Unit 3: Unemployment and Inflation
Most of us are familiar with unemployment and inflation: the unemployment rate reflects the number of people out of work who are actively seeking work; inflation indicates an overall rise in the price level of most, but not all, goods and services. In this unit we delve into these concepts and study their interrelationship.
First, consider that inflation erodes the purchasing power of the dollar, or other currency unit (euro, rupee, naira, dinar, or pound). Macroeconomics helps us measure the effects inflation has on an economy and the standard of living when it distinguishes between nominal income (the dollar amount received), and real income (the amount of goods and services the income can buy).
Secondly, consider the different types of employment. The labor force includes employed and unemployed workers, such as those who are able and willing to work, but not able to obtain employment. The labor force does not include full time students, nonworking spouses, and retirees who are not looking or unable to work. We examine three types of unemployment: frictional or temporary unemployment, structural unemployment which affects entire sectors of the economy, and cyclical unemployment which is caused by downturns in the economy.
Let's consider a hypothetical event to show how unemployment and inflation levels are often interrelated. Suppose everyone who is looking for a job gets hired tomorrow and begins earning income. Unemployment levels fall. Our newly-employed group is flush with cash and wants to spend their income immediately. However, it would take some time for retail stores to make new products available to purchase to meet this demand. More money is available to purchase the limited number of goods available. Prices rise as retailers try to benefit from the rise in consumer demand. Inflation increases. Our scenario shows how employment and inflation levels often follow each other.
Completing this unit should take you approximately 5 hours.