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I
NTRODUCTION TO
M
ACROECONOMICS
:
U
NEMPLOYMENT
, I
NFLATION
,
AND
E
CONOMIC
I
NTRODUCTION TO
M
ACROECONOMICS
:
U
NEMPLOYMENT
, I
NFLATION
,
AND
E
CONOMIC
CHAPTER
21
F
LUCTUATIONS
F
LUCTUATIONS
21.1
Macroeconomic Goals
21.4
Reasons for Unemployment
21.2
Employment and Unemployment
21.5
Inflation
21.3
Types of Unemployment
21.6
Economic Fluctuations
N
ow we focus our attention on macroeconom-
ics and, in particular, on two key concepts that
are at the heart of macroeconomics and
economic policymaking—unemployment and
inflation. To those who have just lost a job, unem-
ployment ranks high on the stress meter. To an
elderly person who is living on a fixed income,
inflation and the loss of purchasing power may be
just as threatening.
In this chapter, we see how economists define
unemployment and inflation and consider the prob-
lems associated with each. In the last section of the
chapter, we examine the short-run fluctuations in
the economy—the so-called business cycle.
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Macroeconomic Foundations
MODULE 6
SECTION
21.1
Macroeconomic Goals
What are the most important macroeco-
nomic goals in the United States?
Are these goals universal?
How has the United States shown its
commitment to these goals?
THREE MAJOR MACROECONOMIC GOALS
Recall from Chapter 1 that macroeconomics is the
study of the whole economy—the study of the
forest, not the trees. Nearly every society has been
interested in three major macroeconomic goals:
(1) maintaining employment of human resources at
relatively high levels, meaning that jobs are rela-
tively plentiful and financial suffering from lack of
work and income is relatively uncommon; (2) main-
taining prices at a relatively stable level so that con-
sumers and producers can make better decisions;
and (3) achieving a high rate of economic growth,
meaning a growth in output per person over time.
We use the term
real
gross domestic product
(RGDP)
to measure
output or production.
The term
real
is used
to indicate that the
output is adjusted for
the general increase in
prices over time.
Technically, gross domestic product (GDP) is
defined as the total value of all final goods and serv-
ices produced in a given period of time, such as a
year or a quarter.
policies that reduced U.S. reliance on other nations
for supplies of oil, partly for reasons of national
security.
HOW DO VALUE JUDGMENTS AFFECT
ECONOMIC GOALS?
In stating that nations have economic goals, we must
acknowledge that nations are made up of individu-
als. Individuals within a society may differ consider-
ably in how they evaluate the relative importance of
certain issues, or even in whether they consider cer-
tain “problems” to really be problems after all. For
example, most people view economic growth posi-
tively, but others consider it less favorably. Some cit-
izens may think the income distribution is just about
right, but others may think it provides insufficient
incomes to the poorer members of society; still
others may think it involves taking too much income
from the relatively well-to-do, thereby reducing
incentives to carry out productive, income-producing
activities.
real gross domestic
product (RGDP)
the total value of all final goods and
services produced in a given period,
such as a year or a quarter, adjusted
for inflation
ACKNOWLEDGING OUR GOALS:
THE EMPLOYMENT ACT OF 1946
Many economic problems—particularly those
involving unemployment, price instability, and eco-
nomic stagnation—are pressing concerns for the
U.S. government. The
Employment Act of 1946
and
the Full Employment and Balanced Growth Act of
1978 (the Humphrey–Hawkins Act) commit the
U.S. government to pur-
suing unemployment
policies that are also
consistent with price
stability. This legisla-
tion was the first
formal acknowledg-
ment of these primary
macroeconomic goals.
WHAT OTHER GOALS ARE IMPORTANT?
In addition to these primary goals, most societies are
concerned, at various times, with other economic
issues, some of which are essentially microeconomic
in character. For example, “quality of life” issues have
prompted some societies to try to reduce “bads,” such
as pollution and crime, and increase goods and serv-
ices, such as education and health services. Another
goal has been “fairness” in the distribution of income
or wealth. Still another goal pursued in many nations
at one time or another has been self-sufficiency in the
production of certain goods and services. For exam-
ple, in the 1970s, the United States implemented
Employment Act
of 1946
a commitment by the federal gov-
ernment to hold itself accountable
for short-run economic fluctuations
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Introduction to Macroeconomics: Unemployment, Inflation, and Economic Fluctuations
CHAPTER 21
SECTION
*
CHECK
1. The most important U.S. macroeconomic goals are full employment, price stability, and economic growth.
2. Individuals all have their own reasons for valuing certain goals more than others.
3. The United States showed its commitment to the major macroeconomic goals with the Employment Act of 1946
and the Full Employment and Balanced Growth Act of 1978 (the Humphrey–Hawkins Act).
1. What are the three major economic goals of most societies?
2. What is the Employment Act of 1946? Why was it significant?
SECTION
21.2
Employment and Unemployment
What are the consequences of
unemployment?
What is the unemployment rate?
Does unemployment affect everyone equally?
What causes unemployment?
How long are people typically
unemployed?
THE CONSEQUENCES OF HIGH UNEMPLOYMENT
Unemployment figures are reported by the U.S.
Department of Labor on a monthly basis. The news of
lower unemployment usually sends stock prices higher;
and the news of higher unemployment usually sends
stock prices lower. Politicians are also concerned about
the unemployment figures because elections often hinge
precariously on whether unemployment has been rising
or falling.
Nearly everyone agrees that it is unfortunate when
a person who wants a job cannot find one. A loss of a
job can mean financial insecurity and a great deal of
anxiety. High rates of unemployment in a society can
increase tensions and despair. A family without income
from work undergoes great suffering; as a family’s sav-
ings fade, family members wonder where they are
going to obtain the means to survive. Society loses
some potential output of goods when some of its pro-
ductive resources—human or nonhuman—remain idle,
and potential consumption is reduced. Clearly, then, a
loss in efficiency occurs when people willing to work
and equipment able to produce remain idle. That is,
other things being equal, relatively high rates of unem-
ployment are viewed almost universally as undesirable.
the unemployment rate,
you must first under-
stand another impor-
tant concept—the
labor
force.
The labor force
is the number of people
over the age of 16 who
are available for employ-
ment, as shown in
Exhibit 1. The civilian
labor force figure
excludes people in the
armed services and those in prisons or mental hospi-
tals. Other people regarded as outside the labor force
include homemakers, retirees, and full-time students.
These groups are excluded from the labor force
because they are not considered currently available
for employment.
When we say that the unemployment rate is
5 percent, we mean that 5 percent of the population
over the age of 16 who are willing and able to work
are unable to get jobs. This 5 percent means that 5 out
of 100 people in the total labor force are unemployed.
To calculate the unemployment rate, we simply divide
the number of unemployed by the number in the civil-
ian labor force:
unemployment rate
the percentage of the population
aged 16 and older who are willing
and able to work but are unable to
obtain a job
labor force
the number of people aged 16 and
over who are available for
employment
WHAT IS THE UNEMPLOYMENT RATE?
When discussing unemployment, economists and politi-
cians refer to the
unemployment rate.
To calculate
Number of unemployed
Civilian labor force
Unemployment rate
=
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Macroeconomic Foundations
MODULE 6
SECTION
21.2
E
XHIBIT
1
The U.S. Labor Force, 2006
Labor Force (Employed + Unemployed)
(151.7 million)
Civilians
Employed
(144.58 million)
Out of
Labor Force
(77.47 million)
Unemployed
(7.12 million)
Total Adult Population
(229.2 million)
SOURCE: Bureau of Labor Statistics, August 2006.
ARE UNEMPLOYMENT STATISTICS ACCURATE
REFLECTIONS OF THE LABOR MARKET?
In periods of prolonged recession, some individuals
think that the chances of landing a job are so bleak
that they quit looking. These people are called
dis-
couraged workers.
Individuals who have not
actively sought work
for four weeks are not
counted as unemployed;
instead, they fall out
of the labor force. Also,
people looking for full-
time work who grudg-
ingly settle for part-time
jobs are counted as “fully” employed, even though
they are only “partly” employed. At least partially
balancing these two biases in government employ-
ment statistics, however, is the number of people who
are overemployed—that is, working overtime or at
more than one job. Also, a number of jobs in the
underground economy (e.g., drug dealing, prostitu-
tion, gambling, and so on) are not reported. In addi-
tion, many people may claim they are seeking work
when, in fact, they may just be going through the
motions so they can continue to collect unemploy-
ment compensation or receive other government
benefits.
In August 2006, the number of civilians unemployed
in the United States was 7.12 million, and the civilian
labor force totaled 151.7 million. Using these data,
we can calculate that the unemployment rate in
August 2006 was 4.7 percent:
Unemployment rate
=
7.12 million/151.7 million
=
.047
×
100
=
4.7 percent
discouraged worker
an individual who has left the labor
force because he or she could not
find a job
THE WORST CASE OF U.S. UNEMPLOYMENT
By far, the worst employment downturn in U.S. his-
tory occurred during the Great Depression, which
began in late 1929 and continued until 1941.
Unemployment rose from only 3.2 percent of the
labor force in 1929 to more than 20 percent in the
early 1930s, and double-digit unemployment per-
sisted through 1941. The debilitating impact of
having millions of productive people out of work led
Americans (and people in other countries as well) to
say, “Never again.” Some economists would argue
that modern macroeconomics, with its emphasis on
the determinants of unemployment and its elimina-
tion, truly began in the 1930s.
VARIATIONS IN THE UNEMPLOYMENT RATE
Exhibit 2 shows U.S. unemployment rates over the
last 46 years. Unemployment since 1960 ranged from
a low of 3.5 percent in 1969 to a high of 9.7 percent
in 1982. Unemployment in the worst years is two or
more times what it is in good years. Before 1960,
variations in unemployment were more pronounced.
WHO ARE THE UNEMPLOYED?
Unemployment usually varies greatly across different
segments of the population and over time.
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Introduction to Macroeconomics: Unemployment, Inflation, and Economic Fluctuations
CHAPTER 21
SECTION
21.2
E
XHIBIT
2
Unemployment Rates, 1960–2006
U.S. Unemployment Rate
10%
9
8
7
6
5
4
3
2
1
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Year
SOURCE: Bureau of Labor Statistics, August 2006.
Education as a Factor in Unemployment
According to the Bureau of Labor Statistics, the
unemployment rate across the sexes and races
among college graduates is significantly lower than
for those who do not complete high school. In June
2006, the unemployment rate for individuals with-
out high school diplomas was 6.5 percent, compared
with 2.1 percent for those with bachelor degrees and
higher. Further, college graduates have lower unem-
ployment rates than people who have some college
education but did not complete their bachelor’s
degrees (3.6 percent).
Age, Sex, and Race as Factors in Unemployment
The incidence of unemployment varies widely among
the population. Unemployment tends to be greater
among the very young, among blacks and other
minorities, and among workers with few skills. The
unemployment rate for adult females tends to be
higher than that for adult males.
Considering the great variations in unemploy-
ment for different groups in the population, we cal-
culate separate unemployment rates for groups
classified by sex, age, race, family status, and type of
occupation. Exhibit 3 shows unemployment rates for
various groups. Note that the variation around the
average unemployment rate for the total population
of 4.7 percent was considerable. The unemployment
rate for blacks was much higher than the rate for
whites, a phenomenon that has persisted throughout
the post–World War II period. Unemployment among
teenagers was much higher than adult unemployment,
at 16.2 percent. Some would regard teenage unem-
ployment a lesser evil than unemployment among
adults, because most teenagers have parents or
guardians on whom they can rely for subsistence.
CATEGORIES OF UNEMPLOYED WORKERS
According to the Bureau
of Labor Statistics, the
four main categories of
unemployed workers
are
job losers
(those who
have been temporarily
job loser
an individual who has been tem-
porarily laid off or fired
Teenagers have the highest rates of unemployment. Do you
think it would be easier for them to find jobs if they had more
experience and higher skill levels?
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