. 19
( 33)


Business Cycles and Fluctuations
Main Idea Key Terms
The term “business cycle” refers to alternating increases business cycle, business fluctuation, recession, peak,
and decreases in the level of economic activity. trough, expansion, trend line, depression, depression
scrip, econometric model, index of leading indicators
Reading Strategy
Graphic Organizer As you read the section, complete
a graphic organizer similar to the one below by list- After studying this section, you will be able to:
ing factors that can cause changes in the business 1. Explain the phases of the business cycle.
cycle. 2. Identify five causes of business cycles.

Applying Economic Concepts
Changes in the business cycle
Economic Security Do you have a job and a paycheck
on which you depend? Read to find out how econo-
mic instability can threaten your income.

conomic growth is something that is beneficial
to almost everyone. However, we cannot take
Cover Stor y economic growth for granted. Sometimes eco-
nomic growth is interrupted by business cycles”
Leading Indicators Up Agai
largely systematic ups and downs of real GDP. At
other times economic growth is interrupted by
A leading indicator business fluctuations”the rise and fall of real GDP
of future economic over time in a nonsystematic manner.
activity slowed some- Either way, economic growth”even the record-
what during March but setting expansion that took place during the 1990s”
still maintained its for- always comes to a halt before it begins to take off
ward momentum for again. The inevitable ups and downs of the econ-
the sixth consecutive
omy is one of many reasons why economists have
month, boosting opti-
developed tools like the monthly index of leading
mism that the nation™s
indicators featured in the cover story.
economic expansion
will continue into the
summer months.
Boldin, ls
Growing construction signa
Business Cycles in the United
director of busines robust economy
cycle research at th States
ch gain typical of a
ce Board, called the Mar
Conferen index™s 1.6 percent
month and noted the Economic activity in the United States fol-
single ted “a lot of confi-
since September genera lowed an irregular course throughout the
ue at a robust pace.”
is expansion will contin twentieth century. The worst and most prolonged
dence th
”CNNfn, May 4, 1999 downturn was the Great Depression of the 1930s.
The years since World War II have taken on a spe-
cial pattern of their own.

Figure 14.1

Phases of the Business Cycle
Real G

Trend Lin


Using Graphs The business cycle is marked by alternating phases of recession and ex-
pansion. What does a trough indicate?

Phases of the Business Cycle Most experts agree that the Great Depression of the
1930s was the only depression the United States
The two phases of the business cycle are illus-
has had in the twentieth century.
trated in Figure 14.1. The first phase is recession, a
period during which real GDP declines for two
quarters in a row, or six consecutive months. The
The Great Depression
recession begins when the economy reaches a
peak”the point where real GDP stops going up. It The stock market crash on October 29, 1929, or
ends when the economy reaches a trough”the “Black Tuesday,” marks the beginning of the Great
turnaround point where real GDP stops going Depression. Between 1929 and 1933, GDP fell
down. from approximately $103 to $55 billion”a decline
As soon as the declining real GDP bottoms out, of nearly 50 percent. At the same time, the number
the economy moves into the second phase of the of people out of work rose nearly 800 percent”
cycle, expansion”a period of recovery from a from 1.6 to 12.8 million. During the worst years of
recession. Expansion continues until the economy the Depression, one out of every four workers was
reaches a new peak. If periods of recession and jobless. Even workers who had jobs suffered. The
expansion did not occur, the economy would fol- average manufacturing wage, which had reached
low a steady growth path called a trend line. As fifty-five cents an hour by 1929, plunged to five
Figure 14.1 shows, the economy departs from, and cents an hour by 1933.
then returns to, its trend line as it passes through Many banks across the country failed. The
phases of recession and expansion. FDIC did not exist at the time, so depositors were
If a recession becomes very severe, it may turn not protected. To prevent panic withdrawals, the
into a depression”a state of the economy with federal government declared a “bank holiday” in
large numbers of people out of work, acute short- March of 1933. Every bank in the country closed
ages, and excess capacity in manufacturing plants. for several days, and many banks never reopened.

The money supply fell by one-third. Currency Easy and plentiful credit also appears to have
was in such short supply that towns, counties, played a role. Many people borrowed heavily in the
chambers of commerce, and other civic bodies late 1920s, which made them vulnerable to credit
resorted to printing their own money, known as contractions, high interest rates, and even minor
depression scrip. Several billion dollars of scrip business fluctuations. When the crunch came, heav-
was used to pay teachers, firefighters, police offi- ily indebted people had nothing to fall back on.
cers, and other municipal employees. Global economic conditions also played a part.
During the 1920s, public and private institutions in
the United States made many foreign loans to help
Causes of the Great Depression support a high level of international trade. Shortly
Several factors contributed to the Great before the Depression began in the United States,
Depression. One was the disparity in the distribu- the private institutions withdrew many of these
tion of income. A great number of very poor and loans. Without the loans, some foreign nations
very rich people lived in America. The poor could could no longer buy American goods, so American
not stimulate the economy with consumer spend- exports fell sharply.
ing because they had little or no income. The rich At the same time, high American tariffs on
had the income, but often used it for such non- imports kept many countries from selling goods to
productive activities as stock market speculation. the United States. Many countries that depended

Portrait of a Deal

GOVERNOR of Yamal-Nenets During difficult economic times, barter can serve
Region demands payment GAZPROM, claiming as a medium of exchange. Many economies also
of energy royalties from gas to lack cash, offers revert to barter when people lose faith in the
monopoly, GAZPROM. to pay in gas.
money supply““and that™s exactly what hap-
pened in Russia.
GOVERNOR asks barter
The chart shows how Yuri Neyolov, governor of
specialist, ANDREI TOLMACHEV then signs Russia™s Yamal-Nenets Autonomous Region,
TOLMACHEV, to trade contract with aircraft
“bought” an airplane for his government. This
the gas for an airplane. manufacturer AVIACAR.
story““and thousands like it““are commonplace
AVIACAR, lacking cash, throughout Russia.
can™t buy components to
GOVERNOR gets his
make the plane. TOLMACHEV
trades more than 100 cars, plane six months
tractors, and buses to after the transaction Critical Thinking
acquire a $2 million engine begins. TOLMACHEV
and swaps $250,000 of 1. Analyzing Information Which functions of
earns a commission
electricity and tires to
money did the gas owned by Gazprom
equal to 10% of the
secure electrical equipment
$17 million plane. perform?
from different companies.
2. Drawing Conclusions Are there any barter
Source: Business Week, April 13, 1998
transactions that take place in the
American economy? Why would anyone
prefer barter to money transactions?

heavily on sales to the United States were soon faced businesses expect future sales to be high, so they
with economic crises. As the Depression spread invest heavily in capital goods. Companies may
from country to country, world trade declined, and build new plants or buy new equipment to replace
American exports dropped even further. older equipment in their plants. After a while, busi-
nesses may decide they have expanded enough.
They begin to pull back on their capital invest-
Business Cycles Since World War II ments, causing layoffs in the capital goods indus-
Massive government spending during World War tries and, eventually, recession results.
II added a huge stimulant to the economy for most
of the early 1940s. Recession returned in 1945, but it
Inventory Adjustments
did not last. As soon as the war was over, consumers
went on a buying binge that stimulated expansion Inventory adjustments, or changes in the level
again. The economy experienced several more reces- of business inventories, are a second possible cause
sions after that, but each downturn was short com- of business cycles. Some businesses cut back on
pared with the length of the recovery that followed. inventories at the first sign of an economic slow-
The average recession lasted about 11 months, while down and then build them back up again at the
the average expansion lasted 43 months. first sign of an upturn. Either action causes invest-
Figure 14.2 shows the recurring pattern of reces- ment expenditures”and therefore real GDP”to
sions and expansions since 1965. With few excep- fluctuate.
tions, most of the earlier recessions occurred on a The influence of inventory adjustments showed
fairly regular basis. After 1980, however, recessions up clearly in the business cycle of the late 1940s.
occurred less frequently. The expansion that began Right after World War II, businesses in the United
in 1991 is the longest expansion in United States States invested heavily in inventories to fill
history. shelves depleted during the war years. By 1948
consumer demand caught up with the backlog
and people stopped buying. Inventories built up
Causes of the Business Cycle on store shelves, so businesses stopped buying
inventory. The resulting recession of 1949 lasted
No one theory seems to explain past busi-
for about a year.
ness cycles, or serves as a way to predict
future ones. In many cases, several factors are
working together to create a cycle.
Innovation and Imitation
A third possible cause of business cycles is inno-
Capital Expenditures vation. An innovation may be a new product or a
new way of performing a task. When a business
Changes in capital expenditures are one cause of
innovates, it often gains an edge on its competitors
business cycles. When the economy is expanding,
because its costs go down or its sales go up. In
either case, profits increase, and the business grows.
If other businesses in the same industry want to
keep up, they must copy what the innovator has
INFOBYTE done or come up with something even better.
The imitating companies must invest heavily to
do this, and an investment boom follows. After the
The Business Cycle The term “business cycle”
innovation takes hold in the industry, however, the
describes economy-wide fluctuations in output,
situation changes. Further investments are unnec-
incomes, and employment. Generally, periods of
essary, and economic activity may slow.
expansion follow periods of low output.
Meanwhile, the fluctuation of investments has pro-
duced a business cycle.

Figure 14.2

The Index of Leading Economic Indicators
Index of Leading Indicators: 1992 = 100


On average, the index
turns down 13 months before
the recession begins.

On average, the index
turns up 4 months before
the recovery begins.

Occasionally, the index predicted
a recession that never occurred.
1965 1970 1975 1980 1985 1990 1995 2000
Recession years

Source: The Conference Board

Using Graphs The index of leading indicators is one of the tools used
to predict future economic activity. How do economists use this
index to predict recessions?
Visit epp.glencoe.com and click on
Textbook Updates”Chapter 14 for
an update of the data.

Monetary Factors wars, and international conflict. Some shocks drive
the economy up, as when Great Britain discovered
A fourth possible cause of business cycles is the
North Sea oil in the 1970s. Other shocks can be
credit and loan policies of the Federal Reserve
negative, as when high oil prices hit the United
System. When “easy money” policies are in effect,
States in the early 1970s.
interest rates are low and loans are easy to get.
Easy money encourages the private sector to bor-
row and invest, which stimulates the economy for Predicting Business Cycles
a short time. Eventually the increased demand for
Economists use a number of methods to
loans causes interest rates to rise, which in turn
predict business cycles. One popular tech-
discourages new borrowers.
nique involves macroeconomic modeling. Another
As borrowing and spending slow down, the level
makes use of statistical predictors.
of economic activity declines. Lenders think twice
An econometric model is a macroeconomic
about making new loans or renewing old ones, and
model that uses algebraic equations to describe
the business cycle begins again.
how the economy behaves. Most models used
today are based on some adaptation of the
External Shocks
output-expenditure model we examined earlier:
A final potential cause of business cycles is
external shocks, such as increases in oil prices, GDP C I G F

For example, an economist might use X to stand Another tool used to predict the turning points
for exports, and M for imports (instead of F for the of business cycles is the index of leading indicators,
foreign sector) to get: a monthly statistical series that usually turns down
before real GDP turns down, and turns up before
real GDP turns up. As we saw in the cover story, the
Other equations in the model also may be substi-
index is widely used to predict the direction of
tuted for some of the variables. Suppose that house-
future economic activity.
holds annually spend a fixed amount of money,
Some statistical indicators, such as the length of
designated as a, along with 95 percent of their dis-
the average workweek”which tends to shrink just
posable personal income. In this case, C a .95
before a recession begins”are fairly good predictors
(DI). If this were substituted for the C in the output-
of real GDP changes. Still, no single series has
expenditure model, the equation would read:
proven completely reliable. To resolve this prob-
GDP a .95(DI) I G (X M) lem, 10 individual series are combined into an
overall index that closely patterns the behavior of
The equation is then broken down into smaller
real GDP, making the index of leading indicators a
and smaller components to the point where it may
useful tool.
have as many as 1,000 variables.
The behavior of the composite index can be
To predict GDP, forecasters put in the latest fig-
seen in Figure 14.2, where the shaded areas repre-
ures for the variables on the right side of the equa-
sent recessions. As you can see, the average time
tion. Because most econometric models are solved
between a dip in the index and the onset of reces-
using a computer, little time is needed to obtain a
sion is about 13 months. The average time
between a rise in the index and an expansion is
As the quarter unfolds, actual changes in the
about four months. The information it supplies is
economy are compared to the model™s predictions.
used along with results from other econometric
The model is then updated. Some models give rea-
models. Together, the results generally let the fore-
sonably good forecasts for up to nine months.
caster predict how real GDP will behave in the
Overall, short-term econometric models have
short run.
proven their value and are used extensively.

Checking for Understanding your spending for your family™s needs if you
had an accurate prediction of future business
1. Main Idea Explain the difference between
cycles? Include examples in your response to
a business cycle and a business fluctuation.
the question.
2. Key Terms Define business cycle, business fluc-
tuation, recession, peak, trough, expansion,
trend line, depression, depression scrip, econo-
metric model, index of leading indicators.
7. Understanding Cause and Effect If business
3. Identify the two main phases of a business inventories are falling, the average hours
cycle. worked per week is going up, and there is
an increase in the number of new building
4. Explain how the Great Depression compared
permits, we would expect the economy to
to other recessionary periods.
be in an expansion phase of the business
5. List five causes of business cycles. cycle. Explain why each of these indicators
would show that the economy would grow
Applying Economic Concepts
in the near future.
6. Economic Security Suppose you were the
head of a household. How would you plan Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.

Economic Freedom:
Walter E.

Walter E. Williams is an econo-
mist, author, and professor of
economics at George Mason
University. Williams™s views are
levels of African American and
decidedly free market”and often
white teenagers: “In 1948, black
“I think many government pro-
teenage unemployment was less
grams have harmed blacks in mak-
than that of whites. Compare it
ing achievements less credible,” he
with today and it™s the opposite,”
argues. “For example, whatever
“Economic freedom” is the cor- Williams explains. “You can™t
inspiration Harvard or the
nerstone of Williams™s beliefs. He explain it by saying there was less
University of Virginia has in
argues that economic freedom is racism in 1948 than there is today.
requiring so many articles in the
the key to both economic growth You can™t explain it by saying that
law journals to be written by
and the fair distribution of wealth. blacks had more education than
women or by minorities reduces
Williams often points to Hong whites in 1948. You have to
the credibility of a black student
Kong, Korea, Taiwan, and explain it by increases in both the
or a female student having written
Singapore as evidence of the spec- level and coverage of the mini-
for the law journal.”
tacular economic growth that can mum wage law.” The implication is
be achieved when there is little that if employers had the freedom
government intervention. This has to pay lower wages, then more
led him to become an outspoken black teenagers would have jobs.
Examining the Profile
critic of many popular government
programs. 1. Summarizing Information Write a
Many Americans, for example, short paragraph that identifies and
Perhaps Williams™s most con-
support the minimum wage. To describes Williams™s basic views.
troversial stand is his opposition
Williams, however, it is a cause of 2. Applying the Writing Process Write
to affirmative action. He views it
economic problems. a response to what Williams said
as a violation of his cherished idea
One example he cites involves a about unemployment levels among
of economic freedom, and worse:
comparison between unemployment white and African American
teenagers. Explain why you agree or
disagree with his analysis.

Main Idea cyclical unemployment, seasonal unemployment,
Frictional, structural, cyclical, seasonal, and techno- technological unemployment, automation
logical are the general types of unemployment.
Reading Strategy After studying this section, you will be able to:
1. Explain how the Bureau of Labor Statistics deter-
Graphic Organizer As you read the section, complete
a graphic organizer similar to the one below by listing mines if a person is employed.
2. Describe five kinds of unemployment.
two ways that structural unemployment takes place.

Applying Economic Concepts
Structural Employment Did you work for at least one hour per
unemployment week for pay or profit last month? Read to find out
how your answer to this question determines your
Key Terms employment status.
unemployed, unemployment rate, frictional
unemployment, structural unemployment,

early one-half of the population of the
Cover Stor y United States belongs to the civilian labor
force, and at any given time millions of
Joblessness Dips to 4.2%
these people are without jobs. This issue is so impor-
tant that full employment is one of the seven eco-
ment rate plunged to
The nation™s unemploy nomic and social goals of the American economy.
bs cre-
while the number of jo
29-year low in March, bor
vel in three years, the La
ated fell to the lowest le
Department said Friday Measuring Unemployment
ment report, among
The monthly employ rised
onomic indicators, surp
most closely watched ec To understand the severity of joblessness, we
analysts. . . . need to know how it is measured, as well as
ess hit 4.2 percent wa
The last time joblessn what the measure overlooks. The measure of job-
, a war
d Nixon led the country
February, 1970. Richar ntly lessness is the unemployment rate, one of the most
the first man had rece
raged in Vietnam, and closely watched statistics in the economy.
walked on the moon.
”CNNfn, April 2, 1999
The Unemployment Rate
In the middle of any given month, thousands
of specialists from the Bureau of the Census
begin their monthly survey of about 50,000
The unemployment rate is households in nearly 2,000 counties, covering
the percentage of the labor all 50 states. Census workers are looking for the
force that is out of work. unemployed”people available for work who
made a specific effort to find a job during the
past month and who, during the most recent

survey week, worked less than one hour for pay or in the unemployment rate would mean that nearly
profit. People are also classified as unemployed if 139,000 people had lost their jobs. This number is
they worked in a family business without pay for more than the population of cities such as Laredo,
less than 15 hours a week. Texas; Tallahassee, Florida; Boise, Idaho; or
After the Census workers collect their data, they Evansville, Indiana.
turn it over to the Bureau of Labor Statistics for
analysis and publication. This data is then pub-
Limitations of the Unemployment Rate
lished on a monthly basis.
Unemployment also is expressed in terms of the It might seem that a measure as comprehensive as
unemployment rate, the number of unemployed the unemployment rate would summarize the prob-
individuals divided by the total number of persons lem. If anything, however, the unemployment rate
in the civilian labor force. As Figure 14.3 shows, the understates employment conditions for two reasons.
unemployment rate tends to rise dramatically dur- First, the unemployment rate does not count
ing recessions and then come down slowly after- those who have become too frustrated or discour-
ward. With a civilian labor force of approximately aged to look for work. These labor force
139 million people, a one-tenth of one percent rise “dropouts” may include nearly a million people

Figure 14.3

The Unemployment Rate
Percent Unemployed



3 Civilian unemployment rate

1965 1970 1975 1980 1985 1990 1995 2000
Recession years
Source: Bureau of Labor Statistics, United States Department of Commerce

Using Graphs The unemployment rate goes up sharply during a
recession and then comes down slowly thereafter. When the rate
moves as little as 0.1 percent, approximately 139,000 workers are
Visit epp.glencoe.com and click on
affected. How would you characterize the unemployment rate Textbook Updates”Chapter 14 for
during the period from 1990 to 2000? an update of the data.

during recessionary periods. Although they are not Frictional Unemployment
working, these people are not classified as unem- One kind of unemployment is frictional
ployed because they did not try to find a job unemployment”unemployment caused by work-
within the previous four-week period. ers who are between jobs for one reason or
Second, people are considered employed even another. These workers are short-term unemployed
when they hold part-time jobs. Someone who has and will suffer little economic hardship from their
lost a high-paying job, but is working just one hour lack of employment. With freedom to choose
a week at a minimum-wage job, would still be con- occupations, many choose to leave their old jobs
sidered employed. As a result, being employed is to look for better work. Others have lost their jobs,
not the same as being fully employed. but will quickly find others.
Some frictional unemployment is the result of
new people moving into the labor force, particu-
Kinds of Unemployment larly young workers searching for their first jobs.
Economists have identified several different Unemployment of this nature is a minor problem
kinds of unemployment. The nature and that cannot be completely eliminated. It is neces-
cause of each affect how much unemployment can sary for workers to be able to move to the jobs
be reduced in the economy. where they are most needed. Because there are

Working in the New work from any location
with a computer and
Internet connection,
Economy will become more preva-
lent. Ideally, the virtual
For generations, the economy was organized around workplace makes use of
mass production. Today, the new economy is fast becoming technology and other
a high-technology, service, and office economy. This does work innovations to
not mean that mass production is no longer important. enable employees to
work together across
Higher rates of productivity in manufacturing and farming
space and time. Workers
have resulted in fewer people producing more goods than
in a virtual workplace
ever before. More and more people are
working at home.
require a highly cus-
As the shift from a manufacturing to a service and tomized set of skills,
knowledge-based economy continues, the rise of new ranging from highly technical specialties to working
industries is creating new jobs. In addition, modern independently in a network or on a string of virtual
technology is changing the nature of many existing teams.
jobs, requiring new knowledge and a new set of skills.
Job Trends Jobs requiring postsecondary, vocational,
Now, more than 100 million Americans (nearly 80 per-
or higher education are expected to grow as a share of
cent of the total workforce) work in occupations that
total employment. Positions calling for individuals with
are service-related or information-related.
at least an associate™s degree are expected to increase
The Virtual Workplace As electronic commerce and from 31 percent of all jobs in 1996 to 32.4 percent in
Internet business grows, fewer people will work in cen- 2006. Along with an increase in the number of high-
tral offices, retail stores and other facilities. Analysts skilled jobs, the number of low-skilled jobs is expected
believe that the virtual workplace, allowing employees to to grow. Occupations predicted to show the largest

always some workers who are in the process of horses, buggies, and buggy whips in favor of
changing jobs, there will always be some frictional domestic automobiles. Later, tastes changed in
unemployment in the economy. favor of foreign-made automobiles, causing consid-
erable unemployment in Michigan, Ohio, and the
industrial Northeast.
Structural Unemployment Industries may also change the way they oper-
ate. During the 1990“1991 recession, a series of
Structural unemployment”unemployment that
mergers and cost reductions trimmed the white-
occurs when a fundamental change in the opera-
collar labor force in the banking and computer
tions of the economy reduces the demand for
industries. This change was sudden and left mil-
workers and their skills”is a more serious type of
lions of highly skilled people out of work. Many of
these workers had to develop new skills before
Changes in technology and changes in con-
they could find employment in other industries.
sumer tastes often cause structural unemployment.
Sometimes the government contributes to struc-
Workers are structurally unemployed because their
tural unemployment when
skills and the skills required by employers who are
it changes the way it
hiring workers do not match. In the early 1900s,
does business.
for example, people reduced their demand for

Did You Know?
Job Trends For the next few
years, most of the new jobs will be in
the services and retail trade industries.
By 2005 these industries are expected to
account for 16.2 million out of a total
increases include cashiers, janitors,
projected growth of 16.8 million
retail salespersons, and restaurant
wage and salary jobs.
workers. Low-skilled occupations are
expected to account for 13 percent of
all new job growth.

Job Skills in the Information Age
A survey of more than 400 of the Employment by Type of Job
fastest-growing U.S. firms over a five-
Percentage of Total

year period points to the importance 40%

of education and training. Over one- 30% Factory
half of the entry-level positions High-Skilled
offered by the firms require a high Services
school diploma and often at least two Farm
years of post-high school studies.
1990 2000*
1960 1970 1980
Nearly 40 percent of the firms require
a four-year college degree, and an Short-Term
Occupational Change by Skill Level
additional 7 percent require comple- 40%
Percentage of Total

tion of postgraduate studies. The
Mid- to Long-

companies™ CEOs place great impor-
Term On-the-
tance on math skills. “Mastering chal- Job Training
lenging mathematics is more Associate™s
important than ever before for our Degree and
25% Above
students,” noted U.S. Secretary of
1996 2002* 2006*
Education Richard W. Riley. “Algebra is *Projected
considered a new basic.”

Seasonal Unemployment
A fourth kind of unemployment is seasonal
unemployment”unemployment resulting from
changes in the weather or changes in the demand
for certain products. Many carpenters and
builders, for example, have less work in the winter
than during the spring and summer because some
tasks, such as replacing a roof or digging a foun-
dation, are harder to do when the weather is cold.
The difference between seasonal and cyclical
unemployment relates to the period of measure-
ment. Cyclical unemployment takes place over the
course of the business cycle, which may last three
to five years. Seasonal unemployment takes place
every year, regardless of the general health of the

Technological Unemployment
A fifth kind of unemployment is technological
Technological Unemployment When techno- unemployment”unemployment caused when
logical unemployment occurs, many workers workers with less skills, talent, or education are
find they have to learn new skills. What causes replaced by machines and other equipment that do
technological unemployment?
their jobs. Technological unemployment happens
when workers face the threat of automation”pro-
duction with mechanical or other processes that
Congress™s decision to close military bases in the reduce the need for workers.
1990s is a prime example. Military bases are much In some cases, automation results in a drastic
larger than most private companies, and the impact reduction in the number of workers needed for
of the base closings was concentrated in select production. Japan, for example, pioneered the use
regions and communities. Some areas were able to of large mechanized factories. Entire assembly lines
attract new industry that hired many of the unem- in industries such as automobiles and steel are
ployed workers, but most workers either developed staffed by one-fifth of the workers needed in simi-
new skills or moved to other regions. lar U.S. plants. In the United States, the use of
automated teller machines by banks has reduced
the need for bank tellers.
Cyclical Unemployment
A third kind of unemployment is cyclical
unemployment”unemployment directly related to
swings in the business cycle. During a recession, for
example, many people put off buying durable
goods such as automobiles, refrigerators, washers, Employment Trends Every spring, the unemploy-
dryers, and new homes. As a result, some industries ment rate slightly rises as college graduates enter
must lay off workers until the economy recovers. the labor force. The high unemployment rates in the
Laid-off workers generally get their jobs back even- mid-1980s were caused in part by the baby boomers
who had graduated from college and were entering
tually when the economy improves. Accordingly,
the work force.
many try to wait out the recession by living on
savings or by taking temporary jobs.

Figure 14.4
The Concept of Full AT A GLANCE

The Fastest-Growing Occupations,
Economists have long wrestled with
the concept of full employment. Full Employment % Increase
employment does not mean zero unemploy- 1998 2008 1998“2008
ment. Instead, full employment is the lowest Computer engineers 299 622 108
possible unemployment rate, with the econ- Computer support
specialists 429 869 102
omy growing and all factors of production
Systems analysts 617 1,194 94
being used as efficiently as possible. Database administrators 87 155 77
While opinions may vary, it appears as if Desktop publishing
specialists 26 44 73
full employment is reached when the
Paralegals and legal
unemployment rate drops below 4.5 per- assistants 136 220 62
cent. The 4.2 percent unemployment rate Personal care and home
health aides 746 1,179
discussed in the cover story, the lowest rate
Medical assistants 252 398
in 29 years, certainly indicates a period of Social and human
full employment. 53
service assistants 268 410
Consistently low unemployment is diffi- Physician assistants 66 98
cult to maintain because of the business Source: Bureau of Labor Statistics (Number in thousands of jobs)
cycle. Figure 14.3 shows that the 1969“1970
recession drove the unemployment rate to Using Tables These occupations are projected to
be the 10 fastest-growing occupations from 1998
6.1 percent. The 1974 recession drove the rate
to 2008. Other than technology, in what fields
to 9.0 percent in 1975, and the 1981“1982
are many of the fastest-growing jobs
recession drove the rate to 10.8 percent. The
rate declined thereafter, but the 1991 reces-
sion drove it back up to 7.8 percent.

Checking for Understanding Applying Economic Concepts
1. Main Idea Why is structural unemployment a 5. Employment Examine the similarities and
more difficult problem for the economy and differences between structural and techno-
for individual workers than other types of logical unemployment. Give an example of
unemployment? each. Why are these kinds of unemployment
serious problems for an economy?
2. Key Terms Define unemployed, unemploy-
ment rate, frictional unemployment, struc-
tural unemployment, cyclical unemployment,
seasonal unemployment, technological unem-
6. Drawing Inferences What factors make it
ployment, automation.
difficult to determine the unemployment
3. Describe how the government collects rate?
monthly data on employment.
7. Categorizing Information Make a list of
4. Differentiate between the five major kinds of three reasons that could cause a person to
unemployment. become a discouraged worker.
Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.

DECEMBER 28, 1998
What do laid-off workers have to fear in
today™s labor market? For those severed
after only a year or two on the job”
especially younger workers”the issue
may not be a burning one. But for many
of those severed from more permanent
jobs, it™s compelling.

What Is the Impact of
Lay-Offs? However, all of the recent increases [went to] to
younger workers. Those from ages 45 to 64 were
still hit with pay declines averaging 10%.
Looking at the 3.1 million workers who were
In short, the severe earnings drops suffered by
laid off from full-time permanent jobs (held at
earlier groups of displaced full-time workers have
least three years) from 1995 through 1997, the
diminished significantly as the expansion has
survey found that in many respects their fates
continued. But with only two-thirds of those laid
were comparable to those found in [a] 1996 sur-
off in recent years back at full-time jobs and
vey for workers laid off in 1993 and 1994.
nearly 40% of full-timers taking pay cuts, it™s clear
Specifically, in each case about 67% of workers
that many workers”particularly those over 45”
were reemployed at full-time jobs, 14% to 16%
continue to suffer considerable economic pain.
were working part-time or at home, and 12% to
14% had dropped out of the labor force. ”Reprinted from December 28, 1998 issue of Business Week, by special
permission, copyright © 1998 by The McGraw-Hill Companies, Inc.
The main difference was that recent earnings
declines were far less pronounced. Whereas
55% of reemployed full-timers in the earlier
Examining the Newsclip
survey experienced pay drops, and 34% of them
suffered cuts of more than 20%, the figures 1. Analyzing Information What percentage
in the 1998 survey were 38% of workers who were laid off during the
and 21%, respectively. And period from 1995 through 1997 found new,
the median period between full-time jobs?
jobs fell from 8.3 to 5 weeks. 2. Analyzing Information What percentage
In addition, the reem- either left the labor force or remained
ployed full-time contingent™s unemployed?
median weekly earnings were 3. Drawing Conclusions What age group
up about 2% in the 1998 sur- faced the most difficulty in obtaining
vey, compared with a 14% employment? Why do you think this is so?
decline in the prior survey.

Main Idea Key Terms
“Inflation” is a rise in the general level of prices. price level, deflation, creeping inflation, galloping
inflation, hyperinflation
Reading Strategy
Graphic Organizer As you read the section,
After studying this section, you will be able to:
complete a graphic organizer similar to the one
1. Explain how inflation is measured.
below by identifying the steps in a wage-price
2. Discuss five causes of inflation.
3. Analyze the destabilizing consequences of inflation.
Higher prices
Step 2 Applying Economic Concepts
Inflation Have you ever wondered if you should buy
Step 1
something before the price of the item goes up? Read
to find out how inflation changes our spending habits.

nflation is a special kind of economic instability,

Cover Stor y
one that deals with changes in the level of prices
rather than the level of employment and output.
Even so, as we saw in the cover story, changes in
Shrinking Labor Pool Raise prices, employment, and output are all linked.
Fear of Wage Pressures an
Higher Prices Inflation in the United States
Is the number To better understand inflation, we must first
of available but examine how it is measured. Then we can
jobless workers in examine the causes of inflation and its consequences.
the United States In order to find inflation, we start with the price level,
shrinking to the
the relative magnitude of prices at one point in time.
point that employ-
ers may be forced
to grant inflation- Measuring Inflation
ary wage increases
To measure the price level, economists select a
to attract new le?
Are fewer workers availab
market basket of goods. They then construct a
employees or keep
the ones they have? price index such as the consumer price index
continue to tighten, sig
“Should labor markets (CPI), the producer price index, or the implicit
s, in excess of produc
cant increases in wage GDP price deflator.
emerge, absent the un
growth, will inevitably ederal Inflation is reported in terms of annual rates
pply and demand,” [F
repeal of the law of su ress. of change of the price level. For example, if the
] Greenspan told Cong
Reserve Chairman Alan CPI at the beginning of one year is 111, and if
June 25, 1999
”The Washington Post,
it reaches 115 by the beginning of the next,
inflation would be computed as follows (with

Figure 14.5

The Rate of Inflation
Annual Rate of Inflation in Percent





1965 1970 1975 1980 1985 1990 1995 2000
Recession years
Source: Bureau of Economic Analysis, United States Department of Commerce

Using Graphs Inflation tends to increase at the end of expansions,
and tends to decrease during periods of recession. How would you
characterize the inflation rate during the period from 1990 to
Visit epp.glencoe.com and click on
Textbook Updates”Chapter 14 for
an update of the data.

everything multiplied by 100 to convert the decimal Degrees of Inflation
to a percent): Several terms describe the severity of inflation.
One is creeping inflation”inflation in the range of 1
change in price level
inflation rate 100 to 3 percent per year. Another is galloping inflation,
beginning price level
a more intense form of inflation that can go as high
or, as 100 to 300 percent. Many Latin American coun-
tries and many countries in the former communist
(115 111)
inflation rate 100 3.6%
bloc have experienced rates in this range in recent
years. When inflation gets totally out of control,
hyperinflation”inflation in the range of 500 percent
Figure 14.5 shows the rate of inflation from
a year and above”occurs. Hyperinflation, however,
1965 to the present. As you can see, prices tend to
does not happen very often and generally is the last
rise faster during expansions and then slow down
stage before a total monetary collapse.
during recessions.
The record for hyperinflation was set in Hungary
On rare occasions, unusual circumstances may
during World War II, when huge amounts of cur-
cause deflation, or a decrease in the general price
rency were printed to pay the government™s bills. By
level. Only two significant deflations have taken
the end of the war, it was claimed that 828 octillion
place in the 1900s. One was during the post“World
(828,000,000,000,000,000,000,000,000,000) pengös
War I recession of the early 1920s. The other was
equaled 1 prewar pengö.
during the Great Depression of the 1930s.

Causes of Inflation The final and most popular explanation for
inflation is excessive monetary growth. This occurs
Several explanations have been offered for when the money supply grows faster than real
the causes of inflation. Nearly every period GDP. According to this view, any extra money that
of inflation is due to one of the following causes. is created by the Federal Reserve System will
According to demand-pull theory, all sectors in increase some group™s purchasing power. When
the economy try to buy more goods and services this money is spent, it causes a demand-pull effect
than the economy can produce. As consumers, that drives up prices.
businesses, and governments converge on stores, Advocates of this explanation point out that
shortages occur and prices go up. Thus prices are inflation cannot be maintained without a growing
“pulled up” by excessive demand. money supply to fuel it. For example, if the price
Another explanation involves the federal govern- of gas goes up sharply, and if the amount of money
ment™s deficit. Basically, this explanation is a variant people have does not change, then they will simply
of the demand-pull theory. While demand-pull have to buy less of something else. So, while the
blames excess demand on all sectors of the economy, price of gas may rise, the prices of other things will
this explanation blames inflation only on the federal fall, leaving the price level unchanged.
government™s deficit spending.
A third explanation claims that
rising input costs”especially labor”
drive up the cost of products for
Figure 14.6
manufacturers and cause inflation.
This situation might take place, for
example, when a strong national
The Declining Value of the Dollar
union wins a large wage contract,
forcing producers to raise prices to
recover the labor costs. Or, as noted .90
in the cover story, labor costs could .80
Value in Terms of 1900

go up when labor markets are tight
Spending Power

and the unemployment rate is excep-
tionally low.
An unexpected increase in the .50
cost of nonlabor inputs also could .40
cause the price level to rise. Such a
price rise occurred during the 1970s
when oil prices went from $5 to $35
a barrel. .10
Still another explanation says .00
that no single group is to blame for







inflation. According to this view, a








self-perpetuating spiral of wages and
Source: U.S. Department of Commerce
prices begins that is difficult to
stop. Using Graphs When the price level goes up, the
purchasing power of the dollar goes down. When the
Higher prices force workers to ask
price level goes down, the
for higher wages. If they get the higher
dollar purchases more. What
wages, producers try to recover that
happens to the purchasing
cost with higher prices. As each side
power of the dollar dur-
tries to increase its relative position Visit epp.glencoe.com and click on
ing a period of inflation? Textbook Updates”Chapter 14 for
with a larger price hike than before,
an update of the data.
the rate of inflation keeps rising.

the price of borrowed money”also went up. This
caused spending on durable goods, especially
housing and automobiles, to fall dramatically.
To illustrate, suppose that a young couple wanted
to borrow $60,000 over 20 years to buy a house. At
Student Web Activity Visit the Economics: Principles
an 8 percent interest rate, their monthly mortgage
and Practices Web site at epp.glencoe.com and click
on Chapter 14”Student Web Activities for an activ- payment would be $501.86. At 14 percent, the pay-
ity on working wth economic statistics. ment would be $746.11. In 1981 some mortgage
rates reached 18 percent, which meant a monthly
payment of about $926 for the same loan! As a
result, the housing industry almost collapsed.
Consequences of Inflation A third destabilizing effect of inflation is that it
Inflation involves more than rapidly rising tempts some people to speculate heavily in an
prices. When inflation is present, it can attempt to take advantage of a higher price level.
have a disruptive effect on an economy for several People who ordinarily put their money in reasonably
reasons. safe investments begin buying luxury condomini-
The most obvious effect of inflation is that the ums, diamonds and gemstones, and other exotic
dollar buys less. Because the purchasing power of items that might be expected to increase in price.
the dollar falls as prices rise, a dollar loses value Finally, inflation alters the distribution of
over time. Figure 14.6 shows how the dollar lost its income. During long inflationary periods, lenders
value as inflation eroded its purchasing power. are generally hurt more than borrowers. Loans made
Decreased purchasing power is especially hard earlier are repaid later in inflated dollars.
on retired people with fixed incomes because their Suppose, for example, that a person borrows
money buys a little less each month. Those not on money to buy bread that costs fifty cents a loaf. If
fixed incomes are better able to cope. They can the amount borrowed was $100, the person could
increase their fees to secure additional income. buy 200 loaves of bread. If inflation set in, and if
A second destabilizing effect is that inflation the price doubled by the time the loan was paid
can cause people to change their spending habits, back, the lender would only be able to buy 100
which disrupts the economy. For example, when loaves of bread. Inflation in the long run, then,
prices went up in the early 1980s, interest rates” favors debtors over creditors.

Checking for Understanding Applying Economic Concepts
1. Main Idea What is the difference between 6. Inflation What does an inflation rate of
the price level and the rate of inflation? 4 percent mean?
2. Key Terms Define price level, deflation,
creeping inflation, galloping inflation,
7. Categorizing Information What kind of
3. Describe how the CPI is used to compute inflation might be described as “too many
the inflation rate. dollars chasing too few goods”?
4. List five explanations for the causes of 8. Understanding Cause and Effect In 1974
inflation. the price of crude oil increased greatly.
5. Identify four ways inflation destabilizes What type of inflation did this cause?
the economy.
Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.

Using the Internet
To learn more about almost any topic imaginable, use the Internet”a
global network of computers. Many features, such as E-mail, interactive
educational classes, and shopping services are offered on the Net. To get on
the Internet, you need three things: (a) a personal computer, (b) a modem
(a device that connects your computer to a telephone line), and (c) an
account with an Internet Service Provider (ISP). An ISP, such as America
Online, is a company that enables you to log on to the Internet, usually
for a fee.

searching until you find the information that
Learning the Skill
you want.
After you are connected, the easiest way to access
4. If you get “lost” on the Internet, click on the back-
Internet sites is to use a “Web browser,” a program
arrow key at the top of the screen until you find a site
that lets you view and explore information on the
that looks familiar.
World Wide Web. The Web consists of many
documents called “Web sites,” each of which has its
5. Continue selecting sites until you have enough
own address, or Uniform Resource Locator (URL).
information to write a short report on inflation trends
Many URLs start with the keystrokes http://
over the past three months.
If you don™t know the exact URL of a site,
commercial “search engines” such as Yahoo! or
AltaVista, can help you find information. Type a
subject or name into the “search” box, then press
Enter. The search engine lists available sites that may
have the information you are looking for.

Practicing the Skill
Follow these steps to learn more about the
inflation rate.
1. Log on to the Internet and choose a search
engine to use.
A search engine can help you
2. Search by selecting one of the listed categories or quickly locate information on
by typing in the subject you want to find, such the World Wide Web.
as “inflation” or “the inflation rate.”
3. Continue your search by scrolling down the list
that appears on your screen. When you select an
entry, click on it to access the information.
Sometimes the information you first access will Follow the above procedures to locate information
not be exactly what you need. If so, continue about the population of your state. Use the infor-
mation you gather to create a chart or graph
depicting changes in population from 1960 to
the present.
Poverty and the Distribution
of Income
Main Idea Key Terms
Reasons for income inequality include ability differ- Lorenz curve, poverty guidelines, welfare, food
ences, education and training, and discrimination. stamps, Earned Income Tax Credits (EITC), enterprise
zone, workfare, negative income tax
Reading Strategy
Graphic Organizer As you read the section, complete
a graphic organizer similar to the one below by list- After studying this section, you will be able to:
ing three explanations for a growing income gap. 1. Explain how economists measure the distribution
of income.
2. Discuss the reasons for the inequality of income.
3. Discuss antipoverty programs.
Applying Economic Concepts
Distribution of Income Do you compare what you
make to the earnings of others? Read to find out more
about how income is distributed in the United States.

Cover Stor y
n the United States, as in other parts of the
world, people do not all have the same
income. A large number of people live in
From Welfare to Work poverty despite the efforts of programs such as the
rvice of America starte one featured in the cover story.
When United Parcel Se ars
to sort packages 25 ye
ring welfare recipients
hi getting
no idea of what it was
ago, the company had
The Distribution of Income
itself into.
What UPS got was a To evaluate the distribution of income, the
pool of adept employ- incomes of all families are ranked from
ees in it for the long
highest to lowest. The ranking is then divided into
quintiles, or fifths, for examination. The table in
In fact, of the
Panel A of Figure 14.7 shows family income quin-
10,000 welfare recipi-
ents the company has tile data for two different years. Only money
hired since January income is counted; other aid such as food stamps,
s for
1996, the shipping Work-hire program a plu medicaid, or subsidized housing is excluded. Using
giant estimates about UPS a recent year as our example, the percent of income
70 percent stay. ork earned by each quintile is added to the lower quin-
oven that welfare-to-w
“Our experience has pr man tiles and plotted as a Lorenz curve. The Lorenz
s,” said . . . a spokeswo
hires are excellent hire curve”a curve that shows how much the actual dis-
for UPS.
tribution of income varies from an equal distribu-
”CNNfn, August 5, 19
tion”appears in Panel B.

To illustrate, the 3.6 percent of Figure 14.7
total income received by the lowest
quintile is plotted in Panel B as point
The Distributions of Income by Families
a. This amount is combined with the
income the next quintile earns and A Family Income Ranked by Quintiles
then plotted as point b. This process


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