Macroeconomic

Measurements, Part I: Prices

and Unemployment
6
CHAPTER
Employment and Unemployment

Population Survey

In the U.S., the population is divided into two groups:

▪ The working-age population or civilian noninstitutional
population — the number of people aged 16 years and older
who are not in the armed forces, jail, hospital, or other
institution.
▪ People too young to work (less than 16 years of age) or in the
armed forces or in institutional care.

▪ In Bangladesh working-age population is the number of

people aged 15 years and older.
Employment and Unemployment

The working-age population is divided into two groups:

▪ People in the labor force
▪ People not in the labor force
The labor force is the sum of employed and unemployed
workers. This is also known as the “economically active
population.”
 Employment and Unemployment

To be considered unemployed, a person must be:

▪ without work, available for work and has been actively looking for jobs
within the past four weeks or waiting to be called back to a job from
which they were temporarily laid off.
▪ Actively looking: specific efforts to find a job such as - registration at a
public or private employment agency; application to employers, checking
at work sites; placing or answering newspaper advertisements; seeking
assistance from friends or relatives; arranging for land, machinery or
resources etc. (LFS 2015-16)
▪ Note that ‘work’ here means ‘gainful activity’ – it does not just mean a
‘job for wages,’ it can be self-employment, or working without pay in a
family business.
Employment and Unemployment
This Figure shows the labor
force categories. In June
2012 in USA:
Population: 314 million
Working-age population:
243.4 million
Labor force: 155.0 million
Employed: 142.2 million
Unemployed: 12.8 million
Employment and Unemployment
In 2015-16, in Bangladesh

Source: LFS 2015-16, Bangladesh Bureau of Statistics

Employment and Unemployment
Labor Market Indicators
The unemployment rate is the percentage of the labor
force that is unemployed.
The unemployment rate is:
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑜𝑝𝑙𝑒 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
× 100
𝐿𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒

In June 2012, in USA, the labor force was 155 million and
12.8 million were unemployed, so the unemployment rate
was 8.2 percent.
The unemployment rate increases in a recession and
reaches its peak value after the recession ends.
 Employment and Unemployment
This Figure shows the unemployment rate in USA: 1980–
2012.
The unemployment rate increases in a recession.
 Employment and Unemployment
Labor Market Indicators
In Bangladesh, according to labour force survey 2016-17, the rate of unemployment
stands at 4.2% which was 4.3% in 2005-06.

Source: LFS 2016-17, Bangladesh Bureau of Statistics.

Employment and Unemployment

Source: LFS 2016-17, Bangladesh Bureau of Statistics.

Employment and Unemployment

Bangladesh: Rural-Urban Unemployment Rates

6

5.5

4.5

3.5
2005 2007 2009 2011 2013 2015
Urban Unemployment Rate Rural Unemployment Rate
Linear (Urban Unemployment Rate) Linear (Rural Unemployment Rate)

Source: Various rounds of labor force survey conducted by BBS

Employment and Unemployment
Trends of Unemployment rates in Bangladesh
Employment and Unemployment

Source: LFS 2015-16, Bangladesh Bureau of Statistics.

Employment and Unemployment

Labor Market Indicators

The employment rate or the employment-to-population ratio
is the percentage of working-age people who have jobs.
The employment-to-population ratio is:

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑜𝑝𝑙𝑒 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑

× 100
𝑊𝑜𝑟𝑘𝑖𝑛𝑔−𝑎𝑔𝑒 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛

In June 2012, in USA, the employment was 142.2 million and the
working-age population was 243.4 million. In USA, the
employment-to-population ratio was 58.45%.

In Bangladesh, in 2016-17, this ratio was 55.8%.

Employment and Unemployment
Formal vs. Informal Sector in Bangladesh
Informal sector: The part of an economy that is not taxed or monitored by any
form of government, e.g., household helpers, street vendors, shoe shiners, junk
collectors etc.

Source: LFS 2016-17, Bangladesh Bureau of Statistics.

Employment and Unemployment

Labor Market Indicators

The labor force participation rate is the percentage of the
working-age population that is in the labor force.
The labor force participation rate is:
𝐿𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒
× 100
𝑊𝑜𝑟𝑘𝑖𝑛𝑔−𝑎𝑔𝑒 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛

In June 2012, in USA, the labor force was 155 million and
the working-age population was 243.4 million.
The labor force participation rate in USA was 63.7%.
In Bangladesh in 2016-17 this ratio was 58.2%.
Employment and Unemployment

Labor Market Indicators

The labor force participation rate falls during recessions as
discouraged workers—people available and willing to
work but who have not made an effort to find work within
the last four weeks—leave the labor force.
Discouraged workers are not considered unemployed –
• Some economists think that the unemployment rate is
therefore biased downward and underestimates the real
unemployment problem in the society.
Employment and Unemployment
This Figure shows that in USA, the labor force participation
rate and the employment-to-population ratio both trended
upward before 2000 and downward after 2000.
Employment and Unemployment

The Anatomy of Unemployment

Three types of people become unemployed:
Job losers — workers who have been laid off or fired and
are searching for new jobs.
Job leavers — workers who have voluntarily quit their
jobs to look for new ones. Job leavers are the smallest
fraction of the unemployed.
Entrants and reentrants — people entering the labor
force for the first time or returning to the labor force and
searching for work.
Employment and Unemployment

The Anatomy of Unemployment

People end a spell of unemployment for two reasons:
Hired or recalled workers get jobs, or start other gainful
activity such as self-employment.
Discouraged unemployed workers withdraw from the labor
force.
Employment and Unemployment

Types of Unemployment
Unemployment can be classified into four conceptual
types:
▪ Frictional
▪ Structural
▪ Seasonal
▪ Cyclical
Employment and Unemployment

Types of Unemployment
Frictional unemployment is unemployment that arises
from normal labor market turnover. The economy changes
constantly, requiring shifts in activity and jobs – new
products grow, old ones die. Same with jobs.
The creation and destruction of jobs requires that
unemployed workers search for new jobs. People moving
from job to job or university graduates looking for jobs fall
into this category.
Increases in the number of young people entering the
labor force, and increases in unemployment benefit
payments [which reduce the opportunity cost of
unemployment] tend to raise frictional unemployment.
Employment and Unemployment

Types of Unemployment
Structural unemployment is unemployment created by structural
changes in the economy i.e. changes in technology, foreign
competition, and the structure of production, including skills and
experience necessary to perform jobs and the geographic locations
of jobs, and the characteristics of the labor force
Seasonal unemployment is unemployment caused by season
changes e.g. during Winter, there is a huge increase in employment
opportunities in the tourism industry in Thailand and the Caribbean.
Lots of jobs in restaurants and clubs, which are unavailable during
other seasons.
Cyclical unemployment is the fluctuation in unemployment
caused by the business cycle.
Unemployment and Full Employment

Full Employment
Full employment occurs when there is no cyclical
unemployment or, equivalently, when all unemployment is
frictional, structural or seasonal.
The unemployment rate at full employment is called the
natural rate of unemployment (frictional + structural +
seasonal)
Unemployment and Full Employment

Real GDP and Unemployment Over the Cycle

Potential GDP is the quantity of real GDP produced at full
employment.
It corresponds to the capacity of the economy to produce
output on a sustained basis. Real GDP minus potential
GDP is the output gap.
Over the business cycle, the output gap fluctuates and the
unemployment rate fluctuates around the natural
unemployment rate.
Unemployment and Full Employment
This Figure shows the
output gap and …

the fluctuations of
unemployment around the
natural rate.

When the output gap is

negative, ...

the unemployment rate

exceeds the natural
unemployment rate.
Price Level and Inflation

The price level is the “average” level of prices and is

measured by using a price index.
The Consumer Price Index, or CPI, measures the average
level of the prices of the average or representative ‘basket’
of goods and services purchased or consumed by a typical
household.
Besides the CPI, another price index is often cited: the GDP
deflator or the GDP implicit price deflator. GDP deflator is
based on all goods and services produced in an economy.
More on the GDP deflator in the next chapter.
Price Level and Inflation

Reading the CPI Numbers

The CPI is defined to equal 100 for the reference base
period.
The value of the CPI for any other period is calculated by
taking the ratio of the current cost of the CPI basket of
goods to the cost of the same CPI basket of goods in the
reference base period and multiplying by 100.
Price Level and Inflation

Constructing the CPI

Constructing the CPI involves three stages:
▪ Selecting the CPI basket
▪ Conducting a monthly price survey
▪Every month, BLS (Bureau of Labor statistics) employees check
the prices of the 80,000 goods in the CPI basket in 30
metropolitan areas.
▪ Using the prices and the basket to calculate the CPI
Price Level and Inflation

This Figure illustrates the

CPI basket for the USA.
Housing is the largest
component.
Transportation and food
and beverages are the next
largest components.
The remaining components
account for 26 percent of
the basket.
Price Level and Inflation

Food 16.9% 4.2%

2.8%
Clothing & 4.1%
Footwear 6.9%
Gross rent, fuel, 2.7%
Lighting 3.6%
Transportation

Medical care

Recreation,
Education
Furniture,
furnishing
Other goods
and services 58.8%

Figure: Share (weights) of expenditures of different items in the CPI

(National) basket of Bangladesh
Price Level and Inflation

For a simple economy that consumes only oranges

and haircuts, we can calculate the CPI.
The CPI basket is 10 oranges and 5 haircuts.

Item Quantity Price Cost of CPI

basket
Oranges 10 $1.00 $10

Haircuts 5 $8.00 $40

Cost of CPI basket at base period prices $50

Price Level and Inflation

This table shows the prices in the base period.

The cost of the CPI basket in the base period was $50.

Item Quantity Price Cost of CPI

basket
Oranges 10 $1.00 $10

Haircuts 5 $8.00 $40

Cost of CPI basket at base period prices $50

Price Level and Inflation

This table shows the prices in the current period.

The cost of the CPI basket in the current period is $70.

Item Quantity Price Cost of CPI

basket
Oranges 10 $2.00 $20

Haircuts 5 $10.00 $50

Cost of CPI basket at current period prices $70

Price Level and Inflation

The CPI is calculated using the formula:

CPI = (Cost of CPI basket in current period/Cost of CPI
basket in base period) ×100.
Using the numbers for the simple example, the CPI is
CPI = ($70/$50) × 100 = 140.
The CPI is 40 percent higher in the current period than in
the base period.
Price Level and Inflation

Measuring Inflation
The main purpose of the CPI is to measure inflation.
The inflation rate is the percentage change in the price
level from one year to the next.
The inflation formula is:
Inflation rate = [(CPI this year – CPI last year)/CPI last
year]  100.
Price Level and Inflation
This Figure shows the
relationship between
the price level and the
inflation rate.
The inflation rate is
▪ High when the price
level is rising rapidly
and
▪ Low when the price
level is rising slowly.
▪ Negative when the
price level is falling
Inflation Rate in Bangladesh: 2014 - 2023

Inflation rate
12.00

10.00 9.90

8.00 7.70
6.99
6.19
6.00 5.70 5.69
5.51 5.54 5.59 5.55

4.00

2.00

0.00
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

10-year average inflation rate: 6.44%

Source: The World Bank (http://data.worldbank.org/)
 Price Level and Inflation

The Biased CPI

The CPI may overstate the true inflation for at least four
reasons:
▪ New goods bias
▪ Quality change bias
▪ Commodity substitution bias
▪ Outlet substitution bias
Note: The CPI does not reflect the price level any one
household faces anyway, because it averages expenditure for
all urban households – so includes, e.g., both rental and
ownership costs for housing.
Price Level and Inflation

New goods bias New goods that were not available in the
base year appear and, if they are more expensive than the
goods they replace, the price level may be biased higher.
Example: iPods, Smart Phones, Tablets, etc.
Quality change bias Quality improvements generally are
neglected, so quality improvements that lead to price hikes
are considered purely inflationary.
Price Level and Inflation

Commodity substitution bias The market basket of goods used in

calculating the CPI is fixed and does not take into account consumers’
substitutions away from goods whose relative prices increase e.g. if
the price of beef rises and the price of chicken remains unchanged,
people buy more chicken and less beef. Say, this change is such that
the consumers get same amount of protein and same enjoyment and
their expenditure is same as before. The price of protein has not
changed. But, because it ignores the substitution of chicken for beef,
the CPI says the price of protein has increased.

Outlet substitution bias When confronted with higher prices, people

switch to buying from cheaper sources such as discount stores, but
the CPI, as measured, does not take account of this outlet
substitution.
Price Level and Inflation

How big is the bias?

In 1996 a Congressional Advisory Commission chaired by
Michael Boskin, a Stanford Economics professor, tackled
this question.

The result: CPI overstates inflation by 1.1 percentage

points a year, i.e., if the CPI reports that inflation is 3.1% a
year, most likely inflation actually is 2% a year.
Price Level and Inflation

Core Inflation
The figure shows the CPI
inflation rate.

The core inflation rate is

the CPI inflation rate
excluding the volatile
elements (of food and fuel).

The core inflation rate

attempts to reveal the
underlying inflation trend.
Price Level and Inflation
The Real Variables in Macroeconomics
We can use the price level (usually the GDP deflator) to
deflate nominal variables to find their real values.
For example,
Real wage = (Nominal wage/GDP deflator)