1 Macroeconomic TOPIC Measurements, Part I: Prices and Unemployment
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.
Employment and Unemployment 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.
Employment and Unemployment 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 newspaper survey, reporting to the labor department etc. 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.
Employment and Unemployment 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
Employment and Unemployment In 2015-16, in Bangladesh Source: LFS 2015-16, Bangladesh Bureau of Statistics
Employment and Unemployment 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.
Employment and Unemployment This Figure shows the unemployment rate in USA: 1980 2012. The unemployment rate increases in a recession.
Employment and Unemployment Labor Market Indicators In Bangladesh, according to labour force survey 2015-16, the rate of unemployment stands at 4.2% which was 4.3% in 2005-06. 10 Bangladesh: Unemployment Rate 8 6 4 2 0 2005 2007 2009 2011 2013 2015
Employment and Unemployment 6 Bangladesh: Rural-Urban Unemployment Rates 5.5 5 4.5 4 3.5 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Urban Unemployment Rate Rural Unemployment Rate Linear (Urban Unemployment Rate) Linear (Rural Unemployment Rate)
Employment and Unemployment Trends of Unemployment rates in Bangladesh
Employment and Unemployment Source: LFS 2010, Bangladesh Bureau of Statistics. This Figure shows unemployment rate in Bangladesh in 2010 by age and sex
Employment and Unemployment Labor Market Indicators 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 2015-16, this ratio was 57.1%.
Employment and Unemployment Formal vs. Informal Sector in Bangladesh Informal 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. Source: LFS 2015-16, Bangladesh Bureau of Statistics.
Employment and Unemployment Labor Market Indicators 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 2015-16 this ratio was 58.5%.
Employment and Unemployment Labor Market Indicators 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.
Employment and Unemployment 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.
Employment and Unemployment 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.
Employment and Unemployment 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.
Employment and Unemployment Types of Unemployment Unemployment can be classified into four conceptual types: Frictional Structural Seasonal Cyclical
Employment and Unemployment Types of Unemployment 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.
Employment and Unemployment Types of 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)
Unemployment and Full Employment 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.
Unemployment and Full Employment 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.
Price Level and Inflation 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.
Price Level and Inflation 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
Price Level and Inflation This Figure illustrates the CPI basket. 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.
Price Level and Inflation 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
Price Level and Inflation This table shows the prices in the base period. The cost of the CPI basket in the base period was $50. 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
Price Level and Inflation This table shows the prices in the current period. The cost of the CPI basket in the current period is $70. Item Quantity Price Cost of CPI basket Oranges 10 $2.00 $20 Haircuts 5 $10.00 $50 Cost of CPI basket at current period prices $70
Price Level and Inflation 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. 3 types of CPI: i) Laspeyres Index: CPI basket is the base year basket ii) Paasche Index: CPI basket is the current year basket iii) Fisher Index: Geometric mean of Laspeyres and Paasche indices
Price Level and Inflation 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.
Price Level and Inflation 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: 2007-2016 10-year average inflation rate: 7.5% Source: The World Bank (http://data.worldbank.org/)
Price Level and Inflation 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.
Price Level and Inflation 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.
Price Level and Inflation 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.
Price Level and Inflation 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.
Price Level and Inflation 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.
Price Level and Inflation 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)