Lecture 4

ECON 410: Macroeconomic Theory

Yoon J. Jo

Texas A&M University

Fall 2021

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Today

• Unemployment rate

• Macroeconomic data during the Covid pandemic

• Reading: Mankiw Chapter 2.

• HW 1 due now.

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Unemployment Rate

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Categories of population (age 16 or above)

Household survey (Current Population Survey (CPS)) asks whether

adults in household is
• Employed
I worked as paid employees, worked in their own business, or worked
as unpaid workers in a family member’s business
• Unemployed
I not employed but looking for a job during the previous four weeks

• Labor force = number of employed +number of unemployed

• Not in the Labor force
I neither employed or unemployed
I a full-time students, homemaker, or retiree

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For those non-employed

For those non-employed, the survey asks as follows.

If the respondent says, yes, then this respondent is classified as unem-

ployed.

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Discouraged workers
Notice that a person who wants a job but has given up looking - a dis-
coraged workers - is counted as not being in the labor force.

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Unemployment rate
Q. Why is unemployment rate different from non-employment rate?
Number of Unemployed
Unemployment rate = ×100
Labor Force
Employed
Non-employment rate =(1- )×100
Adult Population

1 - Epop ratio and Unemployment rate

Hourly-paid workers
42 10

Unemployment rate (%)

1- Epop ratio (%)

40
8

38
6

36

4
1980 1985 1990 1995 2000 2005 2010 2015
Year

1-Epop ratio (%)

NBER recession dates

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Unemployment rate

Labor Force = Number of Employed+Number of Unemployed

Number of Unemployed
Unemployment rate = ×100
Labor Force

Labor Force
Labor force participation rate = ×100
Adult population

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Labor force participation rate

Labor Force
Labor-Force Participation Rate = ×100
Adult Population

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Younger men exhibited a larger decline in work hours than older men or
women.

Aguiar, Bils, Charles, and Hurst (2018)

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Video Games

Aguiar, Bils, Charles, and Hurst (2018)

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Macroeconomic data during the Covid Pandemic:
Inflation

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CPI Inflation

• CPI is constructed each month using 80,000 items in a fixed

basket of goods and services representing what Americans buy in
their everyday lives.
• BLS uses the Consumer Expenditures Survey to determine which
items go in the basket and how much weight to assign to each
item.
• Different prices are weighted according to how important they are
to the average consumer.
• The US Bureau of Labor Statistics (BLS) updated the weights in
December 2019 using expenditure information collected back in
2017-2018.

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CPI Inflation

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CPI Inflation

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CPI Inflation

• CNBC article (Link)

• The consumer price index jumped 5.4% from a year earlier, the
largest increase since before the worst of the financial crisis,
• Prices of used cars and car rentals led the increase in overall
prices.
• For the 12-month period, used car and truck prices leaped 45.2%,
while car and truck rental costs skyrocketed 87.7%.
• Public transportation, which includes airline fares, recorded a
17.3% jump year over year, while lodging away from home
including hotels and motels saw a 16.9% year-over-year burst.

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CPI Inflation

• NY Times article(Link)

• Part of the rise in inflation can be explained by “base effects.”

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CPI Inflation

• What are some other potential reasons?

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CPI Inflation
• Increased demand
I Rebound in the economy
I Opportunity to spend the stimulus funds

• Supply disruptions
I Mismatch between supply and demand.
I Car production has been limited by a computer chip shortage. Rapid
demand and constrained supply have sent the cost of used cars
soaring in recent months.
I Pandemic restrictions closed many factories and shipping routes
around the globe.
I Other supply issues: Texas winter storm in Feb, 2021 shut down
production of many petroleum-based products that affect multiple
industries like foam for furniture or resin for PVC pipes in
construction. Gasoline prices elevated from shortages caused
during the Colonial Pipeline shutdown.

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CPI Inflation
• Increased demand
I Rebound in the economy
I Opportunity to spend the stimulus funds

• Supply disruptions
I Mismatch between supply and demand.
I Car production has been limited by a computer chip shortage. Rapid
demand and constrained supply have sent the cost of used cars
soaring in recent months.
I Pandemic restrictions closed many factories and shipping routes
around the globe.
I Other supply issues: Texas winter storm in Feb, 2021 shut down
production of many petroleum-based products that affect multiple
industries like foam for furniture or resin for PVC pipes in
construction. Gasoline prices elevated from shortages caused
during the Colonial Pipeline shutdown.

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Review: CPI vs. GDP deflator

• The basket of goods:

I CPI: fixed
I GDP deflator: changes every year
I Economists call a price index with a fixed basket of goods a
Laspeyres index and a price index with a changing basket a
Paasche index.

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CPI during the pandemic: Case study (Cavallo, July
2020)

• CPI measure is based on weights on consumption basket using

lagged data.
I BLS CPI data are updated every 2 years for weights.

• Inflation with Covid consumption baskets

I Covid pandemic led to major changes in consumer expenditure
patterns that introduce bias in measurement of inflation.

• Reading: (Link)

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CPI during the pandemic: Case study (Cavallo, July
2020)

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CPI during the pandemic: Case study (Cavallo, July
2020)

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CPI during the pandemic: Case study (Cavallo, July
2020)
• The first column shows a comprehensive list of all the CPI
categories that compose the all-items index. The second column
shows the monthly CPI sector inflation for that month. The third
and fourth columns show the CPI and Covid weights. Finally, the
last two columns show the incidence that each category has on the
total inflation rate.
• Table 2 shows that the US Covid inflation rate was higher in April
because there was more weight in categories that had a positive
inflation rate, and less weight in categories experiencing significant
deflation. In particular, the weight for “Food at Home” rose from
7.58% to 11.28%, increasing the incidence of this category by
0.1%. At the same time, the weight for “Transportation” fell from
15.74% to 6.25%, increasing the incidence on the total monthly
inflation rate by about 0.47%.

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CPI during the pandemic: Case study (Cavallo, July
2020)

• Construct Covid CPI based on Covid consumption baskets.

• CPI and Covid CPI have nearly identical inflation rates in Jan and
Feb, 2020. Divergence in following months due to change in
weights.
• Study ends with data in May 2020, where annual inflation with
Covid basket was 0.95% and only 0.13% with official CPI weights.
• Difference due to consumers spending more on food and similar
categories experiencing inflation and less on transportation and
related categories with significant deflation.

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CPI during the pandemic: Case study (Cavallo, July
2020)

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Macroeconomic data during the Covid Pandemic:
Unemployment

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Unemployment rate

Unemployment rate declined to 5.2 percent in August, but hiring slowed,

likely due to Covid resurgence.

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Unemployment rate by sector

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Unemployment rate by sex and age

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Unemployment rate by education

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Labor force participation rate
The labor force participation rate declined to 60.2% in April 2020—a
level not seen since the early 1970s—then began a partial recovery in
May 2020.

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Labor force participation rate: Male vs female

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Parental LFPR in the pandemic: Case study (Lofton,
Petrosky-Nadeau, and Seitelman, April 2021)
• Reading (Link)

• Gender differences are driven by differential impacts of the

pandemic on parents. The effect of the pandemic on mothers’
LFPR is pronounced.
• If mothers had experienced a recovery similar to that of non-parent
women, we would have approximately 700 thousand additional
prime aged women in the workforce in December 2020.
• Mothers in the lowest income group exited the labor force at a rate
four times that of mothers in the highest household income group.
• The decline in participation for fathers was smaller than for
mothers across all household income groups.

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Parental LFPR in the pandemic: Case study (Lofton,
Petrosky-Nadeau, and Seitelman, April 2021)

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Parental LFPR in the pandemic: Case study (Lofton,
Petrosky-Nadeau, and Seitelman, April 2021)

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Parental LFPR in the pandemic: Case study (Lofton,
Petrosky-Nadeau, and Seitelman, April 2021)
In occupations with flexible work schedules like management, ratio of mothers’
to women’s employment did not change significantly during the pandemic. In
contrast, occupations with rigid work schedules—such as education—saw
pronounced declines in mothers’ relative to women’s employment within the
same occupation.

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Why not GDP?

• GDP numbers released every quarter.

• Even monthly data, like CPI and unemployment rate comes with a
month delay.
• During the pandemic, the situation is fast moving so we need data
at higher frequency and without delay.

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Sources for macroeconomic data

FRED, hosted by Federal Reserve Bank of St. Louis

• Has data from BLS, BEA and various statistical agencies.
• International data from OECD database etc.
• Easy to search and also graph

Opportunity Insights Economic Tracker

• Measures economic activity at a granular level in real time.
• Built using anonymized data from private companies, like credit
card processors and payroll firms.

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