Chapter 8- Unemployment and Inflation
How unemployment is measured and how the unemployment rateis calculated
The significanceof the unemployment rate for the economy
The relationship between the unemployment rate and economic growth
The factors that determine the natural rate of unemployment
The economic costs of inflation
How inflation and deflation createwinners and losers
Why policy makers try to maintain a stable rate of inflation
Every month Statistics Canada conducts Labor ForceSurvey (LFS). It collects
information on labour market activity from the civilian, non-institutionalised
population 15 years of age and over (excluded in the survey are persons living on
reserves and Aboriginal settlements, full-time members of the armed forces and
institutionalized population, these groups make up less than 2% of the
population).It usesa rotating sample of around 54,000 households and each
household remains in the sample for 6 consecutive months. It uses the survey
information to provide estimates of employment and unemployment
Employment denotes the number of adult workers (15years and over) who have
jobs. Unemployment denotes the number of workers who are not employed but
are actively looking for a job.
Labour force =
Employment rate =
Participation rate =
Unemployment rate =
1 Chapter 8-UUneempploymeent and nflation
Canada;Unemploymentrae Rate)Bothsexes;5 yeas nd overSeasonalyadusted
TheeSignifcannce ofthe UnnempploymeenntRaate
The uneempploymeent rateisa gooddindicator ofhoow easy or dffcultitisto fnddaa
job gvenntheecurrenttstateoffthe econoomyy. But,
• IItcan oveersate the true eveelof unemployment.
Unnempploymeent neverrfalsto zero even inbooom ttmees wheen obbsare plentiuul
sincejob searching takes imee
• IItcan undderstate heetrue leveloffunemmployymeent.
You are nott“unemmployyed” fyyou have given up oooknggfor ajob beccause hhere
are no jobs available.
Discouraged workers: wwhoowaant towoork and are avaiable totake woork,buttwhho
do nottlook fora job because they believe no obbsare avaiable.
Maarginaly attacheddwoorkers: The maarginaly attached compprise hoose whooaree
availablefor work and are waating orrempploymeent,buutare nottcurrently ookkngg
2 Chapter 8- Unemployment and Inflation
Involuntary Part-Timers: People who want full-timework but who are involuntarily
working part-time are really partly unemployed but they are counted as employed
So unemployment rate should be treated as an indicator of overall labour market
conditions, not as an exact measure of the percentage of people unable to find
Unemployment rate also doesn’t measure the quality of jobs or how well people
are matched to their jobs.
Also important to realize that the unemployment rate also varies greatly by region
and among different demographic groups:
3 Chapter 8- Unemployment and Inflation
8 Rate; 15 years
2 Rate; 15 years
-1 -1 -9 -7 -5 -3 -1 -1 -9 -7 -5 -3 -1
Growth and Unemployment
During recessions, unemployment rate rises and during expansions, unemployment
rate usually falls. However, It is important to recognize that economic expansions
aren’t always periods of falling unemployment. A jobless recovery is a period in
which the real GDP growth rate is positive but theunemployment rate is still
4 Chapter 8- Unemployment and Inflation
Job Creation and Job Destruction –
Continual job creation and job destruction are a feature of modern economics,
making a naturally occurring amount of unemploymentinevitable. There are 2
types of unemployment in this group:
• Frictional Unemployment
• Structural Unemployment
Frictional unemployment: unemployment due to the time workers spend in job
search. Scarcity of information creates frictional unemployment. Matching people
to jobs takes time.
The short duration of unemployment for most workers suggests that most
unemployment in 2007 was frictional.
Structural unemployment:more people are seeking jobs in a particular labor
market than there are jobs available at the currentwage rate, there is a persistent
surplus of of labour.
5 Chapter 8- Unemployment and Inflation
Labor unionsare associations of workers that bargains collectively
with employers over wages, benefits, and working conditions.
Evidence shows that labour unions earn higher wagesand benefits
than non-union workers with similar skills. The result of this is similar
to minimum wage: workers wages are pushed up abovethe