Question No. 2

Q. 2 a. Unemployment rate is a key and most watched indicator of the economy. Therefore, it is important to understand how it is defined and determined, explain?

Unemployment, as defined by the International Labour Organization, occurs when people are without jobs and they have actively looked for work within the past four weeks. The unemployment rate is a measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labour force.

Why does the Government collect statistics on the unemployed?

When workers are unemployed, they, their families, and the country as a whole lose. Workers and their families lose wages, and the country loses the goods or services that could have been produced. In addition, the purchasing power of these workers is lost, which can lead to unemployment for yet other workers.

To know about unemployment—the extent and nature of the problem—requires information. How many people are unemployed? How did they become unemployed? How long have they been unemployed? Are their numbers growing or declining? Are they men or women? Are they young or old? Are they white or black or of Hispanic ethnicity? Are they skilled or unskilled? Are they the sole support of their families, or do other family members have jobs? Are they more concentrated in one area of the country than another? After these statistics are obtained, they have to be interpreted properly so they can be used—together with other economic data—by policymakers in making decisions as to whether measures should be taken to influence the future course of the economy or to aid those affected by joblessness.

What are the basic concepts of employment and unemployment?

The basic concepts involved in identifying the employed and unemployed are quite simple:

• People with jobs are employed.
• People who are jobless, looking for jobs, and available for work are unemployed.
• People who are neither employed nor unemployed are not in the labor force.

The survey is designed so that each person age 16 and over who is neither in an institution (for example, correctional facilities and residential nursing and mental health care facilities) nor on active duty in the Armed Forces is counted and classified in only one group. The sum of the employed and the unemployed constitutes the civilian labor force. Persons not in the labor force combined with those in the civilian labor force constitute the civilian noninstitutional population 16 years and over. (There is no upper age limit.) Under these concepts, most people are quite easily classified. For example:

• Elizabeth Lloyd reported to the interviewer that last week she worked 40 hours as a sales manager for the Western Beverage Company. Elizabeth is employed.
• Steve Hogan lost his job when the local plant of the Chariot Aircraft Manufacturing Company was closed down. Since then, he has been visiting personnel offices of other businesses in town trying to find a job. Steve is unemployed.
• Linda Coleman is a homemaker. Last week, she was occupied with her normal household chores. She neither held a job nor looked for a job. Her 80-year-old father who lives with her has not worked or looked for work because of a disability. Linda and her father are not in the labor force.
  

  Who is counted as unemployed?

  Persons are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work. Actively looking for work may consist of any of the following activities:

  • Contacting:
  • An employer directly or having a job interview
  • A public or private employment agency
  • Friends or relatives
  • A school or university employment center
  • Sending out resumes or filling out applications
  • Placing or answering advertisements
  • Checking union or professional registers
  • Some other means of active job search

  Passive methods of job search do not have the potential to result in a job offer and therefore do not qualify as active job search methods. Examples of passive methods include attending a job training program or course, or merely reading about job openings that are posted in newspapers or on the Internet.

  Workers expecting to be recalled from temporary layoff are counted as unemployed, whether or not they have engaged in a specific jobseeking activity. In all other cases, the individual must have been engaged in at least one active job search activity in the 4 weeks preceding the interview and be available for work (except for temporary illness).

  The questions used in the interviews are carefully designed to elicit the most accurate picture of each person’s labor force activities. Some of the major questions that determine employment status are: (The capitalized words are emphasized when read by the interviewers.)

  1. Does anyone in this household have a business or a farm?
  2. LAST WEEK, did you do ANY work for (either) pay (or profit)?
     
     If the answer to question 1 is “yes” and the answer to question 2 is “no,” the next question is:
  3. LAST WEEK, did you do any unpaid work in the family business or farm?
     
     For those who reply “no” to both questions 2 and 3, the next key questions used to determine employment status are:
  4. LAST WEEK, (in addition to the business,) did you have a job, either full or part time? Include any job from which you were temporarily absent.
  5. LAST WEEK, were you on layoff from a job?
  6. What was the main reason you were absent from work LAST WEEK?
     
     For those who respond “yes” to question 5 about being on layoff, the following questions are asked:
  7. Has your employer given you a date to return to work?
     
     and, if “no,”

  8. Have you been given any indication that you will be recalled to work within the next 6 months?
     
     If the responses to either question 7 or 8 indicate that the person expects to be recalled from layoff, he or she is counted as unemployed. For those who were reported as having no job or business from which they were absent or on layoff, the next question is:
  9. Have you been doing anything to find work during the last 4 weeks?
     
     For those who say “yes,” the next question is:
  10. What are all of the things you have done to find work during the last 4 weeks?
      
      If an active method of looking for work, such as those listed at the beginning of this section, is mentioned, the following question is asked:
  11. LAST WEEK, could you have started a job if one had been offered?
      
      If there is no reason, except temporary illness, that the person could not take a job, he or she is considered to be not only looking but also available for work and is counted as unemployed.

  Some examples of responses that are typically given in interviews and that may result in a person being classified as unemployed are:

  1. Yvonne Bennett reported that 2 weeks ago she applied for a job as a receptionist at the Capitol Travel Agency and the Equity Mortgage Lending Company. She is awaiting the results of her applications. Yvonne is unemployed because she made a specific effort to find a job within the prior 4 weeks and is presently available for work.
  2. Mrs. Jenkins tells the interviewer that her daughter, Katherine Marie, was thinking about looking for work in the prior 4 weeks but knows of no specific efforts she has made. Katherine Marie does not meet the activity test for unemployment and is, therefore, counted as not in the labor force.
  3. John Stetson has been checking for openings at a local superstore for each of the past 3 weeks, but his wife reported that last week he had the flu and was unable to work because of it. John is counted as unemployed because he took steps to look for work and would have been available for work during the survey reference week, except for his temporary illness.
  4. Marcus Green was laid off from the Hotshot Motor Company when the firm began retooling to produce a new model car. Marcus knows he will be called back to work as soon as the model changeover is completed, and he also knows it is unlikely that he would be able to find a job for the period he is laid off; so, although he is available to work, he is not seeking a job. Marcus is unemployed because he is waiting to be recalled from layoff.
  5. Joan Howard told the interviewer that she has filed applications with three companies for summer jobs. However, it is only April and she doesn’t wish to start work until at least June 15, because she is attending school. Although she has taken specific steps to find a job, Joan is classified as not in the labor force because she is not currently available for work. Students are treated the same as other persons; that is, they are classified as employed or unemployed if they meet the criteria, whether they are in school on a full- or part-time basis.

  How is unemployment measured for States and local areas?

  The Local Area Unemployment Statistics (LAUS) program is a Federal-State cooperative effort in which monthly estimates of total employment and unemployment are prepared for approximately 7,300 areas:

  • Census regions and divisions
  • States
  • Metropolitan Statistical Areas and Metropolitan NECTAs (New England City and Town Areas)
  • Metropolitan Divisions and NECTA Divisions
  • Micropolitan Statistical Areas and Micropolitan NECTAs
  • Combined Metropolitan Statistical Areas and Combined NECTAs
  • Small Labor Market Areas
  • Counties and county equivalents
  • Cities of 25,000 population or more
  • Cities and towns in New England regardless of population

  further reading: http://www.bls.gov/cps/cps_htgm.htm

  Same answer with other Point of View

  Unemployment
  

  The percentage of the labor force that is seeking a job but does not have one is known as the unemployment rate. The unemployment rate is defined as follows:

  Unemployed Workers	x   100%
  Employed  +  Unemployed Workers

  Unemployed workers are those who are jobless, seeking a job, and ready to work if they find a job.

  The sum of the employed and unemployed workers represent the total labor force. Note that the labor force does not include the jobless who are not seeking work, such as full-time students, homemakers, and retirees. They are considered to be outside the labor force.

  The labor force participation rate is the percentage of the adult population that is part of the total labor force. All of these measures consider only persons 16 years of age or older.

  The movement among the three groups can be illustrated as shown in the following diagram.

  

  The diagram shows seven possible movements:

  1. Employed  to  Employed  –  an employed person moves directly from one job to another job.

  2. Employed  to  Unemployed  –  an employed person moves to unemployed status either as a job loser leaving against one’s will or as a job quitter who leaves voluntarily with the intention to search for another job.

  3. Employed  to  Not in the Labor Force  –  an employed person quits a job with no intention of immediately finding another job, for example, to return to school, to raise a family, or to retire.

  4. Unemployed  to  Employed  –  an unemployed person finds and accepts a job.

  5. Unemployed  to  Not in the Labor Force  –  an unemployed person ends the job search and leaves the labor force, often because of lack of success in finding a job after an extended period of time (discouraged workers).

  6. Not in the Labor Force  to  Unemployed  –  a person who is not in the labor force begins a job search, for example, a student who seeks a job after graduation.

  7. Not in the Labor Force  to  Employed  –  a person not in the labor force moves directly into a job, for example, a student with a job waiting upon graduation.

  
  

  From this model, we see that a worker may end up in the grouping of “unemployed” from one of two possible paths:  1) by job separation, either as a job loser or a job quitter, and  2) by moving into the labor force, either as a new entrant or as a re-entrant.

  
  

  Full Employment and the Natural Rate of Unemployment

  It commonly has been the goal of policy makers to use monetary policy to achieve the goal of full employment in the economy. Over the years, several different definitions have been proposed for full employment, but such a definition is complicated by the fact that the economy always has some unemployment, even during economic expansions. This non-zero rate of unemployment is due to:

  • Frictional unemployment  –  caused by the fact that it takes time for employers and workers to find an appropriate match. For example, job seekers tend to spend time to find the best possible job rather than take the first one available, and employers take the time to interview several candidates to find the best fit. Unemployment insurance increases frictional unemployment by decreasing the opportunity cost of unemployment, thereby increasing the lowest wage that the job seeker would be willing to accept and lengthening the job search.

  • Structural unemployment  –  refers to unemployment caused by a mismatch between workers and jobs. This mismatch may be in geographical location or in skills. For example, technological change may have caused a worker’s skills to become obsolete, and he or she may experience a period of unemployment before finding the opportunity to develop new skills and to adapt. The resulting surplus of labor (quantity supplied is greater than quantity demanded) is influenced by minimum wage laws, collective bargaining, and efficiency wages, all of which create higher wages that attract more people into the labor force while decreasing the demand for labor.

  Since zero unemployment is unachievable in a free labor market, Milton Friedman used the term natural rate of unemployment to describe the baseline rate of unemployment, considering that some unemployment cannot be avoided. The natural rate of unemployment is the sum of the frictional and structural unemployment rates. It does not include cyclical unemployment that results from a downturn in the business cycle.

  When the unemployment rate falls below its natural rate, there is upward pressure on wages, and the economy runs the risk of inflation. Rather than a simple trade-off between the rate of inflation and the rate of unemployment, under the natural rate hypothesis once the rate went below the natural rate, inflation would accelerate. The natural rate of unemployment became known as the non-accelerating inflation rate of unemployment (NAIRU).

  The natural rate of unemployment changes over time. In the U.S., some mainstream economists have placed the natural rate of unemployment in the 5% to 6% range, though other economists have placed it as low as 4% and as high as 7% over the past several decades. This variability and lack of precision in the natural rate of unemployment represent a source of uncertainty with which policy makers must deal.

  Public policy itself has an impact on the natural rate of unemployment. With regard to frictional unemployment and labor surplus we see at least two levers controlled by public policy: 1) unemployment insurance, and 2) minimum wage laws. As discussed above, both of these tend to increase the natural rate of unemployment, and there is a trade-off between the benefits of such labor policies and an increased natural rate of unemployment.

  
  

  Seasonal Variations

  The number of job seekers changes over the course of the year due to seasonal effects. For example, weather patterns, harvests, tourist seasons, school and university calendars, and holidays all influence unemployment numbers. If left unadjusted, such changes make it difficult to compare unemployment figures from one month to the next.

  To address seasonal variations, the U.S. Bureau of Labor Statistics adjusts the monthly unemployment rate numbers based on a statistical analysis of previous years. The result is that the reported unemployment rate more accurately reflects the underlying state of the economy.

  
  

  Duration of Unemployment

  In addition to the unemployment rate itself, the average length of time that a person remains unemployed also is of interest. The severity of the impact of unemployment depends in part on how quickly and easily an unemployed person can find work. For example, teenagers have an unemployment rate that is much higher than average, but also find jobs quicker and therefore have a lower duration of unemployment. Statistics reported by the U.S. Department of Labor indicate that since 1948, the average duration of unemployment in the U.S. ranged from a low of approximately 7 weeks to a high of approximately 20 weeks.

  Statistics such as the number of workers unemployed for more than half a year provide additional information about the unemployment situation.

  
  

  Limitations of the Unemployment Rate Measurement

  The unemployment rate is not a perfect indicator of employment in the economy. The following are some reasons:

  • Discouraged workers – those who want a job but have given up looking and therefore do not fall within the definition of the labor force. These persons tend to make the reported unemployment rate lower than it otherwise would be.

  • Collecting benefits but not job seeking – while a state unemployment office may require a person to actively seek a job in order to collect unemployment insurance benefits, some benefit recipients do not really want a job and do not put much effort into the job search. Due to this effect, the reported unemployment rate is higher than it otherwise might be.

  • Underemployed – a person is counted as employed if he or she is working part-time; however, that person nonetheless may be seeking full-time work.

  Discouraged workers and ones collecting unemployment benefits without seeking a job make it difficult to distinguish between those who are unemployed and those who are not in the labor force. These effects work in mixed directions; unemployment may be overstated or understated by the unemployment rate. As long as any bias in the unemployment rate is relatively constant over time, then the rate is still useful for measuring changes in the economy from one period to the next.

  Other indicators such as the number of discouraged workers and part-time labor statistics all can supplement the unemployment rate data to provide additional insight.

  
  

  Impact of Unemployment

  Unemployment presents problems for both the individual and for the economy as a whole.

  • Individual hardship (financial and psychological) can arise when a person needs a job and cannot find one. The individual’s economic hardship is mitigated somewhat by unemployment insurance benefits.

  • Aggregate economic output is less than the potential GDP level due to loss of production from those who are unemployed.

  Further Readings: http://www.quickmba.com/econ/macro/unemployment/
  http://www.investinganswers.com/term/unemployment-rate-809

  b. Discuss different types of inflation and develop concept to understand consumer price index (CPI) and how it is calculated?

  Types of Inflation
  Inflation is a situation of sustained and inordinate increase in the prices of goods and services. Read on to understand the various types of inflation.
  When there is a rise in general price level for all goods and services it is known as inflation. An inflationary movement could be because of the rise in any single price or a group of prices of related goods and services.

  Types of Inflation

  There are four main types of inflation. The various types of inflation are briefed below.

  Wage Inflation: Wage inflation is also called as demand-pull or excess demand inflation. This type of inflation occurs when total demand for goods and services in an economy exceeds the supply of the same. When the supply is less, the prices of these goods and services would rise, leading to a situation called as demand-pull inflation. This type of inflation affects the market economy adversely during the wartime.

  Cost-push Inflation: As the name suggests, if there is increase in the cost of production of goods and services, there is likely to be a forceful increase in the prices of finished goods and services. For instance, a rise in the wages of laborers would raise the unit costs of production and this would lead to rise in prices for the related end product. This type of inflation may or may not occur in conjunction with demand-pull inflation.

  Pricing Power Inflation: Pricing power inflation is more often called as administered price inflation. This type of inflation occurs when the business houses and industries decide to increase the price of their respective goods and services to increase their profit margins. A point noteworthy is pricing power inflation does not occur at the time of financial crises and economic depression, or when there is a downturn in the economy. This type of inflation is also called as oligopolistic inflation because oligopolies have the power of pricing their goods and services.

  Sectoral Inflation: This is the fourth major type of inflation. The sectoral inflation takes place when there is an increase in the price of the goods and services produced by a certain sector of industries. For instance, an increase in the cost of crude oil would directly affect all the other sectors, which are directly related to the oil industry. Thus, the ever-increasing price of fuel has become an important issue related to the economy all over the world. Take the example of aviation industry. When the price of oil increases, the ticket fares would also go up. This would lead to a widespread inflation throughout the economy, even though it had originated in one basic sector. If this situation occurs when there is a recession in the economy, there would be layoffs and it would adversely affect the work force and the economy in turn.

  Other Types of Inflation

  Fiscal Inflation: Fiscal Inflation occurs when there is excess government spending. This occurs when there is a deficit budget. For instance, Fiscal inflation originated in the US in 1960s at the time President Lydon Baines Johnson. America is also facing fiscal type of inflation under the presidentship of George W. Bush due to excess spending in the defense sector.

  Hyperinflation: Hyperinflation is also known as runaway inflation or galloping inflation. This type of inflation occurs during or soon after a war. This can usually lead to the complete breakdown of a country’s monetary system. However, this type of inflation is short-lived. In 1923, in Germany, inflation rate touched approximately 322 percent per month with October being the month of highest inflation.

  Consumer Price Index
  Prices of goods increase every year without any quality or quantity addition, which is known as inflation. Consumer price index helps to determine and adjust the inflation, which ultimately helps to adjust the prices of goods. Read on to know more about consumer price index.
  Consumer price index or CPI is an inflationary indicator, which measures the changes in the average prices of consumer goods and services purchased by the households. In the United States, it was first started in 1919 during the first world war by the Bureau of Labor Statistics (BLS), because of rapidly increasing prices.

  The consumer price index is determined by measuring the price of a representative sample group for a commodity bundle of a representative urban consumer, designed by the U.S. Bureau of the Census. It is calculated by many national statistical agencies. The change in the percentage of consumer price index represents inflation. It is an economic indicator, which shows the effectiveness of the country’s economic policies.

  Purpose of Consumer Price Index
  CPI is used by economists and financial consultants as a guide for making economic decisions. CPI helps in adjusting the inflation effects on salaries, wages, pensions, retail sales, components of the national income and product accounts; and also both regulated and contracted prices. It helps in determining price changes in the nation’s economy, which is useful for governments, businessmen, labor leaders, and private citizens.

  How to Calculate CPI
  CPI is a measure, that determines the changes in the price for a incessant commodity bundle of goods and services for a particular area, during a particular period. Basically consumer price index is a ratio of the price of the commodity bundle in a particular year to the price in the base year, multiplied by 100. We can also say that, if a person pays $100 in the base year, then CPI is the amount that he has to pay, to buy the same goods in a particular year. It changes as per the month and also as per the area.

  CPI= (price of the commodity bundle in a particular year/ price in the base year)*100

  (In the United States, the current base period used is 1982-4.) Being a ratio, CPI has no unit. Usually, it is represented in time series. Current consumer price index is generated by the Bureau of Labor Statistics (BLS) for every month. It is calculated for goods including

  * Recreation goods
  * Drugs and health services
  * Clothes and jewelry, transportation goods and services
  * Food and beverages (like milk, coffee, chicken, wine, full service meals, snacks)
  * Residences (including rent of primary residence, owner’s equivalent rent, fuel oil, bedroom furniture)
  * Educational and communicational goods and services (for example, college tuition, postage, telephone services, computer software and accessories)

  And many other goods and services not listed above. Government user fees and taxes, that are directly associated with purchasing of goods and services such as excise tax and sales tax are included in the consumer price index. CPI prices are changed and reviewed according to the price changes in consumer purchasing habits and demographics or population distribution shifts.

  Limitations of Consumer Price Index
  Though CPI is a widely used index, it has few limitations. It does not take into account the changes in taxes, health care, consumer safety, crime levels, water quality, air quality, and educational quality. It also sticks to the experiences of people living in the urban area. Psychological behavioral patterns of the buyer are not considered. CPI may not be applied to all population samples. Measures may not be accurate, because of the sampling and non-sampling errors such as substitution bias, quality bias, formula bias etc.

  Consumer Price Index is an index, which measures the average price level of the goods and services purchased by a sample in a particular year. Nowadays, personal consumption expenditures price index (PCE) is more preferred by the federal reserve system, because of the limitations of CPI. However, CPI is still a widely used price index to measure inflation and it’s effect on economy.

  http://en.wikipedia.org/wiki/Inflation
  http://www.buzzle.com/articles/consumer-price-index.html
  http://www.smallbusinessforum.com/showthread.php?16832-Types-of-Inflation

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