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Lectures in Macroeconomics- Charles W. Upton
The Natural Rate of Unemployment
Un
The Natural Rate of Unemployment
Three Facts
• Unemployment is good for you
• There is a natural rate of unemployment
The Natural Rate of Unemployment
Unemployment is good for you
• Resources get reallocated– Joseph Schumpeter called this the process of
creative destruction.
• Unemployment is part of the process by which we reallocate resources.
The Natural Rate of Unemployment
Unemployment is good for you
• The modern American economy is quite dynamic; with over 130 million employed.
• Tens of millions of jobs are created and destroyed each year.
The Natural Rate of Unemployment
Unemployment is good for you
• Suppose– No one is allowed to quit.– No one can be fired.– Anyone wanting to start work must take the
first job offered.
• This would not be a pretty situation.
The Natural Rate of Unemployment
Un
D
SSRSLR
H*
w*
The Natural Rate of Unemployment
Un
D
SSRSLR
H*
w*
Even here, some people will be
searching. This is the natural rate
The Natural Rate of Unemployment
Un
D
SSRSLR
H*
w*
Even here, some people will be
searching. This is the natural rate
Un can vary
• Across age, gender and racial groups.
The Natural Rate of Unemployment
Un
D
SSRSLR
H*
w*
Even here, some people will be
searching. This is the natural rate
Un can vary
• Across age, gender and racial groups.
• Over Time
The Natural Rate of Unemployment
Un
D
SSRSLR
H*
w*
Even here, some people will be
searching. This is the natural rate
Un can vary
• Across age, gender and racial groups.
• Over Time
• Across Nations
The Natural Rate of Unemployment
Un
D
SSRSLR
H*
w*
Even here, some people will be
searching. This is the natural rate
Un can vary
• Across age, gender and racial groups.
• Over Time
• Across Nations
Why? The Economics of
Search can vary
The Natural Rate of Unemployment
U for different nations
1998-2001 Unemployment Rates for Different Countries
France 9.9 Japan 4.7 Germany 8.5 Italy 11.0 United Kingdom 5.7 Canada 6.8 United States 4.4
The Natural Rate of Unemployment
Why differences across countries?
• Large safety net. – Workers in Europe receive a large portion of
their pay when unemployed and for much longer time than in the US. The rules about which type of jobs they have to accept are very narrow. Hence, many prefer to remain unemployed.
The Natural Rate of Unemployment
Why differences across countries?
• Large safety net.
• Rigid labor force.– In Europe, it is very difficult to fire someone,
so firms are hesitant to hire. The benefits that companies are required to give each worker make it cheaper to pay overtime in many cases rather than hire a new worker.
The Natural Rate of Unemployment
Why differences across countries?
• Large safety net.
• Rigid labor force.
• Different hiring policies for young people. – Given the difficulty of firing, many European
firms are unwilling to hire inexperienced young people. They spend much more time working as casual workers, or in the gray market.
The Natural Rate of Unemployment
Why differences across countries?
• Large safety net. • Rigid labor force.• Different hiring policies for young people. • Different employment policies.
– Many Japanese firms will not fire or lay off any workers. In Japanese companies, many workers go to work, though they have nothing to do. Some estimates put the number of workers in this situation at over one million.
The Natural Rate of Unemployment
U, 1959-2002
0.0
5.0
10.0
15.0
1959-2002
Un
em
plo
ym
en
t R
ate
The Natural Rate of Unemployment
U, 1959-2002
0.0
5.0
10.0
15.0
1959-2002
Un
em
plo
ym
en
t R
ate
The Natural Rate of Unemployment
What does this mean?
• The natural rate fluctuates.
• The unemployment rate can differ from the natural rate.
The Natural Rate of Unemployment
Can we alter Un?
• What happens if we eliminate– Welfare– Unemployment
Compensation– Job Retraining
Programs
The Natural Rate of Unemployment
Can we alter Un?
• What happens if we eliminate– Welfare– Unemployment
Compensation– Job Retraining
Programs
Natural rate falls because it is more attractive to finish
search quickly.
The Natural Rate of Unemployment
Can we alter Un?
• What happens if we eliminate– Welfare– Unemployment
Compensation– Job Retraining
Programs
• What happens if we expand– Welfare– Unemployment
Compensation– Job Retraining
Programs
The Natural Rate of Unemployment
Can we alter Un?
• What happens if we eliminate– Welfare– Unemployment
Compensation– Job Retraining
Programs
• What happens if we expand– Welfare– Unemployment
Compensation– Job Retraining
Programs
Natural rate rises because it is less
attractive to finish search quickly.
The Natural Rate of Unemployment
Should we alter Un?
• Each program has its benefits and costs.
• Don’t think you can expand unemployment compensation or welfare without affecting the Natural Rate.
• Don’t think you should eliminate these programs without imposing other costs.
The Natural Rate of Unemployment
Un
D
SSRSLR
H*
w*
Are there other ways to measure
Un? Yes, but not now
The Natural Rate of Unemployment
End
©2004 Charles W. Upton. All rights reserved
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