1 LEARNING OBJECTIVE

Measuring the Unemployment Rate

and the Labor Force Participation Rate

The Household Survey

Labor force The sum of employed and unemployed

workers in the economy.

Unemployment rate The percentage of the labor force

that is unemployed.

Discouraged workers People who are available for

work, but who have not looked for a job during the
previous four weeks because they believe no jobs are
RET P AHC

available for them.

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 Measuring the Unemployment Rate
and the Labor Force Participation Rate

The Household Survey

 The unemployment rate measures the

percentage of the labor force that is unemployed:

Number of unemployed
x 100 = Unemployment rate
Labor Force
 The labor force participation rate measures
the percentage of the working-age population that
is in the labor force:

Labor force
x 100 = Labor force participation rate
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Working - age population

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 Measuring the Unemployment Rate
and the Labor Force Participation Rate

Unemployment Rates for Demographic Groups

8-3
Unemployment Rates in the United States
by Demographic Group, June 2005
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 Measuring the Unemployment Rate
and the Labor Force Participation Rate

How Long Are People Usually Unemployed?

8–1
Duration of Unemployment

LENGTH OF TIME UNEMPLOYED PERCENTAGE OF TOTAL UNEMPLOYED

Less than 5 weeks 36.2%
5 to 14 weeks 31.8
15 to 26 weeks 14.1
27 weeks or more 17.8
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 Measuring the Unemployment Rate
and the Labor Force Participation Rate

The Establishment Survey: Another Measure of

Employment
8–2
Household and Establishment
Survey Data for May and June 2005

HOUSEHOLD SURVEY ESTABLISHMENT SURVEY

MAY JUNE CHANGE MAY JUNE CHANGE
Employed 141,475,000 141,638,000 +163,000 133,391,000 133,537,000 +146,000
Unemployed 7,647,000 7,486,000 –161,000
Labor Force 149,122,000 149,123,000 +1,000
Unemployment Rate 5.1% 5.0%
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 Measuring the Unemployment Rate
and the Labor Force Participation Rate

Job Creation and Job Destruction Over Time

8–3
Establishments Creating and Eliminating
Jobs, September-December 2004

NUMBER OF NUMBER
ESTABLISHMENTS OF JOBS
ESTABLISHMENTS CREATING JOBS
Existing establishments 1,530,000 6,365,000
New establishments 379,000 1,716,000
ESTABLISHMENTS ELIMINATING JOBS
Continuing establishments 1,467,000 5,727,000
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Closing establishments 320,000 1,485,000

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 2 LEARNING OBJECTIVE

Types of Unemployment

8-4
The Annual Unemployment Rate in the
United States, 1950-2004
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 Types of Unemployment

Frictional Unemployment and Job Search

Frictional unemployment Short-term unemployment

arising from the process of matching workers with jobs.

Structural Unemployment

Structural unemployment Unemployment arising

from a persistent mismatch between the skills and
characteristics of workers and the requirements of jobs.
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 Types of Unemployment

Cyclical Unemployment

Cyclical unemployment Unemployment caused by a

business cycle recession.

Full Employment

Natural rate of unemployment The normal rate of

unemployment, consisting of structural unemployment
plus frictional unemployment.
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 3 LEARNING OBJECTIVE

Explaining Unemployment

Government Policies and the Unemployment Rate

UNEMPLOYMENT INSURANCE AND OTHER PAYMENTS TO THE

UNEMPLOYED

INTERNATIONAL COMPARISONS

8-5
Average Unemployment Rates
in the United States, Canada,
Japan, and Europe, 1995-2004
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 4 LEARNING OBJECTIVE

Measuring Inflation

Price level A measure of the

average prices of goods and services
in the economy.

Inflation rate The percentage

increase in the price level from one
year to the next.
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 Measuring Inflation

The Consumer Price Index

Consumer price index (CPI) An average of the prices

of the goods and services purchased by the typical urban
family of four.

8-6
The CPI Market Basket,
December 2004
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 Measuring Inflation

BASE YEAR (1999) 2006 2007

PRODUCT QUANTITY PRICE EXPENDITURES PRICE EXPENDITURES PRICE EXPENDITURES
Eye 1 $50.00 $50.00 $100.00 $100.00 $85.00 $85.00
examinations
Pizzas 20 10.00 200.00 15.00 300.00 14.00 280.00
Books 20 25.00 500.00 25.00 500.00 27.50 550.00
Total 750.00 900.00 915.00

FORMULA APPLIED TO 2006 APPLIED TO 2007

Expenditures in the current year  $900   $915 

CPI = Expenditures in the base year × 100   × 100 = 120   × 100 = 122
 $750   $750 
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Don’t Miscalculate the Inflation Rate

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 Measuring Inflation

Is the CPI Accurate?

 Substitution bias.

 Increase in quality bias.

 New product bias.

 Outlet bias.
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 Measuring Inflation

The Producer Price Index

Producer price index (PPI) An average of the prices

received by producers of goods and services at all stages
of the production process.
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 5 LEARNING OBJECTIVE

Using Price Indexes to Adjust for the Effects of Inflation

 CPI in 2004 
Value in 2004 dollars = Value in 1980 dollars ×  
 CPI in 1980 

Falling Real Wages at Lucent

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 8-2
4 LEARNING OBJECTIVE

Calculating Real Average Hourly Earnings

YEAR NOMINAL AVERAGE HOURLY EARNINGS CPI

(1982-1984 = 100)
2002 $14.95 179.9
2003 15.35 184.0
2004 15.67 188.9

YEAR NOMINAL AVERAGE CPI REAL AVERAGE

HOURLY EARNINGS (1982-1984 = 100) HOURLY EARNINGS
(1982-1984 DOLLARS)
2002 $14.95 179.9 $8.31
2003 15.35 184.0 8.34
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2004 15.67 188.9 8.30

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 6 LEARNING OBJECTIVE

Real versus Nominal Interest Rates

Nominal interest rate The stated interest rate on a

loan.

Real interest rate The nominal interest rate minus

the inflation rate.

Deflation A decline in the price level.

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 Real versus Nominal Interest Rates

8-7
Nominal and Real Interest Rates, 1970-2004
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 7 LEARNING OBJECTIVE

Does Inflation Pose Costs on the Economy?

Inflation Affects the Distribution of Income

The Problem with Anticipated Inflation

Menu costs The costs to firms of changing prices.

The Problem with Unanticipated Inflation

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 Consumer price index Menu costs
(CPI)
Natural rate of
Cyclical unemployment
unemployment
Deflation
Discouraged workers Nominal interest rate
Efficiency wage Price level
Frictional unemployment Producer price index
Inflation rate (PPI)
Labor force
Real interest rate
Labor force participation
rate Structural
unemployment
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Unemployment rate

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