Unemployment rate, Inflation rate, and Labor force participation rate
ECO 2302, Principles of Macroeconomics 1
Course Learning Outcomes for Unit IV
Upon completion of this unit, students should be able to:
4. Discuss the effects of unemployment and inflation on the economy.
4.1 Describe what the unemployment rate measures and the four types of unemployment.
4.2 Define inflation and the sources of inflation.
4.3 Describe how to measure labor productivity and why it is important.
Course/Unit
Learning Outcomes
Learning Activity
4.1
Unit Lesson
Chapter 7
Article: “Why the Unemployment Rate Still Matters”
Unit IV PowerPoint Presentation
4.2
Unit Lesson
Chapter 7
Article: “Price & Inflation”
Unit IV PowerPoint Presentation
4.3
Unit Lesson
Chapter 8
Article: “Understanding the Labor Productivity and Compensation Gap”
Article: “What Can Labor Productivity Tell Us About the U.S. Economy?”
Unit IV PowerPoint Presentation
Required Unit Resources
Chapter 7: Unemployment and Inflation
Chapter 8: Productivity and Growth
In order to access the following resources, click the links below.
Bureau of Economic Analysis. (2018, September 6). Prices & inflation.
https://www.bea.gov/resources/learning-center/what-to-know-prices-inflation
Brill, M., Holman, C., Morris, C., Raichoudhary, R., & Yosif, N. (2017, June). Understanding the labor
productivity and compensation gap. Beyond the Numbers, 6(6). https://www.bls.gov/opub/btn/volume 6/understanding-the-labor-productivity-and-compensation-gap.htm
Sprague, S. (2014, June). What can labor productivity tell us about the U.S. economy? Beyond the Numbers,
3(12). https://www.bls.gov/opub/btn/volume-3/what-can-labor-productivity-tell-us-about-the-us economy.htm
U.S. Bureau of Labor Statistics. (2017, January 25). Why the unemployment rate still matters.
https://blogs.bls.gov/blog/2017/01/25/why-the-unemployment-rate-still-matters/
UNIT IV STUDY GUIDE
Unemployment and Inflation
ECO 2302, Principles of Macroeconomics 2
UNIT x STUDY GUIDE
Title
Unit Lesson
As we begin Unit IV, we continue our look at the overall economy and build on the knowledge we have gained
in the first three units of the course. In this unit, we will be addressing the topics of unemployment, inflation,
and labor productivity. Each of these topics is addressed below.
Unemployment
It is doubtful that any adult is unfamiliar with the word unemployment. We hear this word on the news, read it
in newspapers, and hear it while we are shopping—it seems to be everywhere. Essentially, we are
surrounded by worries about unemployment and the unemployment rate. As common as this word is in
society, many do not understand the true meaning of the term unemployment or what it means to be
unemployed. Many may think that any person not working would be considered to be unemployed. You will
see why this is not necessarily the case as you move through this lesson and the rest of Unit IV.
When we discuss unemployment and how it is measured, we first must address who can be considered to be
employed or unemployed. First, only the adult population can be considered as employed or unemployed.
This adult population is defined as anyone over the age of 16 (McEachern, 2019). Next, there are limitations
to this adult population. Specifically, these adults are civilians. This means that anyone in the military is not
considered when calculating unemployment. Also, any adult in prison, a mental hospital, or a home for the
elderly is not counted. Finally, someone either has to be employed or actively looking for a job to be counted
as either employed or unemployed. All of these limitations are summarized as the “labor force.” Those adult,
noninstitutionalized civilians who are actively working are considered to be employed. The adult,
noninstitutionalized civilians who are looking for work, but cannot find work, are considered to be unemployed.
As you can see, being unemployed is far more specific that someone who just does not have a job.
Once it is understood that a person has to be in the labor force to be considered to be employed or
unemployed, calculating the unemployment rate becomes easy. Divide the number of people in the labor
force who are not working (but are actively seeking employment) by the total labor force, and you get the
unemployment rate (McEachern, 2019).
There are many reasons adults may not be in the labor force. Retirees, for instance, who are no longer willing
to work are not counted in the labor force. Those staying at home to take care of small children or who are in
school are also not choosing to work. The textbook also suggests that adults may have searched and
searched for employment with no luck and just gave up (McEachern, 2019). These individuals are referred to
as discouraged workers. For many different reasons, individuals may just drop out of the labor force. When
this happens, these individuals are no longer counted as being unemployed.
Individuals who drop out of the labor force are not forgotten, however. The labor force participation rate
evaluates all those in the labor force versus the total adult population, which would include those not in the
labor force. Specifically, McEachern (2019) suggests that the labor participation rate is determined by dividing
the labor force by the entire adult population. In January 1966, the labor participation rate was equal to 59%
(U.S. Bureau of Labor Statistics, n.d.). This means that 59% of the adult population of the United States in
January of 1966 were in the labor force. This percentage began to grow steadily in the 90s, reaching its peak
in April of 2000 at 67.3%. As of October 2019, the labor participation rate was at 63.3% (U.S. Bureau of Labor
Statistics, n.d.).
To help you better understand this topic, watch the video Unemployment. A transcript and closed captioning
are available once you access the video.
Types of Unemployment
Now that unemployment has been defined and understood, it is important to know the various types of
unemployment. These types are frictional, seasonal, structural, and cyclical unemployment. Frictional
unemployment refers to the fact that it takes time for those looking for work to find employers (McEachern,
2019). This type of unemployment is expected and does not worry economists and policy makers. After all, it
takes time for a person to find the right job and time for the employer to find the right person to hire.
ECO 2302, Principles of Macroeconomics 3
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The next type of unemployment is seasonal. Seasonal unemployment occurs in industries that need a lot of
labor only during specific times of the year. For example, there is higher demand for lifeguard labor at
beaches during the summer months than in January. Laborers who pick fresh fruits become unemployed
once all the fruit is harvested. Finally, those employed only during the busy Christmas holiday season would
be considered to be seasonal unemployment. This is another type of unemployment that does not worry
economists and policy makers (McEachern, 2019).
The next type of unemployment does bother economists and policy makers. Structural unemployment occurs
when a change in the demand for certain skills rises or lowers based on criteria such as technology,
competition, preferences, and taxes (McEachern, 2019). For instance, at one time, bowling alleys employed
people to reset the bowling pins after each ball was rolled. After machines were developed to reset these
pins, these workers’ skills were no longer needed. Also, at one time, people had to call directory Helpance to
find a phone number. People were employed at directory Helpance to physically look up the phone number
in a phone book and provide the caller with the number. Today, these job skills are no longer needed as you
can search for a phone number on the Internet. One has to wonder as we enter the next century if travel
agents, cashiers, postal carriers, and bank tellers will find themselves structurally unemployed because their
skills will no longer be needed.
Cyclical unemployment, the last type of unemployment, worries economists and policy makers the most
(McEachern, 2019). Cyclical unemployment occurs with fluctuations in the business cycle. Simply put, cyclical
unemployment occurs when demand for goods and services decreases so much that there is no longer a
need for as much labor. Cyclical unemployment occurring also means that the economy is producing inside
its production possibilities frontier, which means that resources are not being utilized to their full potential.
Because people are cyclically unemployed, demand decreases even more. Firms have less need for workers
and reduce labor even more. The cycle goes on and on until an event happens that breaks this cycle.
Inflation
Another term that is common in news reports today is inflation. As you learned previously, inflation is the rise
in the economy’s price level over time (McEachern, 2019). The price of cars increasing by 10% in one year
does not necessarily mean that inflation has occurred. However, if the price of all goods in the economy
increase by 10% in one year, we have inflation.
As with unemployment, there are different types of inflation. McEachern (2019) specifically addresses three
additional types: hyperinflation, deflation, and disinflation. Extremely high inflation is called hyperinflation. An
example of hyperinflation occurred in Venezuela in 2005 when Venezuela experienced an inflation rate of
16% (International Monetary Fund, 2019). This sounds bad enough, as the average price level in Venezuela
had increased by 16% from 2004 to 2005. However, by 2019, Venezuela was facing an inflation rate of
200,000%!
Deflation occurs when the economy’s actual price level decreases from one time period (e.g., one year) to the
next. Another way to look at deflation is that the inflation rate is negative. The most noted era of deflation was
the Great Depression. In 1930, the inflation rate for the United States was -6.4%. It dropped to -9.3% in 1930,
then to -10.3% in 1931, before finally becoming positive again in 1933 when the inflation rate was 0.8% (U.S.
Bureau of Labor Statistics, 2017).
Finally, disinflation occurs when the inflation rate is still positive, but it is lower than the previous time period
(McEachern, 2019). As an example, in 2011, the inflation rate for the United States was 3.0% (U.S. Bureau of
Labor Statistics, 2017). In 2012, the inflation rate was still positive but had dropped to 1.7%. Notice how the
inflation rate is still positive in 2012 but lower than the inflation rate in 2011. This is an example of disinflation.
Watch the video Inflation to get a better understanding of this topic. A transcript and closed captioning are
available once you access the video.
ECO 2302, Principles of Macroeconomics 4
UNIT x STUDY GUIDE
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Sources of Inflation
Economists have identified two sources of inflation. Looking at the aggregate supply and demand curve below
that we learned about in Unit III, we see that the intersection of these two curves tells us the average price
level (on the vertical axis) in the economy. There are two ways the average price level in the economy can
increase—either the demand curve has to shift to the right, or the supply curve has to shift to the left. It is as
simple as that.
Demand-Pull Inflation
When the demand curve shifts to the right from AD1 to AD2, as illustrated below, notice how the demand
moves farther away from the vertical price level axis (the demand curve is “pulling away” from the vertical
axis). In this case, the price level increases from 111.4 to 115.2—it is getting pulled higher by the demand
curve shifting right. That is why this is called demand-pull inflation. McEachern (2019) points out that
government spending during the Vietnam War and expanded social programs during the 1960s resulted in
the aggregate demand curve continuously shifting to the right and causing demand-pull inflation.
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Cost-Push Inflation
The aggregate supply curve shifting to the left can also cause what is known as cost-push inflation. In this
case, the aggregate supply curve shifts from AS1 to AS2, as shown below. The aggregate supply curve is
pushing in toward the vertical price level axis. The price level in the figure below increases from 111.4 to
113.7 (it is getting pushed higher by the aggregate supply curve shifting left). Because prices are being
“pushed” higher by the aggregate supply curve, we call this type of inflation cost-push inflation. McEachern
(2019) indicates that cost-push inflation occurred between 1973 and 1975 when crops failed in the United
States and when OPEC raised oil prices. Both of these events resulted in decreases in aggregate supply.
ECO 2302, Principles of Macroeconomics 6
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As we learned earlier in the course, both the aggregate demand and aggregate supply curves can shift at the
same time. If the aggregate demand curve is shifting to the right, and the aggregate supply curve is shifting to
the left at the same time, we can have both demand-pull and cost-push inflation.
Labor Productivity
Think back to the concept of production possibilities frontier that was covered in Unit I. The production
possibilities frontier showed what the economy can produce when the resources that are available are used
efficiently (McEachern, 2019). Also recall that changes in technology, capital stock, laws, or the amount of
resources available can cause the production possibilities frontier to shift to the right. One of the resources
that is available for producing output is labor. If the population increases, the production possibilities frontier
can shift to the right. The same shift can occur if the population does not change, but on average everyone
decides to work more hours.
We focus so much on labor and the production of goods for an economy because it is the most common
resource used to measure productivity in an economy (McEachern, 2019). It is further explained that labor
accounts for about 70% of the cost of production. Also, labor is easier to measure than other inputs, as data
concerning labor hours, employment levels, and so on is easier to obtain than information on other inputs.
Given all these factors, much focus is placed in economics on labor productivity. Labor productivity is
determined by dividing real GDP by the hours of labor used to produce that output.
When it comes to increasing labor productivity, McEachern (2019) points out that capital gives the most “bang
for the buck.” If you were asked to go into a large park in the city and pull all the weeds by hand, your labor
productivity would be very low compared to someone who could use a tool, such as a garden hoe. In this
instance, the garden hoe would be physical capital that is added to make labor productivity increase.
Likewise, increasing human capital (accumulated knowledge, skill, and experience) can increase labor
productivity. Chefs who have been studying and cooking in the same restaurant and making the same meals
for 20 years are far more productive than chefs who have just been hired. Years of experience means the first
group of chefs would probably not even need to measure out the ingredients for each meal. The newly hired
chefs would need to refer to recipes, measure ingredients, maybe figure out how to turn on and use the stove
and other equipment and thus would have a much lower labor productivity.
It is safe to say that as an economy accumulates more capital per worker, whether it is physical capital,
human capital, or both, labor productivity increases. The increase in labor productivity causes incomes to
increase and thereby increases the standard of living (McEachern, 2019).
References
International Monetary Fund. (2019). República Bolivariana de Venezuela. Retrieved October 2019, from
https://www.imf.org/en/Countries/VEN
McEachern, W. A. (2019, March 8). Macro ECON6: Principles of macroeconomics (6th ed.). 4LTR Press.
U.S. Bureau of Labor Statistics. (n.d.). Labor force participation rate [Graph]. Federal Reserve Bank of St.
Louis. Retrieved October 2019, from https://fred.stlouisfed.org/series/CIVPART
U.S. Bureau of Labor Statistics. (2017, August 14). Consumer price index (CPI) databases.
https://www.bls.gov/cpi/data.htm

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