Macro Chapter 3: Costs of (Not) Working and Living (Unemployment
The labour force is the sum of the employed and unemployed
The unemployment rate is the percentage of people in the labour force who are
unemployed—without work and actively seeking a job.
Unemployment = Unemployed
Labour force participation rate—the percentage of the working-age population
who are in the labour force
LFPR = X 100
Unemployment Rate misses
Involuntary part-time workers—employed part time, would rather have full time
jobs but cant find one.
Discouraged workers—want to work but have given up actively searching for jobs.
Labour Underutilization rate—unemployment rate including unemployed
involuntary part-time workers, discourages works.
There are large regional differences in unemployment rates in Canada
Healthy and Unhealthy types of unemployment
Frictional Unemployment—due to normal labour turnover and job search;
healthy part of changing economy; not a problem Structural Unemployment—due to technological change or international
competition making workers skills obsolete; healthy part of a changing economy;
problem requiring retraining
Seasonal Unemployment—due to seasonal changes in weather; neutral; not a
Cyclical Unemployment—due to business cycle fluctuations in economic activity;
unhealthy part of changing economy; problem needs addressing.
Natural Rate of Unemployment: Unemployment rate at full employment, when
there is only frictional, structural, and seasonal unemployment.
“Full employment is not zero unemployment, but zero cyclical unemployment”
In a recessionary gap, unemployment rate is above natural rate due to cyclical
In an inflationary gap, the unemployment rate is below the natural rate due to less
than normal friction, structural, seasonal unemployment
Economist disagree about what is the natural rate of unemployment but it is generaly
somewhere between 4-9%
Inflation is measured by changes in the consumer price index, hurts those on fixed
incomes, creates risk for business investment, and through expectation, can create a
vicious cycle of more inflation. The inflation rate overstates increases in the cost of
living by missing switches to cheaper substitutes and new/improved products/services.
Inflation is both a persistent rise in average prices and a fall in the value of money.
When inflation occurs, you must spend more just to get the same products/services
as before. Your money is worth less.
Consumer Price Index (CPI): Measure of average prices of fixed shopping basket of
products and services—some times called the cost of living index
(Current) (Minus) (Last Year)
Inflation rate = X100
CPI Last Year Inflation rate: annual percentage change in the consumer price index
Core Inflation rate: Inflation rate excluding volatile categories
Inflation is a worry because of the falling value of money
-Inflation reduces purchasing power of people wit fixed (unchanged dollar) savings
-Nominal Interest rate—observed interest rate; e