Monitoring Jobs and Inflation

Chapter 23

Economics 3ed: Global and Southern African Perspectives © 2020 1

Main ideas
After studying this chapter, you will be able to:

• Explain why unemployment is a problem and how we measure the

unemployment rate and other labour market indicators
• Explain why unemployment occurs and why it is present even at full
employment
• Explain why inflation is a problem and how we measure the inflation rate

Economics 3ed: Global and Southern African Perspectives © 2020 2

Employment and Unemployment
Why unemployment is a problem
Lost Incomes and Production
• The loss of a job brings a loss of income and lost production
• Lost production means lower consumption and a lower investment in capital, which
lowers the living standard in both the present and the future

Lost Human Capital

• Prolonged unemployment permanently damages a person’s job prospects by
destroying human capital

Economics 3ed: Global and Southern African Perspectives © 2020 3

Employment and Unemployment
Quarterly Labour Force Survey (QLFS)
• Every quarter, a survey by StatsSA of
30 000 households
• Working age population = nr of people
> 15 years
• Labour force = employed +
unemployed
• Narrow def. of Unemployed =
1. Without work
2. Actively looked for work in previous
4 weeks
3. Would be able to start work
• Expanded def. of Unemployed =
o 1 + 3 + Has not actively looked for
work in previous 4 weeks
o Difference between narrow &
expanded = discouraged

Economics 3ed: Global and Southern African Perspectives © 2020 4

Employment and Unemployment
Three labour market indicators
• Production within the country, vs. National product
1. Unemployment rate

Economics 3ed: Global and Southern African Perspectives © 2020 5

Employment and Unemployment
2. Labour absorption rate

3. Labour force

Economics 3ed: Global and Southern African Perspectives © 2020 6

Employment and Unemployment
Other definitions of unemployment
Marginally attached workers
• A person who currently is neither working nor looking for work but has indicated that
he or she wants and is available for a job and has looked for work sometime in the
recent past.
• A marginally attached worker who has stopped looking for a job because of repeated
failure to find one is called a discouraged worker
Part-time workers who want full-time jobs

Most costly unemployment

• Long-term unemployment that results from job loss
• These costs include the loss of income and search costs for those seeking
employment

Economics 3ed: Global and Southern African Perspectives © 2020 7

Unemployment and Full Employment
Frictional unemployment
• The unemployment that arises from the normal labour turnover
• There is an unending flow of people into and out of the labour force
• There is also an unending process of job creation and job destruction
Youth unemployment
• We have observed rising youth (15-24 yrs) unemployment in SA and all over the
world
Structural unemployment
• The unemployment that arises when changes in technology or international
competition change the skills needed to perform jobs or change the locations of jobs
Cyclical unemployment
• Higher than normal unemployment at a business cycle trough and the lower than
normal unemployment at a business cycle peak

Economics 3ed: Global and Southern African Perspectives © 2020 8

Unemployment and Full Employment
‘Natural’ Unemployment
• Arises from frictions and structural change when there is no cyclical unemployment –
when all the unemployment is frictional and structural
• Influenced by many factors:
o The age distribution of the population
o The scale of structural change
o The real wage rate

Economics 3ed: Global and Southern African Perspectives © 2020 9

Unemployment and Full Employment
Real GDP and Unemployment over the Cycle
• The quantity of real GDP at full employment is potential GDP
• Over the business cycle, real GDP fluctuates around potential GDP
• The gap between real GDP and potential GDP is called the output gap
• As the output gap fluctuates over the business cycle, the unemployment rate
fluctuates around the natural unemployment rate
• At full employment: unemployment = natural unemployment
GDP = potential GDP
output gap = 0

Economics 3ed: Global and Southern African Perspectives © 2020 10

The Price Level, Inflation and Deflation
• The price level is the average level of prices and the value of money
• Inflation is a persistently rising price level
• Deflation is a persistently falling price
Why inflation and deflation are problems
• Low, steady, anticipated inflation or deflation = not a problem
• But, unexpected bursts of inflation or deflation = big problems and costs:
o Redistribution of income: between workers and employers
o Redistribution of wealth: between lenders and borrowers
o Lowers real GDP and employment
o Diverts resources from production
• Hyperinflation e.g. Zimbabwe

Economics 3ed: Global and Southern African Perspectives © 2020 11

The Price Level, Inflation and Deflation
The Consumer Price Index
• A measure of the average of the prices
paid by urban consumers for a fixed
basket of consumer goods and
services
• The CPI tells you about the value of
the money in your pocket
• The CPI is defined to equal 100 for a
period called the reference base period
Constructing the CPI
• Selecting the CPI basket: based on
IES
• Conducting the monthly price survey:
prices of >400 goods & services in 30
metropolitan areas
• Calculating the CPI

Economics 3ed: Global and Southern African Perspectives © 2020 12

The Price Level, Inflation and Deflation

Economics 3ed: Global and Southern African Perspectives © 2020 13

The Price Level, Inflation and Deflation
The biased CPI
• New goods bias
• Quality change bias
• Commodity substitution bias
• Outlet substitution bias
• When confronted with higher prices, people use discount stores more frequently and
convenience stores less frequently
Alternative price indices
• Personal consumption expenditure (PCE) deflator: (nominal C / real C) x 100
• GDP deflator: (nominal GDP / real GDP) x 100

Economics 3ed: Global and Southern African Perspectives © 2020 14

The Price Level, Inflation and Deflation
Core CPI inflation
• Number may vary from month to
month or quarter to quarter
• To determine the trend in the inflation
rate, we need to strip the raw numbers
of their volatility
• CPI excluding fuel and food
Deflating macroeconomic variables
• Real = (nominal / deflator) x 100
• Real interest rate = nominal interest
rate – inflation rate

Economics 3ed: Global and Southern African Perspectives © 2020 15