Monitoring Jobs and Inflation
Chapter 23
Economics 3ed: Global and Southern African Perspectives
© 2020
Main ideas
• After studying this chapter, you will be able to:
• Explain why unemployment is a problem
and how we measure the unemployment
rate and other labour market indicators
• Explain why unemployment occurs and why
it is present even at full employment
• Explain why inflation is a problem and how
we measure the inflation rate
Economics 3ed: Global and Southern African Perspectives ©
2020
Employment and Unemployment
Why unemployment is a problem
Lost Incomes and Production
• The loss of a job brings a loss of income and lost
production
• Lost production means lower consumption and a
lower investment in capital, which lowers the living
standard in both the present and the future
Lost Human Capital
• Prolonged unemployment permanently damages a
person’s job prospects by destroying human capital
( When you are unemployed you loose certain skills
e.g. unemployed for 2 years by the time you get a
job others have upgraded skills in the industry)
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Employment and Unemployment
1.The cost of unemployment is spread
unequally, which makes it a highly charged
political problem as well as a serious economic
problem.
2.Governments make strenuous efforts to
measure unemployment accurately and to
adopt policies to moderate its level and ease
its pain.
3.Government can only adopt policies but
government does not create jobs directly.
4
Employment and Unemployment
Quarterly Labour Force Survey (QLFS)
• Every quarter, a survey by StatsSA of 30 000 households is
conducted
• Working age population = is the number of people > 15 years
• Labour force = includes employed + unemployed
• Narrow definition . of Unemployed =
1. Without work
2. Actively looked for work in previous 4 weeks
3. Would be able to start work
• Expanded definition . of Unemployed =
o 1 + 3 + Has not actively looked for work in previous 4 weeks
o Difference between narrow & expanded = discouraged
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Employment and Unemployment
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Employment and
Unemployment
1.Discouraged workers are people who are
available and willing to work but have not
made specific active efforts to find a job within
the previous four weeks.
2.These workers often temporarily leave the
labour force during a recession and re-enter
during an expansion and become active job
seekers
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Employment and
Unemployment
1.About 2.7 million people were classified as
discouraged workers in the third quarter of
2018. ( Update by checking Sta SA data)
2.People in the working-age population who
are neither employed nor unemployed are
classified as not in the labour force (not
economically active)
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Employment and
Unemployment
1.In the third quarter of 2018, the working-age
population of South Africa was 37.985 million;
2.The labour force was 22.589 million and
15.395 million were not in the labour force. Of
this number, most were in school full time or
had retired from work.
3.Within the labour force, 6.209 million were
unemployed and 16.380 million were
employed
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Three labour market indicators
1.The unemployment rate The amount of
unemployment is an indicator of the extent to
which people who want jobs cannot find them.
2.The unemployment rate is the percentage of the
people who are unemployed.
3.Whenever we mention the unemployment rate,
we are referring to the official (narrow)
definition of unemployment in South African the
labour force
10
Three labour market indicators
1.The unemployment rate fluctuates over the
business cycle and reaches a peak value after
a recession ends.
2.Unemployment is expected to fall during a
boom and increase during a recession
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Three labour market indicators
1.The absorption rate The number of people of
2.working age who have jobs is an indicator of
both the availability of jobs and the degree of
match between people’s skills and jobs.
3. The absorption rate is the percentage of
people of working age who have jobs.
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Three labour market indicators
1.The labour force participation rate
2.The number of people in the labour force is
an indicator of the willingness of people of
working age to take jobs.
3.The labour force participation rate is the
percentage of the working-age population
who are members of the labour force
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Employment and Unemployment
Three labour market indicators
Unemployment rate formular
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Perspectives © 2020 14
Employment and Unemployment
2. Labour
absorption rate
3. Labour force
participationj
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Perspectives © 2020 15
Employment and Unemployment
Other definitions of unemployment
Marginally attached workers
• A person who currently is neither working nor looking for work
but has indicated that he or she wants and is available for a job
and has looked for work sometime in the recent past.
• A marginally attached worker who has stopped looking for a job
because of repeated failure to find one is called a discouraged
worker
• Many unemployed in South Africa are discouraged work seekers
Part-time workers who want full-time jobs
1.This arrangement fits in with the other demands on their time.
But some part-time workers would like full-time jobs and cannot
find them.
2.In the official statistics, we do not differentiate between workers
who want to work part time and those who want to work full
time.
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Employment and
Unemployment
Most costly unemployment
1.People who are unemployed for a few weeks and
then find another job bear some costs of
unemployment.
2.But these costs are low compared to the costs
borne by people who remain unemployed for
many months.
3.These costs include the loss of income and search
costs for those seeking employment
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Unemployment and Full Employment :Types
Frictional unemployment
• The unemployment that arises from the normal labour turnover
• There is an unending flow of people into and out of the labour force
• There is also an unending process of job creation and job destruction
Youth unemployment
• We have observed rising youth (15-24 yrs) unemployment in SA and
all over the world
Structural unemployment
• The unemployment that arises when changes in technology or
international competition change the skills needed to perform jobs
or change the locations of jobs
Cyclical unemployment
• Higher than normal unemployment at a business cycle trough and
the lower than normal unemployment at a business cycle peak
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Perspectives © 2020 18
Unemployment and Full Employment
‘Natural’ Unemployment
• Arises from frictions and structural change when there
is no cyclical unemployment – when all the
unemployment is frictional and structural.
• Natural unemployment as a percentage of the labour
force is called the natural unemployment rate.
• Full employment is defined as a situation in which the
unemployment rate equals the natural unemployment
rate.
• The natural unemployment rate is influenced by
factors:
o The age distribution of the population
o The scale of structural change
o The real wage rate
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Perspectives © 2020 19
The natural unemployment
rate is influenced by factors:
1.The age distribution of the population: An
economy with a young population has a large
number of new job seekers every year and has a
high level of frictional unemployment.
2.An economy with an aging population has fewer
new job seekers and a low level of frictional
unemployment.
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The natural unemployment
rate is influenced by factors
1.The scale of structural change: The amount of
structural unemployment fluctuates with the
pace and volume of technological change
2.And the change driven by fierce international
competition, especially from fast-changing
Asian economies.
3.A high level of structural unemployment is
present in many parts of South Africa today.
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The natural unemployment
rate is influenced by factors
1.The real wage rate The natural unemployment rate
is influenced by the level of the real wage rate.
2.Real wage rates that bring unemployment are a
minimum wage and an efficiency wage. Chapter 6
explains how the minimum wage creates
unemployment.
3.An efficiency wage is a wage set above the going
market wage to enable firms to attract the most
productive workers, get them to work hard and
discourage them from quitting ( especially scarce
skills)
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Unemployment benefits
1.Unemployment benefits increase the natural
unemployment rate by lowering the
opportunity cost of job search.
2. European countries have more generous
unemployment benefits and higher natural
unemployment rates than the United States.
3. Extending unemployment benefits increases
the natural unemployment rate.
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Unemployment and Full Employment
Real GDP and Unemployment over the Cycle
• The quantity of real GDP at full employment is potential
GDP
• Over the business cycle, real GDP fluctuates around
potential GDP
• The gap between real GDP and potential GDP is called the
output gap
• As the output gap fluctuates over the business cycle, the
unemployment rate fluctuates around the natural
unemployment rate
• At full employment: unemployment = natural
unemployment
GDP = potential GDP
output gap = 0
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The Price Level, Inflation and Deflation
• The price level is the average level of prices
and the value of money
• Inflation is a persistently rising price level
• Deflation is a persistently falling price
Why inflation and deflation are problems
• Low, steady, anticipated inflation or deflation =
not a problem
• But, unexpected bursts of inflation or deflation
= big problems and costs:
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Perspectives © 2020 25
The Price Level, Inflation and
Deflation
o Redistribution of income: between workers and employers
o Redistribution of wealth: between lenders and borrowers
o Lowers real GDP and employment
o Diverts resources from production
• Hyperinflation e.g. Zimbabwe
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Redistribution of income
1.Workers and employers sign wage contracts
that last for a year or more.
2.An unexpected burst of inflation raises prices
but does not immediately raise the wages.
3. Workers are worse off because their wages
buy less than they bargained for and
employers are better off because their profits
rise
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Redistribution of wealth
1.People enter into loan contracts that are fixed
in money terms and that pay an interest rate
agreed as a percentage of the money borrowed
and lent.
2.With an unexpected burst of inflation, the
money that the borrower repays to the lender
buys less than the money originally loaned.
3.The borrower wins and the lender loses. The
interest paid on the loan does not compensate
the lender for the loss in the value of the money
loaned.
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Lowers real GDP and employment
1.Lowers real GDP and employment.
2.Unexpected inflation that raises firms’ profits
brings a rise in investment and a boom in
production and employment.
3.Real GDP rises above potential GDP and the
unemployment rate falls below the natural rate
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Lowers real GDP and
employment
1.But this situation is temporary.
2.Profitable investment dries up, spending falls,
real GDP falls below potential GDP and the
unemployment rate rises.
3.Avoiding these swings in production and jobs
means avoiding unexpected swings in the
inflation rate.
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Diverts resources from
production
1.Diverts resources from production.
2.Unpredictable inflation or deflation turns the
economy into a casino and diverts resources from
productive activities to forecasting inflation.
3.It can become more profitable to forecast the
inflation rate or deflation rate correctly than to
invent a new product.
4.People in other professions by spending more of
their time dabbling as amateur economists and
inflation forecasters and managing their
investments.
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Hyperinflation
1.At its worst, inflation becomes hyperinflation
– an inflation rate of 50 per cent a month or
higher that grinds the economy to a halt and
causes a society to collapse.
2.Hyperinflation is rare, but Zimbabwe in
recent years and several European and Latin
American countries have experienced it.
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Consumer Price Index
1.Every month, Statistics South Africa measures
the price level by calculating the Consumer Price
Index (CPI), which is a measure of the average of
the prices paid by urban consumers for a fixed
basket of consumer goods and services.
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The Price Level, Inflation and Deflation
The Consumer Price Index
• A measure of the average of the prices paid by
urban consumers for a fixed basket of
consumer goods and services
• The CPI tells you about the value of the money
in your pocket
• The CPI is defined to equal 100 for a period
called the reference base period
Constructing the CPI
• Selecting the CPI basket: based on Income and
expenditure Survey
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Constructing the CPI
1.This basket contains the goods and services
represented in the index, each weighted by its
relative importance.
2.The idea is to make the relative importance of
the items in the CPI basket the same as that in
the budget of an average urban household.
3.For example, because people spend more on
housing than on clothing and footwear, the CPI
places more weight on the price of housing
than on the price of clothing and footwear.
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The Consumer Price Index
1.Conducting the monthly price survey: prices
of >400 goods & services in 30 metropolitan
areas
2.Because the CPI aims to measure price
changes, it is important that the prices
recorded each month refer to exactly the same
item.
• Calculating the CPI
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Calculating the CPI
1.To calculate the CPI, we:
2. Find the cost of the CPI basket at base-period
prices.
3.Find the cost of the CPI basket at current
period prices.
4.Calculate the CPI for the base period and the
current period.
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Calculating the CPI
38
Calculating the CPI
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Calculating the CPI
1.To find the CPI for 2016 and 2017.
2.The formula for the CPI is CPI = Cost of CPI
basket at current prices Cost of CPI basket at
base-period prices
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Calculating the
CPI
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FIGURE 23.4 The CPI
basket
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The Price Level, Inflation and Deflation
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Perspectives © 2020 43
Figure 23.5
1.When the price level in part (a) rises slowly, (the
early 1990s), the inflation rate in part (b) is low.
2.A high inflation rate means that the price level is
rising rapidly.
3. A high price level means that there has been a
sustained period of rising prices.
4.When the price level in part (a) falls, the inflation
rate in part (b) is negative – deflation.
5.During the graphed period, South Africa did not
experience deflation.
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The Price Level, Inflation and Deflation
The biased CPI
• New goods bias
• Quality change bias
• Commodity substitution bias(Changes in relative
prices lead consumers to change the items they buy.
• Outlet substitution bias
• When confronted with higher prices, people use
discount stores more frequently and convenience
stores less frequently
Alternative price indices
• Personal consumption expenditure (PCE) deflator:
(nominal C / real C) x 100
• GDP deflator: (nominal GDP / real GDP) x 100
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The Price Level, Inflation and Deflation
Core CPI inflation
• Number may vary from
month to month or quarter to
quarter
• To determine the trend in the
inflation rate, we need to
strip the raw numbers of
their volatility
• CPI excluding fuel and food
Deflating macroeconomic
variables
• Real = (nominal / deflator) x
100
• Real interest rate = nominal
interest rate – inflation rate
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Perspectives © 2020 46
