CHAPTER 8 cont…

Prices

Unemploym
ent

1
 CHAPTER OBJECTIVES
 Convert nominal income to
real income.
 Compute the unemployment
rate.
 Discuss the differences
between frictional,
structural, cyclical &
natural unemployment
rates.

CH 6 • 2
 Inflation & Income
 When you know the inflation rate, you
can find out whether your income is
i. keeping up with,
ii. not keeping up with, or
iii. more than keeping up with
inflation.

 How you are doing depends on

whether your income is rising by
i. the same percentage as,
ii. a smaller percentage than, or
iii. a greater percentage than the
inflation rate, respectively.

CH 6 • 3
Nominal VS Real

4
 Real Income
 When you make this computation and
comparison, you are determining your real
income for different years.
 Real income is a person’s nominal income (or
current dollar amount of income) adjusted for
any change in prices.
 Real income is computed as follows:

CH 6 • 5
 Inflation, Nominal & Real Income

• If:
(i) %  nominal Y = %  inflation rate  real Y stays constant
(ii) %  nominal Y < %  inflation rate  real Y 
(iii) %  nominal Y > %  inflation rate  real Y 

6
 %  Nominal Y (10%) = %  Inflation (10%)

nominal Y (year 1)  RM50,000 CPI (year 1)  100

nominal Y (year 2)  RM55,000 CPI (year 2)  110

%  nominal Y = 55,000 – 50,000  100 %  inflation = 110 – 100  100

50,000 100
= 10% = 10%

real Y (year 1)= 50,000  100 real Y (year 2) = 55,000  100

100 110
= 50,000 = 50,000

* Real Y stays constant (income is keeping up with the inflation rate)

7
 %  Nominal Y (4%) < %  Inflation (10%)

nominal Y (year 1)  RM50,000 CPI (year 1)  100

nominal Y (year 2)  RM52,000 CPI (year 2)  110

%  nominal Y = 52,000 – 50,000  100 %  inflation = 110 – 100  100

50,000 100
= 4% = 10%

real Y (year 1)= 50,000  100 real Y (year 2) = 52,000  100

100 110
= 50,000 = 47,273

* Real Y  (income is not keeping up with the inflation rate)

8
 %  Nominal Y (20%) > %  Inflation (10%)

nominal Y (year 1)  RM50,000 CPI (year 1)  100

nominal Y (year 2)  RM60,000 CPI (year 2)  110

%  nominal Y = 60,000 – 50,000  100 %  inflation = 110 – 100  100

50,000 100
= 20% = 10%

real Y (year 1)= 50,000  100 real Y (year 2) = 60,000  100

100 110
= 50,000 = 54,545

* Real Y  (income is more than keeping up with the inflation rate)

9
10
11
12
UNemployment
 Unemployment is a phenomenon
that occurs when a person who is
actively searching for
employment is unable to find the
job.
 Unemployment statistics are
widely used to assess the
macroeconomic health of the
economy.

 Two important topics that will be

discuss in this chapter are:
i. Definition & measurement
of unemployment
ii. Types of unemployment

CH 6 • 13
Definition

 In the Malaysian labour

market, for those age
between 15 to 64 years,
their activity status will
be determined & placed
under one of these
categories:
i. Employed
ii. Unemployed
iii. Not in labour force

CH 6 • 14
15
16
Who are the employed?
 According to the Malaysian
Department of Statistic, a person is
considered employed if
 he or she, at any time during the
reference week, worked at least
one hour for pay, profit or family
gain (as an employer, employee,
own-account worker or unpaid
family worker).

 he or she did not work during the

reference week because of illness,
injury, disability, bad weather,
leave, labour disputed or social or
religious reasons but had a jobs,
farms, enterprises or other family
enterprises to return to.

CH 6 • 17
 Who are the unemployed & not in the
labour force?
 a person is considered unemployed
if
 he or she must not have worked
during the reference week but
must have available for work
and actively looking for work
during the reference week.

 Not in the labour force.

 A person who was neither
employed nor unemployed,
such as a full-time student,
homemaker, institutionalized
individual, retiree, or
discouraged workers.

CH 6 • 18
 Discouraged Workers
 They are former
workers who are not
actively looking for
work and are not
waiting to be called
back to a job or to
report for a job.
 Discouraged workers
are not counted as
unemployed workers.

CH 6 • 19
 Reason For Unemployment

 Job loser. This is a person who was employed in the labor force
and was either fired or laid off.
 Job leaver. This is a person employed in the labor force who quits
his or her job. For example, Ali quit his job with company X and is
looking for a better job.
 Reentrant. This is a person who was previously employed, hasn’t
worked for some time, and is currently reentering the labor force.
 New entrant. This is a person who has never held a full-time job
for two weeks or longer and is now in the labor force looking for
a job.

Unemployed person = job losers + job leavers + reentrants

+ new entrants

CH 6 • 20
Measurement of
unemployment

21
Cont…..

Adult population = Employed + Unemployed + Not in

(22.34 million) labour force

Labour Force = Employed + Unemployed

(15.23 million)

22
 Labour Force Participation Rate

 Labour force = 15.23 million

 Adult population = 22.34 million

 LFPR = (15.23/ 22.34) x 100

= 68.2 %

23
 TYPES OF UNEMPLOYMENT

Types of
Unemployment

Frictional Structural Cyclical

Unemployment Unemployment Unemployment

CH 20 • 24
 Frictional Unemployment
 The unemployment that results from the short-run
process of matching workers with suitable jobs is
called frictional unemployment.
 Caused by changing market conditions & is
represented by qualified individuals with
transferable skills who change jobs.
 People who are moving between jobs. Someone
may leave one computer job & get hired by another
computer firm due to changes in demand.
 In a dynamic economy, there will always be some
frictional unemployment because demand is
constantly changing.

CH 6 • 25
CH 9 • 26
 Structural Unemployment

 Unemployment due to structural changes in the

economy that eliminate some jobs & create other
jobs for which the unemployed are unqualified.
 When demand for a good produced by different
sectors or economy changes, forcing people to
make career changes, such as from being an
automobile worker to being a computer network
specialist, the result is structural unemployment.

CH 6 • 27
CH 9 • 28
 Natural Unemployment

 The sum of frictional and structural unemployment is

the level of natural unemployment for the economy.

 Economists think this currently is between 4 and 6.5

percent.

CH 6 • 29
Cyclical Unemployment
 The difference between the existing unemployment
rate and the natural unemployment rate is the
cyclical unemployment rate.

 If unemployment is currently 7% & the natural rate

of unemployment is 5%, then cyclical unemployment
is 2%.

 Cyclical unemployment rate (UC) = unemployment

rate (U) – natural unemployment rate (UN).

CH 6 • 30
 Full Employment

 Full employment does not mean that the unemployment

rate is zero.

 Even in a growing economy, some frictional & structural

unemployment will exist.

 Economists say full employment exists when: actual

unemployment rate = natural unemployment rate.

 Cyclical unemployment is zero.

CH 6 • 31
 1. What is the major difference between a
person who is frictionally unemployed and
one who is structurally unemployed?
SELFTEST
The frictionally unemployed person has readily
transferable skills & the structurally unemployed
person does not.

CH 6 • 32
 2. If the cyclical unemployment rate is
positive, what does this imply?
SELFTEST
 It implies that the (actual) unemployment rate in
the economy is greater than the natural
unemployment rate.
 For example, if the unemployment rate is 8% & the
natural unemployment rate is 6%, the cyclical
unemployment rate is 2%.

CH 6 • 33