Week 5_Case Study_Unemployment and Inflation.edited

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Running head: UNEMPLOYMENT AND INFLATION 1 Case Study: Macroeconomic Challenges: Unemployment and Inflation Author’s Name: Author’s Email Address: Class: Professor’s Name: Date:

UNEMPLOYMENT AND INFLATION 2 Case Study: Macroeconomic Challenges: Unemployment and Inflation PART I Introduction Unemployment is described as a state where a person of working age and who would like to be in full-employment is unable to secure an occupation. Unemployment is a primary economic indicator since it shows the capability of employees to readily acquire a lucrative job to engage in the effectual output of the economy ( Petrosky-Nadeau and Valletta, 2019). A persistent and high unemployment rate can show critical distress in an economy and also result in political and social disruption. On the other hand, a low rate of unemployment implies that the nation is more likely to be generating up to its full capacity, increasing output and over time driving living standards and wage growth. Unemployment occurs and increases in an economy due to various reasons such as when there are fewer occupations than the applicants, wages are too high, and when new employees enter the labor force. On the other hand, inflation is a constant rise in the overall price level of commodities and services in a nation over a particular period. There are three types of inflation which comprise built-in inflation, cost-push inflation, as well as demand-pull inflation ( Linde, 2018). Built-in inflation occurs and rises in a nation when wages are increasing due to the high cost of living. Cost-push inflation occurs when the production prices of goods and services increases. Demand-pull inflation is a result of an overall increase in

UNEMPLOYMENT AND INFLATION 3 demand for commodities and services as compared to the nation's production capability. Gross Domestic Product (GDP) is a numerical measure of a country’s overall economic activity. GDP signifies the financial value of all products and services generated within a country's geographic borders in a particular period. There is a significant relationship between GDP and employment, inflation, and wages. A high GDP which implies an increased production rate lowers the unemployment rate and raises demand. High wages also increase demand for products and services because consumers spend more freely ( Trigari, 2018). In such a scenario where the consumers spend more due to high wages, the GDP increases. With high inflation, there is a reduced purchasing power that decreases consumptions and lowers GDP rate. As of August 2019, the United States unemployment rate was 3.7 percent which is similar to that of the previous two months (Plecher, 2019). For the financial year that was closed in August 2019, the United States inflation rate was 1.7 percent. The two unemployment/inflation issues, which will be critiqued in this paper, are unemployment rates by gender and lower wages in some sections of the nation. An unemployment rate by gender is a scenario where the jobless people are classified according to their genders. There are unequal unemployment rates between males and females. As of June 2019, the male unemployment rate was 3.7 percent in the US. In the same period, the female unemployment rate stood at 4.1 percent (Plecher, 2019). Based on

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UNEMPLOYMENT AND INFLATION 4 these figures, there is considerable variance between male and female unemployment rates. As a result, the unemployment rate by gender is an important issue to research and resolve since it can help in identifying the causes of the differences and finding solutions. Justice would be achieved when both male and female unemployment rates are equal. The other issue is lower wages in some parts of the country, which describes people's earnings according to their geographic locations in the nation. People from different states and regions in the country earn varying amounts of wages regardless of their types of occupations. The importance of researching and resolving this issue is to help in achieving equality and identical national growth. By determining the causes of lower wages in a particular part of the country, corrective measures can be taken, such as more allocation of development funds from the federal government. Data Unemployment For the fiscal year ended on August 2019, the US unemployment rate was at 3.7 percent. The number of the long-term unemployment rate at the end of this period was 1.4 million (Plecher, 2019). As a result, the unemployment rate in 2019 has reduced as compared to the previous year, which was at 3.93 percent, as shown in figure 1 below. The graph also depicts the trend of the United States unemployment rate from 1998 to 2018. The highest unemployment rate, according to this chart, was recorded

UNEMPLOYMENT AND INFLATION 5 in 2010 at 9.25 percent. This is also the highest unemployment rate for the past ten years. However, the chart depicts that since 2010; the unemployment rate has continually decreased and has recorded the lower value this year. Figure 1 : Unemployment rates between 1998 and 2018 (Plecher, 2019). Figure 2 below depicts that the monthly unemployment rate has been decreasing from 2014 to 2019. In 2019, the lowest monthly unemployment rate was in the months of April and May at 3.6 percent while the highest was recorded in January at 4 percent. In 2018, the highest unemployment rate was in February and March at 4.1 percent, while the lowest was recorded in

UNEMPLOYMENT AND INFLATION 6 October and November at 3.7 percent (Plecher, 2019). The highest rate in 2017 was 4.8 in January, while the lowest was in October and December at 4.1 percent (Plecher, 2019). From this data, it is clear that the unemployment rate is typically higher at the start of the year. Figure 2 : Monthly US Unemployment rates from 2014 to 2019 (Plecher, 2019). Inflation As of June 2019, the inflation rate in the US was 1.6 percent which was a decrease from 1.8 percent in 2018. On August 2019, the inflation rate increased to 1.7 percent as prices of products and services continued to increase. Between 1914 and 2019, the US inflation rate averaged at 3.29 percent (Mcmahon, 2019). During the period range, the highest inflation rate was recorded in 1920 at 23.70 percent, while the lowest was in 1921 at -15.90 percent (Mcmahon, 2019). Table 1 below shows the monthly inflation

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UNEMPLOYMENT AND INFLATION 7 rate from May to August. Between these months, the lowest was in June at 1.6 percent while the highest was recorded in May and July at 1.8 percent. Table 1 also depicts the forecasts for inflation rates for September, October, and November. Table 1 : US Monthly Inflation rate (Mcmahon, 2019). Figure 3 below is a chart showing the United States inflation rates for the past ten years. According to this chart, the highest inflation rate between 2009 and 2019 was documented in 2011 at 3 percent while the lowest was at 0.7 in 2015.

UNEMPLOYMENT AND INFLATION 8 Figure 3 : US Inflation rates for the past ten years (Mcmahon, 2019). GDP Growth Rate Table 2 below shows the United States GDP growth rates between 2008 and 2018. Between these periods, the highest GDP growth rate was recorded in 2015 at 2.88 percent while the lowest was in 2009 at -2.54 percent. Table 2 further shows that in most years, the GDP growth rate has reached a mark of 2 percent and over. There are only years that recorded negative GDP growth rates which are 2008 and 2009.

UNEMPLOYMENT AND INFLATION 9 Table 2 : US GDP growth rate between 2008 and 2018 (Plecher, 2019). From 1948 to 2019, the US annual GDP growth rate has averaged 3.2 percent. The highest GDP growth rate was in the fourth quarter of 1950 at 13.40 percent while the lowest was recorded in the second quarter of 2009 at -3.90 percent. Currently, that is the second quarter of 2019; the GDP growth rate is at 2.30 percent, as shown in figure 4 below.

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UNEMPLOYMENT AND INFLATION 10 Figure 4 : Quarter GDP growth rate (Plecher, 2019). Real GDP Volume As depicted in Table 3 below, for the past ten years, the highest real GDP was in 2019 at 19.02 trillion USD while the lowest was in 2009 at 15.36 trillion USD. 2019 real GDP volume has been computed for only two quarters since the year has not ended.

UNEMPLOYMENT AND INFLATION 11 Table 3 : Real GDP volume (Plecher, 2019). Changes in Real Wages since 2005 After the recession, real wages were stagnated in the US and in the entire world. However, for the past three decades, the US real wages of an ordinary employee has risen by 32 percent. Between June 2016 and June 2017, real wages in the US grew by 2.5 percent. From August 2018 to August

UNEMPLOYMENT AND INFLATION 12 2019, real hourly wages rose by 1.8 percent. Figure 5 below shows the changes in real hourly wages for all workers from 2006 to 2018. The chart depicts that real wages have continually increased during this period after the recession. Figure 5 : Real wages trend (Plecher, 2019). Unemployment Rates by Gender Figure 6 below shows the unemployment rates by gender in the United States between 1948 and 2018. The chart depicts that unemployment rates for women have been higher in many fiscal periods as compared to male unemployment rates. Between 2008 and 2012, the male unemployment rate was much higher than of women (Plecher, 2019). The male unemployment rate was 3.7 percent while the female unemployment rate stood at 4.1 percent as of June 2019.

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UNEMPLOYMENT AND INFLATION 13 Figure 6 : Unemployment rates by gender (Albanesi and Sahin, 2018). Low Wages in Some Parts of the Country Since 2009, the minimum wage that has been mandated by the federal government is 7.25 USD per hour. Most states have observed this regulation by the federal government for the past ten years (Yellin and Houp, 2019). However, this minimum wage still varies from one state to another, implying that there are lower wages in some parts of the country. The District of Columbia has the highest minimum wage at 13.25 USD. On the other hand, the states with the lowest minimum wage which is at 7.25 USD comprise of Wyoming, Wisconsin, Virginia, Utah, Texas, Pennsylvania, Oklahoma, North Dakota, North Carolina, New Mexico, New Hampshire, Kentucky, Kansas, Iowa, Indiana, Idaho, and Georgia. Figure 7 below shows an extract of the current minimum wages per state.

UNEMPLOYMENT AND INFLATION 14 Figure 7 : Extract of the current minimum wages by state (Plecher, 2019). PART II Analysis According to the data, the US employment rate has continuously reduced since 2010. The employment rate was recorded at the highest value in 2010, which is 9.25 percent which was a mark of 5.78 percent in 2008. The year that recorded the lowest rate of unemployment is 2019 at 3.7 percent, which was an improvement from 3.93 percent in the previous year. As a result, the US economy has been progressively recovering, thanks to the different expansionary financial and economic policy measures that were implemented to assist in restoring and stimulating the economy back to health. The unemployment rate is now at a record low of 3.7 percent.

UNEMPLOYMENT AND INFLATION 15 The data shows that for the past ten years, the US inflation rate has had a mixed trend. Inflation has risen and dropped over this period. However, since 2016 to date, the inflation rate has been on a constant reduction. The year that recorded the highest inflation rate was 2011 at 3 percent while the lowest was manifested in 2015 at 0.7 percent. The standing inflation rate in the US is 1.7 percent. The data also reveals that inflation influences the growth rate of GDP. During the year when the inflation rate was highest, that is 2011 at 3 percent; the GDP growth rate was 1.55 percent. On the other hand, when the inflation rate was the lowest in 2015 at 0.7 percent, the GDP growth rate was 2.88 percent. These statistics reveal that inflation adversely impacts the GDP growth rate. When inflation is high, the consumption power of the consumers is low, which causes the GDP to go down. Wages are significant to the economy since they influence the consumption power of the citizens. The data shows that since the end of the recession, wages have made a constant increase over the years. Now, there is a minimum wage which is set by the federal government at 7.25 USD per hour. Nevertheless, some states have higher minimum wages that 7.25 USD. For instance, the District of Columbia has a minimum wage of 13.25 USD, which is the highest in the country. Also, over the years, the District of Columbia has recorded higher wages as compared to other states implying it has the best professionals and government occupations. The data reveals that in the past ten years, the male unemployment rate has been lower as compared to the female unemployment rate. The current standing shows that the male unemployment rate is at 3.7 percent, while female unemployment is at 4.1 percent . Unequal employment rate by gender represents a big challenge for the economy because it signifies that there are some unutilized skills in the country. Since there is equal education for both males and females, employment should also be equal to the two genders.

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UNEMPLOYMENT AND INFLATION 16 Regarding wages issue, the state which has the highest minimum wage according to the data is District of Columbia at 13.25 USD while the other 17 states have the lowest at 7.25 USD. Lower wages in some parts of the country are a problem for the economy because people from these regions will have lower consumption powers. In the case of inflation, such people may not be able to acquire some products and services. Reflection and Critical Thinking The changes in GDP, unemployment, wages, and inflation can be linked to one another. A high GDP means there is an increased production rate in an economy that decreases the unemployment rate and raises demand. From the data, it is evident that the unemployment rate was lower during the period where GDP was high. High wages further increase the demand for goods and services since the consumers spend more freely. In such a situation where the customers spend more due to high wages, the GDP increases. The data shows that when wages were high, the rate of GDP growth was also high. In macroeconomics, when the inflation rate is high, there is a reduced purchasing power that declines consumptions and lowers GDP rate ( Dawid and Gatti, 2018). The data shows that the highest inflation rate, which was recorded in 2011 lowered the GDP growth in the same year. Also, in macroeconomics, unemployment increases during business cycle recessions and drops during business-cycle expansions or recoveries. Inflation declines during recessions and rises during expansions or recoveries. The data depicts that inflation has been declining since the 2005 recession. The variance between the male unemployment rate and the female unemployment rate

UNEMPLOYMENT AND INFLATION 17 is caused by various factors. The primary factor is the fact that men can be hired across many industries as compared to females. Some females choose not to work in some sectors, such as construction. Policymakers should extend sectors which are fit for female and increase their chances of acquiring occupations in such industries. Lower wages in some regions in the country are caused by the unequal distribution of resources and industries. There are more profitable industries and government agencies in the District of Columbia as compared to other states. To solve this scenario, policymakers should advocate for the extension of federal government agencies and profitable organizations to other states. Solution The government should increase jobs so as to solve the issue of unequal employment by gender. The government should also extend stronger organizations and agencies to states with lower minimum wage to try and solve the issue of lower wages in some sections of the country. The macroeconomics policy which should be implemented is monetary policy. This is because it is powerful, quick, and efficient as well as due to the fact that it decreases interest rates and makes it easier for families to borrow what they need ( Nakamura and Steinsson, 2018). I would advocate for equal minimum wage in all states so as to avoid a situation whereby some consumers are unable to purchase goods and services in recessions because they are paid lowly. On the other hand, I would encourage women to apply for jobs across all sectors, even those which are regarded to be linked to males such as construction and handling of machinery. This will help close the unemployment gap between males and females since the variance is small as per the data.

UNEMPLOYMENT AND INFLATION 18 References Dawid, H., & Gatti, D. D. (2018). Agent-based macroeconomics. In Handbook of computational economics (Vol. 4, pp. 63-156). Elsevier. Nakamura, E., & Steinsson, J. (2018). Identification in macroeconomics. Journal of Economic Perspectives , 32 (3), 59-86. Petrosky-Nadeau, N., & Valletta, R. G. (2019). Unemployment: Lower for Longer? FRBSF Economic Letter , 21 . Linde, A. (2018). On the Problem of Initial Conditions for Inflation. Foundations of Physics , 48 (10), 1246-1260. Trigari, A. (2018). Discussion of "Fiscal Consolidation in a Low-Inflation Environment: Pay Cuts versus Lost Jobs." International Journal of Central Banking . Albanesi, S., & Sahin, A. (2018, January 3). The gender unemployment gap . Retrieved October 2, 2019, from VOX: https://voxeu.org/article/gender- unemployment-gap Yellin, T., & Houp, W. (2019, April 9). CNN Business . Retrieved October 2, 2019, from The US minimum wage through the years: https://edition.cnn.com/interactive/2019/business/us-minimum-wage- by-year/index.html

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UNEMPLOYMENT AND INFLATION 19 Plecher, H. (2019, September 9). United States: Unemployment rate from 1998 to 2018 . Retrieved October 2, 2019, from Statistica: https://www.statista.com/statistics/263710/unemployment-rate-in-the- united-states/ Mcmahon, T. (2019, September 12). Annual Inflation . Retrieved October 2, 2019, from Inflation Data: https://inflationdata.com/Inflation/Inflation/AnnualInflation.asp

Week 5_Case Study_Unemployment and Inflation.edited

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