ECO 372 Week 2 Unemployment and Inflation Example

A Tight Labor Market in Grand Rapids and Prices That Would Not Settle: Measuring Unemployment and Inflation, Their Types and Costs and the Trade-Off Between Them in 2024-2025

[Student Name]

University of Phoenix

ECO/372: Principles of Macroeconomics

Week 2 Assignment

[Instructor Name]

[Date]

Lakeview Precision Components is a composite written for a model paper; labor and price statistics and research findings come from the sources listed and are stated generally.

Lakeview Precision Components, the composite Grand Rapids supplier of steering and brake parts, has had 22 machinist positions open for most of the past year, even after raising starting pay twice. At the same time, its costs for steel, electricity and health insurance rose, and its customers resisted price increases. Its finance chief asked how the region could have unfilled jobs while people said times were hard, and why inflation had not fallen faster. Unemployment and inflation are the two numbers most people use to judge the economy, and both are easier to quote than to understand. This paper explains them.

Counting the Unemployed

The Bureau of Labor Statistics (2025) measures unemployment from a monthly survey of about 60,000 households. People are employed if they worked for pay in the survey week. They are unemployed if they had no job, were available for work and looked for work in the previous four weeks, or were on temporary layoff. Everyone else of working age, such as retirees, full-time students and people who stopped looking, is outside the labor force. The unemployment rate is the unemployed divided by the labor force; the participation rate is the labor force divided by the working-age population.

The Numbers in 2024 and 2025

The national unemployment rate stayed low by historical standards through 2024 and the first half of 2025, around 4 to 4.3 percent, after reaching about 3.4 percent in 2023. Michigan's rate ran somewhat higher, reflecting the auto industry's uneven demand. Labor force participation had not fully returned to its pre-2020 level, partly because many baby boomers retired. A low unemployment rate with lower participation meant fewer people available for open jobs.

Three Kinds of Unemployment

Frictional unemployment arises as people move between jobs or enter the labor force; it takes time to match. Structural unemployment arises when the skills or locations of job seekers fail to fit the openings. Lakeview's machinist vacancies reflect structural unemployment: people are looking for work in Grand Rapids, but few have the training to run computer-controlled machining centers. Cyclical unemployment rises in recessions and falls in expansions as demand changes. The natural rate of unemployment combines frictional and structural unemployment (Mankiw, 2021), the rate the economy tends toward when cyclical unemployment is zero, estimated recently at around 4 percent.

How Inflation Is Measured

The consumer price index tracks what a set list of household purchases costs over time, each item weighted by its share of urban consumers' spending. Inflation is the percentage change in the index. Over the twelve months to mid-2025, the index rose by roughly 2.5 to 3 percent, well below the peak above 9 percent in mid-2022 but above the Federal Reserve's 2 percent goal, which refers to a related measure of personal consumption prices.

Why the Index May Overstate Inflation

Economists have identified biases that make the consumer price index overstate the rise in the cost of living: consumers substitute away from goods whose prices rise most, new products enter the basket with a delay and quality improvements are hard to measure. A car part that lasts twice as long at a higher price may represent a smaller real price increase than the index shows. The Bureau has reduced these biases over time, but some remain.

The Costs of Inflation

Expected inflation imposes modest costs: the time and expense of changing prices, the erosion of cash holdings and distortions in taxes, which are based on nominal amounts. Unexpected inflation does more damage by redistributing wealth. Lakeview signed three-year supply contracts with automakers in 2021 at fixed prices, and the unexpected inflation of 2022 raised its costs far faster than its revenue, squeezing margins. Workers on fixed wages lost purchasing power until raises caught up. Borrowers with fixed-rate loans gained at lenders' expense.

The Phillips Curve

Phillips (1958) documented an inverse relationship between unemployment and wage growth in Britain, which economists later expressed as a trade-off between unemployment and inflation. When unemployment is low, employers compete for workers, raising wages and prices. Lakeview's two pay increases fit that story.

Why the Trade-Off Shifts

Friedman (1968) argued that the trade-off holds only in the short run, because workers and firms adjust their expectations of inflation. If people expect higher inflation, they demand higher wages, shifting the curve up. Keeping expectations anchored near the Federal Reserve's 2 percent goal is therefore central to bringing inflation down without a large rise in unemployment. In 2023 and 2024, inflation fell while unemployment stayed low, an outcome helped by easing supply problems and by expectations that remained fairly well anchored.

Tariffs and Prices

In 2025, new tariffs on imported steel, aluminum and many other goods raised costs for manufacturers like Lakeview. Higher input costs push prices up even when unemployment does not change, a supply-side source of inflation that the Phillips curve does not capture well. Week 3 examines such shocks.

Wages and Real Wages

Nominal wages at Lakeview rose about 11 percent over two years, but consumer prices rose about 7 percent over the same period, so machinists' real wages, their purchasing power, rose only about 4 percent. Real wage growth matters for both sides: it determines whether workers feel better off and whether employers' labor costs are rising faster than the prices they can charge. During 2022, real wages fell for many workers because inflation outpaced raises; by 2024 and 2025, wage growth exceeded inflation again. Distinguishing nominal from real wages explains why many people felt worse off even as their paychecks grew.

Lessons for Lakeview

Lakeview's finance chief drew three lessons. Structural shortages call for training: the company partnered with a community college on a machinist apprenticeship. Unexpected inflation is costly in fixed-price contracts, so new contracts include price adjustment clauses tied to steel indexes. And national averages hide local conditions, so the company tracks Michigan data alongside national figures.

Conclusion

Unemployment counts only those looking for work, so a low rate can coexist with labor shortages when participation is low and skills do not match jobs. The consumer price index measures inflation with known biases, and unexpected inflation redistributes wealth, as Lakeview's fixed-price contracts showed. The short-run trade-off between unemployment and inflation shifts with expectations and with supply shocks such as tariffs.

References

Bureau of Labor Statistics. (2025). The employment situation. U.S. Department of Labor. https://www.bls.gov/news.release/empsit.toc.htm

Friedman, M. (1968). The role of monetary policy. The American Economic Review, 58(1), 1-17.

Mankiw, N. G. (2021). Principles of macroeconomics (9th ed.). Cengage.

Phillips, A. W. (1958). The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1861-1957. Economica, 25(100), 283-299. https://doi.org/10.2307/2550759