraged workers rejoined the labor force to search for a job. Even though it was lower than
previously, because 5.1 million workers were hired, it is likely that the employment-to-population
ratio increased. There are two effects on the unemployment rate. First, 5.1 million more workers
were hired but, second, more discouraged workers rejoined the labor force to look for work and
while they search they were now counted as unemployed. Taken together, the unemployment rate
probably fell.
b. If the government slashed unemployment benefits, how would the numbers in the news clip
change? Why?
Slashing unemployment benefits increases the cost of being unemployed and thereby decreases the
unemployment rate as people take less time to search for a new job. The number of job openings
would not be directly affected but the number of workers hired would increase.
18. Why might the unemployment rate underestimate the underutilization of labor resources?
The official unemployment rate underestimates the underutilization of labor resources for two
reasons. First the official unemployment rate completely omits some underutilized labor. In
particular the official unemployment rate omits marginally attached workers, such as discouraged
workers. These workers are not included in the unemployment rate because they are not searching
for a job, though if the labor market was better and jobs more plentiful they would reenter the
labor market. Marginally attached workers are not a major source of mismeasurement because
they are a small subset of people. Second the unemployment rate counts as fully employed
workers who are working part time but who want full time jobs. These workers are underutilized
because they would like to work for more hours than is presently the case. These workers are a
significantly more substantial source of error because they account for a much larger part of the
labor force.
Use the following data to work Problems 19 to 21.
The IMF World Economic Outlook reports the
Region 2015 2016
unemployment rates in the table.
United States 5.3 4.9
19. What do these numbers tell us about the phase Spain 22.1 19.6
of the business cycle in the four countries in Venezuela 7.4 21.2
2016? Singapore 1.9 2.1
The unemployment rates were low in the
United States and very low in Singapore, so it is probably the case that both countries were in an
expansionary period. The unemployment rate in Spain fell, so Spain might be entering an
expansionary period. The unemployment rate in Venezuela rose drastically, so Venezuela was in a
recession.
20. What do these numbers tell us about the relative size of their natural unemployment rates?
These numbers cover only two years, so making inferences about the relative size of the natural
unemployment rates is potentially dangerous. To the extent that these data are representative, the
natural unemployment rate is likely the highest in the Venezuela and Spain and the lowest in
Singapore.
21. Do these numbers tell us anything about the relative size of the labor force participation rates
and employment-to-population ratios?
The numbers tell us nothing about the relative sizes of the labor force participation rates or the
employment-to-population ratios in these three regions.
22. Amazon Will Add 100,000 Jobs as Bricks-and-Mortar Stores Turn to Rubble
Amazon says that it will hire 100,000 new employees in the next 18 months. Meanwhile,
Macy’s, J. C. Penney, and other traditional retailers are closing stores and laying off workers.
And the workers that Amazon is hiring aren’t the ones being laid off by Macy’s and J. C.
Penney.
Source: The New York Times, January 13, 2017
Why will the decisions reported in the news clip increase unemployment and what type of
unemployment will increase?
The decisions reported in the news clip probably increase unemployment because the traditional
retailers likely will lay off more than 100,000 workers. Since retailers are not laying off these
workers due to recession, the unemployment is not cyclical. Frictional unemployment will
increase and to the extent that the laid off workers do not have the necessary skills for a job at
Amazon or other similar positions, structural unemployment also increases.
23. Retraining
Many people graduate with a bachelor’s degree that doesn’t open jobs doors. Acquiring a skill
provides a way of getting a decent paycheck. But acquiring a skill isn’t a one-time event: It is
an ongoing process. A skill doesn’t last for decades and retraining is required. Government-
funded job training is a promising way to help individual workers, employers and the country
as a whole.
Source: The New York Times, February 26, 2017
a. What is the main type of unemployment that retraining programs seek to avoid? Explain.
Retraining programs attempt to reduce structural unemployment. The education would retrain
workers so that they have the skills that business need for the jobs that are available.
b. How might government funded retraining influence the natural unemployment rate? Explain.
If retraining is successful, it will decrease the natural unemployment rate. Natural unemployment
is comprised of frictional and structural unemployment. By decreasing structural unemployment,
the retraining decreases the natural unemployment rate.
24. A typical family on Sandy Island consumes only juice and cloth. Last year, which was the
base year, the family spent $40 on juice and $25 on cloth. In the base year, juice was $4 a
bottle and cloth was $5 a length. This year, juice is $4 a bottle and cloth is $6 a length.
Calculate
a. The CPI basket.
The CPI basket is 10 bottles of juice and 5 lengths of cloth.
b. The CPI in the current year.
The CPI in the current year is 107.7. To calculate the CPI, divide the value of the CPI basket in
current year prices by the base-year value of the CPI basket and then multiply the resulting
number by100. The value of the CPI basket in current year prices is: ($4 10) + ($6 5) = $70.
The value in base-year prices is $40 + $25 (provided in the question), which equals $65. So the
CPI is ($70/$65) 100 = 107.7.
c. The inflation rate in the current year.
The inflation rate in the current year is 7.7 percent. The inflation rate equals the CPI in the current
year minus the CPI in the base year expressed as a percentage of the base-year CPI. Because the
base-year CPI is 100, the inflation rate is [(107.7 – 100)/ 100] × 100 = 7.7 percent.
25. Amazon.com agreed to pay its workers $20 an hour in 2016 and $22 an hour in 2017. The
price level for these years was 241 in 2016 and 245 in 2017. Calculate the real wage rate in
each year. What is the real wage increase received by these workers in 2017?
The real wage rate equals the nominal wage rate divided by the price level. In 2016 the real wage
rate was $20/241 × 100, for a real wage rate of $8.30. In 2017 the real wage rate was $22/245 ×
100, for a real wage rate of $8.98. The workers got a real pay raise between 2016 and 2017 of
$0.68.
26. News release
In May 2017, real personal consumption expenditure (PCE) was $11,845 billion and the PCE
deflator was 112.257. In June 2017, real personal consumption expenditure was $11,850
billion and personal consumption expenditure was $13,305 billion.
Source: BEA, July 31, 2017
Calculate personal consumption expenditure in May 2017 and the PCE deflator in June 2017.
Was the percentage increase in real personal consumption expenditure greater or smaller than
that in personal consumption expenditure?
Personal consumption expenditure = (real personal consumption expenditure) × (PCE deflator) ÷
100, so in May 2017 personal consumption expenditure was $11,845 billion × 112.257 ÷ 100 =
$13,297 billion.
PCE deflator = ([personal consumption expenditure] ÷ [real personal consumption expenditure) ×
100, so in June 2017 the PCE deflator = ($13,305 billion ÷ $11,850 billion) × 100 = 112.278.
The percentage increase in real personal consumption expenditure was smaller than the percentage
increase in personal consumption expenditure. Personal consumption expenditure grows because
real personal consumption expenditure grows and/or because the PCE deflator grows. During this
period, both real personal consumption expenditure grew and because the PCE deflator grew so
the percentage increase in (nominal) personal consumption exceeded the percentage increase in
real personal consumption expenditure.
27. Adjusted for Inflation, the Federal Minimum Wage is Worth Less than 50 Years Ago
The federal minimum wage was raised to $7.25 an hour from $6.55 nearly seven years ago.
Despite periodic increases, its buying power hasn’t kept up with inflation. In 1968, the federal
minimum was equivalent to $10.90 in 2015 dollars, nearly $4 higher than today’s rate.
Source: CNBC, July 21, 2016
Given the additional information that in 1968, the federal minimum wage was $1.60 an hour,
by what percentage did the CPI increase between 1968 and 2015?
According to the problem, the minimum wage of $1.60 in 1968 is equivalent to $10.90 in 2015.
This equality means that the real values of the federal minimum wage in 1968 and in 2015 are the
same. If we set 1968 as the base year, then the price level in 1968 is 100, and the real federal
minimum wage in 1968 is equal to the nominal federal minimum wage in 1968, $1.60. So
$1.60/1.00 = $10.90/P2015. Solving the equation for P2015 and multiplying the answer by 100 to get
the index value gives P2015 = 681. The inflation rate is the percentage change in the price levels, so
the inflation rate equals [(681 − 100)/100] × 100, which is 581 percent.
28. After you have studied Economics in the News on pp. 126–127 (534–535 in Economics),
answer the following questions.
a. How many jobs must be created each month to keep pace with a growing population?
About 137,000 jobs per month must be created.
b. What normally happens to the unemployment rate when the pace of job creation exceeds the
increase in population?
When the pace of job creation exceeds the increase in population, normally the unemployment
rate falls.
c. Why might the unemployment rate sometimes increase, when the pace of job creation
exceeds the increase in population?
The unemployment rate might increase because the relatively rapid pace of job creation brings
more discouraged workers back into the labor force. Unless they immediately find jobs, these
workers are counted as unemployed, which can increase the unemployment rate.
d. How would you expect the labor force participation rate to respond to job creation in excess
of population growth?
One would expect the labor force participation rate to increase, which is indeed what occurred
between May and June 2017.
e. How would you expect an increase in the growth rate of real GDP to affect jobs and
unemployment?
An increase in the growth rate of real GDP increases the number of jobs and decreases
unemployment.
29. Older American Workers Are Still Struggling to Find Jobs
Employers are creating new jobs but older workers are not getting them. In August 2016,
151,000 new jobs were created. But 2.5 million workers over 55 were either unemployed, in
part time jobs but wanting full time, or had given up on seeking work. That’s a 12 percent
unemployment rate. Age discrimination is illegal but hiring discrimination is hard to prove
and economists at the University of California at Irvine and Tulane University say they have
found evidence of age discrimination in hiring, particularly for older women.
Source: Fortune, September 8, 2016
a. What type of unemployment might older workers be more prone to experience?
Older workers are more likely to experience structural unemployment.
b. Explain how the unemployment rate of older workers is influenced by the business cycle.
Older workers might be more likely to be fired when the economy enters a recession because the
business would rather train its younger workers to prepare for the future. If this takes place, then
the unemployment rate of older workers will rise more than that of other groups when the
economy enters a recession.
c. Why might older unemployed workers become marginally attached or discouraged workers?
The news clip explains that older unemployed workers have a significantly more difficult time
finding a new job than do younger unemployed workers. Older workers have a significantly higher
unemployment rate than younger workers. It would be easy for some older workers to become
discouraged about their job prospects and either quit looking entirely, thereby becoming
marginally attached or discouraged workers.