MACROECONOMICSMACROECONOMICS

Chapter 6Chapter 6

UnemploymentUnemployment

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Steady StateSteady StateThe labor market is in equilibrium.The labor market is in equilibrium.No unemployment = long-run rate of No unemployment = long-run rate of

unemployment.unemployment.Call it “natural rate of unemployment” or Call it “natural rate of unemployment” or

NAIRU – non-accelerating inflation rate of NAIRU – non-accelerating inflation rate of unemployment.unemployment.

Number of unemployed finding a job is the Number of unemployed finding a job is the same as number of employed losing a job.same as number of employed losing a job.

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Natural Rate DefinitionsNatural Rate Definitions

sf

s

L

U

sL

Usf

L

Uss

L

Uf

L

ULs

L

fU

ULsfU

sEfU

jobslostjobsfound

eSteadyStatE

jobslosts

U

jobsfoundf

L

UUR

UEL

)(

)(

)(

##

:

#

# The natural rate of unemployment (the rate when the labor market is in long run equilibrium) can be calculated by s/(f+s): rate of jobs lost over rate of jobs lost plus rate of jobs found.

Suppose during steady state 2% of the employed lose jobs per month and 30% of the unemployed find a job.

.02/.32 = 1/16 = 6.7%

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How To Reduce Natural RateHow To Reduce Natural Rate

Either lower s, rate of job separation, or Either lower s, rate of job separation, or raise f, rate of job finding.raise f, rate of job finding.Can the government make job losses Can the government make job losses

smaller?smaller?There are measures government can do to There are measures government can do to

increase f.increase f.

55

Frictional UnemploymentFrictional Unemployment

Unemployment during search for a job.Unemployment during search for a job. It is the result ofIt is the result of

Sectoral shiftsSectoral shiftsBankrupt firmsBankrupt firmsFiringFiringSkills are obsoleteSkills are obsoleteChanging careersChanging careersMoving to another locationMoving to another location

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Policies to Reduce UPolicies to Reduce UNN

Retraining to shift workers from declining Retraining to shift workers from declining industries to growing industries.industries to growing industries.

Disseminate information about job Disseminate information about job vacancies.vacancies.

Make companies pay the full Make companies pay the full unemployment insurance for laid-off unemployment insurance for laid-off workers.workers.

77

Policies That Raise UPolicies That Raise UNN

Unemployment insuranceUnemployment insuranceThe urgency of finding a job – any job – is The urgency of finding a job – any job – is

diminished.diminished.For those who need the support to survive, it For those who need the support to survive, it

is a lifeline.is a lifeline. It also allows longer search to match skills It also allows longer search to match skills

and jobs.and jobs.For those who do not care to have a job, it For those who do not care to have a job, it

may delay their job finding.may delay their job finding.

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Even five years after losing his job, a sacked Norwegian worker can expect to take home almost three-quarters of what he did while employed, according to the OECD. The corresponding fraction is nearly two-thirds in Belgium, but is much lower in most other OECD countries. Benefits in America are not only less generous to begin with, but also expire after one year. Sweden and France both pay an unemployed person around two-thirds of his previous income in the first year of joblessness. But although a French worker can expect benefits to provide nearly a third of what he earned in his last job even five years after he lost it, a Swede can expect only 8% of his previous income to be replaced.

http://www.economist.com/markets/indicators/displaystory.cfm?story_id=14513958

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Structural UnemploymentStructural Unemployment

Define it as unemployment resulting from Define it as unemployment resulting from wage rigidity: real wage above the wage rigidity: real wage above the equilibrium real wage.equilibrium real wage.Minimum wage lawsMinimum wage lawsUnionsUnionsEfficiency wagesEfficiency wages

1010

Minimum Wage LawsMinimum Wage Laws

In general, a 10% increase in the minimum In general, a 10% increase in the minimum wage reduces teenage employment by 1-wage reduces teenage employment by 1-3%.3%.

Earned income tax credit helps the Earned income tax credit helps the working poor more.working poor more.

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Characteristics of Minimum Characteristics of Minimum Wage WorkersWage Workers

http://www.bls.gov/cps/minwage2008.htmThey are a small percentage of the labor They are a small percentage of the labor

force. They are young, female, less force. They are young, female, less educated, part-time, working for educated, part-time, working for restaurants and bars.restaurants and bars.

1212

UnionsUnions

Most countries in the EU cover 2/3 or Most countries in the EU cover 2/3 or more of their workers through collective more of their workers through collective bargaining.bargaining.

US is at 18%, UK at 47%.US is at 18%, UK at 47%.How come Sweden with 83% covered with How come Sweden with 83% covered with

collective bargaining did not have high collective bargaining did not have high unemployment?unemployment?Government including the outsiders in the Government including the outsiders in the

process.process.

UnionsUnions

1313http://www.bls.gov/news.release/union2.nr0.htm

1414

Efficiency WagesEfficiency Wages

Higher wages influence nutrition in poorer Higher wages influence nutrition in poorer countries.countries.

Higher wages lower turnover rates and Higher wages lower turnover rates and retraining costs.retraining costs.

Higher wages reduce adverse selection.Higher wages reduce adverse selection.Better workers do not seek higher paying jobs Better workers do not seek higher paying jobs

leaving the firm with worse workers. leaving the firm with worse workers. Higher wages reduce moral hazard.Higher wages reduce moral hazard.

Less shirking, more worker effort.Less shirking, more worker effort.

1515

The US ExperienceThe US Experience

During 1990 to 2006 During 1990 to 2006 38% of unemployed found jobs within a month38% of unemployed found jobs within a month31% were unemployed for more than 15 31% were unemployed for more than 15

weeks.weeks.71% of unemployment time was represented 71% of unemployment time was represented

by the second group while only 7% was from by the second group while only 7% was from the first group.the first group.

1616

The US ExperienceThe US Experience

Example: Example: Suppose there are 10 people who are Suppose there are 10 people who are

unemployed some time.unemployed some time.7 of the 10 are unemployed for one month.7 of the 10 are unemployed for one month.3 are unemployed for 11 months.3 are unemployed for 11 months.Total time of unemployment: 7+33=40 months.Total time of unemployment: 7+33=40 months.Most time of unemployment is from the long-Most time of unemployment is from the long-

term: 33/40.term: 33/40.Most unemployed (7/10) have short spells. Most unemployed (7/10) have short spells.

1717

Unemployment Rates in 2008

Men Women

Total 6.1 5.4

White 5.5 4.9

Black 11.4 8.9

Typically, the unemployment rates between groups have been very consistent: 2W=B, 2B=Wta, 2Wta=Bta.

1818

Productivity, Sluggish Real Productivity, Sluggish Real Wages and UnemploymentWages and Unemployment

W/P W/P

L L

S

MPL MPL

SS’

S’

MPL’MPL’

1919

Alternative MeasuresAlternative Measures

http://www.bls.gov/news.release/empsit.t12.htm

Weeks UnemployedWeeks Unemployed

2020

Intensity of UnemploymentIntensity of Unemployment

2121

2222

European ExperienceEuropean Experience Western European unemployment has been Western European unemployment has been

higher.higher. Generous benefits for unemployed.Generous benefits for unemployed. Technological impact on the demand for unskilled Technological impact on the demand for unskilled

labor.labor.

Public spending on active labor market policies Public spending on active labor market policies reduces unemployment.reduces unemployment. Job trainingJob training Job search assistanceJob search assistance Subsidized employmentSubsidized employment

2323

Misery IndexMisery Index

Starting 1970s a misery index has been Starting 1970s a misery index has been used to indicate the hardship of the used to indicate the hardship of the population: UR+population: UR+ππ..

Studies indicate the true misery index Studies indicate the true misery index should be UR+0.5should be UR+0.5ππ or 2UR+ or 2UR+ ππ (if you (if you support the opposition! Same measure, support the opposition! Same measure, higher number)higher number)

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Why Europeans Work Less?Why Europeans Work Less? High taxes in Europe make people decide to High taxes in Europe make people decide to

give up work.give up work. Assumes very large labor elasticityAssumes very large labor elasticity US hours per year haven’t changed yet tax rates US hours per year haven’t changed yet tax rates

dropped a lot since 1960s.dropped a lot since 1960s. Underground economy in Europe may be higher Underground economy in Europe may be higher

indicating people work off books.indicating people work off books. Unions have pushed for more holidays and Unions have pushed for more holidays and

vacations.vacations. Europeans prefer more leisure to more income, Europeans prefer more leisure to more income,

maybe.maybe.