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In macroeconomics consumer spending is measured by the household. Using this model, the most important determining factor of consumer spending is a family's disposable income. While salaries are typically how people report earnings, income after taxes and government transfers (disposable income) is the true measure of spending possibilities. The typical analysis of the relationship between a household's disposable income and its consumer spending is done via the consumption function, c= a + MPC x yd. In this equation c is consumer spending, yd is disposable income, MPC is the marginal propensity to consume, and a is household autonomous consumer spending (a constant).

From this graph we see the consumption function at work. The slope of the graph is the natural log of MPC, which stays relatively smooth over time. This is in line with the concept that over time our consumption stays constant. A point of note representing potential changes to our consumption is seen in 2008/2009 during the Great Recession. Because of this monumental event there was a decrease in many households' disposable income and therefore a decrease in consumer spending.

The aggregate consumption function shows the relationship between aggregate current disposable income and aggregate consumer spending. It has the same form as the household level consumption function, therefore its equation is also C = A+ MPC x YD, where A is the aggregate autonomous consumer spending (the amount of consumer spending when YD=0) and YD is the aggregate current disposable income.

As with any function, certain changes cause shifts in the aggregate consumption function. If something other than disposable income changes, which would simply cause a movement along the function, the function shifts. Two principle causes of this are changes in expected future disposal income and changes in aggregate wealth.

For example, an employee expecting a big promotion will typically increase their consumption due to this expectance of an increase in future displays income. This would cause an upward shift of the aggregate consumption  function. On the other hand, an employee expecting to be laid off from their job in the near future may decrease his or her consumption due to this expectance of decrease in future disposable income, causing a downward shift in the aggregate consumption function. An example of a change on aggregate wealth is having just paid off your mortgage; you have accumulated more wealth by owning your house and by having more disposable income to save and spend due to no longer having to pay that bill every month.

Flat World Knowledge and Krugman and Wells 5th edition.


Caroline Rivers and Parker Skinner

While the terms employment and unemployment may seem straightforward, not all without a job are counted as unemployed. To be considered unemployed, one must not only be without a job, but also seeking a job and available to work. For example, the retired and disabled are not counted as unemployed-- one group is not seeking jobs, while the latter is not available to work.

Additional groups represent how the unemployment rate can be distorted by either overstatement or understatement. The first is discouraged workers, jobless individuals who are not counted as unemployed because they have not been actively seeking a job in the past 4 weeks, typically due to a lack of success in their recent job searches. These workers fall under the umbrella of marginally attached workers, those who want a job and have searched for one in the recently past, but are not currently looking. Underemployed workers, those who want a full-time job but are working part-time due to a lack of full-time positions, are also not counted in the unemployment rate.

Below is a graph representing the difference between the reported unemployment rate versus the unemployment rate when these uncounted groups of marginally attached workers and underemployed workers are included.

When compared to the chart of Civilian Unemployment rate shown below, you can see the rate is much higher when these groups are considered, an example of how the unemployment rate can inaccurately reflect the state of the economy. For example, in June 2009 the civilian unemployment rate is 9.5%, while it is 16.5% when marginally unattached and underemployed workers are accounted for.

Unemployment tracked from the end of 1989 until December 2017. This graph shows the fluctuation of the Unemployment Rate.

Here the ever-changing rate of unemployment is presented using data from the end of 1989 until December 2017. The concept of natural rate of unemployment is also shown as the rate has never and will never fall to 0% (in fact over this time period it rarely drops below 4%).

This next graph presents the fluctuating GDP growth rate over the same time period as the above graph. As you can see the growth rate of GDP is inverse to the unemployment rate, i.e. when the GDP change is negative the unemployment rate rises. When the GDP change is positive yet unemployment still rises it is known as a jobless recovery. This phenomenon was evident in 1992, a period of economic growth also known as a growth recession.