16UNEMPLOYMENTANDINFLATION.pdfVIP

16 UNEMPLOYMENT AND INFLATION OVERVIEW 1. The population is divided into those in the labor force and those not in the labor force. The labor force is divided into those employed and those unemployed but looking for work. Those unemployed but looking for work are called unemployed. The unemployment rate is the percentage of the labor force who cannot find work. 2. The unemployment rate may not measure the true amount of unemployment because some people become discouraged and do not even look for a job. Also some people may take jobs at skill levels below their abilities or can find only part-time employment. These people are underemployed. 3. Those unemployed can be classified by their cause of unemployment. Frictional unemployment involves those who are between jobs. Seasonal unemployment involves those laid off during the off season. Cyclical unemployment occurs because the economy slows down. Structural unemployment occurs when those unemployed do not have the qualifications for the jobs that are available. 4. Frictional and seasonal unemployment are expected and generally are of short duration. Cyclical and structural unemployment are not expected and are targets of policy action. 5. Full employment is usually defined as a percentage of the labor force unemployed. The exact percentage is a matter of dispute. 6. Full employment is desirable because the unemployed resources represent output that is lost to society. Furthermore, those unemployed bear the personal costs of unemployment. 7. Inflation is a continued rise in the average price level. The main cost of inflation is a redistribution of income. 8. Inflation has several causes. Demand-pull inflation is caused by an excess demand at full employment. Cost-push inflation is due to an increase in production costs. Supply shock r