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Macroeconomics+Unemployment+
ECON+321+
U.S.+Unemployment+Rate+
Unemployment+Rate+
€
UR =U
U + EUR+ +=+Unemployment+Rate+(working+age+populaMon)+U +=+Unemployed+(+have+not+acMvely+looked+for+a+job+in+the+last+4+weeks)+E+ +=+Employed+U+E++=+Labor+Force+
The+informaMon+is+aVained+through+a+60K+household+phone+survey.++Biggest+Problem+right+now+–+Cell+Phones.+
AlternaMve+Measures+• Employment+to+PopulaMon+RaMo+
• ParMcipaMon+Rate+
• Where+NL+are+the+working+age+populaMon+not+in+the+labor+force+and+E+U+NL=working+age+populaMon.+
€
EPR =E
E +U + NL
€
PR =LF
Working Age Population
Unemployment+Rate+
Labor+Supply+
Labor+Demand+
++++++W*r+
++++++Wr+
L+
0%+Unemployment+Here+
Don’t+want+to+work+at+this+wage.+
++++L*+
Current+SituaMon+
January'2005' January'2010' January'2011' January'2012'
UR+ 5.3%+ 9.7%+ 9.1%+ 8.3%+
UR+>+15+Weeks+ 1.9%+ 5.8%+ 5.5%+ 4.8%+
Involuntary+Part+Time+(Not+SA)+
2.96%+ 5.54%+ 5.51%+ 5.33%+
U6+=+U+++IPT+++Marginally+aVached+
9.3%+ 16.7%+ 16.1%+ 15.1%+
0.00#
2.00#
4.00#
6.00#
8.00#
10.00#
March.48#
June.49#
September.50#
January.52#
April.53#
July.54#
October.55#
January.57#
April.58#
July.59#
October.60#
January.62#
April.63#
July.64#
October.65#
January.67#
April.68#
July.69#
October.70#
January.72#
April.73#
July.74#
October.75#
January.77#
April.78#
July.79#
October.80#
January.82#
April.83#
July.84#
October.85#
January.87#
April.88#
July.89#
October.90#
January.92#
April.93#
July.94#
October.95#
January.97#
April.98#
July.99#
October.00#
January.02#
April.03#
July.04#
October.05#
January.07#
April.08#
#Quarterly#Unemployment#Rate#1948#2008:#Bureau#of#Labor#and#StaJsJcs#(BLS)#
0"
2"
4"
6"
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10"
12"
M/YR"
M,08"
J,08"
S,08"
D,08"
M,09"
J,09"
S,09"
D,09"
M,10"
J,10"
S,10"
D,10"
M,11"
J,11"
S,11"
D,11"
M,12"
J,12"
S,12"
D,12"
M,13"
J,13"
S,13"
D,13"
Une
mploymen
t*Rate*
Date*
Forecasted*Unemployment*Rate*with*2.6%*GDP*Growth*********
UR"Recovery"from""1960's"to"1984"
UR"Recovery"A?er"1984"
UR"Recovery"Before"1960's"
0"
0.5"
1"
1.5"
2"
2.5"
3"
3.5"
4"
4.5"
5"
Oct,00" Oct,01" Oct,02" Oct,03" Oct,04" Oct,05" Oct,06" Oct,07" Oct,08" Oct,09" Oct,10"
Percen
t'Hiring,'Separa/on,'and'Job'Opening'Rates'
(3'Month'Moving'Averages)'
Hiring"Rate" Separa;on"Rate"Job"Opening"Rate" Layoff"&"Discharge"Rate"
0"
2"
4"
6"
8"
10"
12"
Oct+00" Oct+01" Oct+02" Oct+03" Oct+04" Oct+05" Oct+06" Oct+07" Oct+08" Oct+09" Oct+10"
Percen
t'
Hiring,'Separa/on,'and'Job'Opening'Rates'
Hiring"Rate"
Separa:on"Rate"
Job"Opening"Rate"
Unemployment"Rate"
€
Participation Rate(PR) =LF
Working Age Population
0"
5"
10"
15"
20"
25"Jan)00"
Apr)00"
Jul)00"
Oct)00"
Jan)01"
Apr)01"
Jul)01"
Oct)01"
Jan)02"
Apr)02"
Jul)02"
Oct)02"
Jan)03"
Apr)03"
Jul)03"
Oct)03"
Jan)04"
Apr)04"
Jul)04"
Oct)04"
Jan)05"
Apr)05"
Jul)05"
Oct)05"
Jan)06"
Apr)06"
Jul)06"
Oct)06"
Jan)07"
Apr)07"
Jul)07"
Oct)07"
Jan)08"
Apr)08"
Jul)08"
Oct)08"
Jan)09"
Apr)09"
Jul)09"
Oct)09"
Jan)10"
Apr)10"
Jul)10"
Oct)10"
Unem
ploym
ent*Rate*
DATE*
Industry*3*Month*Moving*Average*Unemployment*Rate*
Service"Average"(SA)"
ConstrucBon"(SA)"
Goods"Producing"without"ConstrucBon"Average"(SA)"
Search+Theory+• Unemployment+is+a+result+of+workers+and+jobs+being+heterogeneous+causing+fricMons+for+both+employees+and+employers+finding+a+suitable+match.+
• There+is+a+fixed+labor+force.+
• If+we+normalize+the+labor+force+we+have+the+fracMon+of+those+employed.++This+makes+U+the+unemployment+rate.+
€
E =1−U€
E = L −U
The+Value+of+Being+Employed+
Ve(w)+
w+
Ve(w)+
Value+of+Employment+Versus+the+Value+of+Unemployment+
• The+Value+of+Being+Employed+(Ve(w)).+ +separaMon+rate+(s)+leads+to+a++in+(Ve(w)).+
+s+is+exogenous+in+the+model.+
+wage+tax+(τw)+leads+to+a++in+(Ve(w)).+
• The+Value+of+Being+Unemployed+(Vu).+ +unemployment+benefits+(b)+leads+to+a++in+(Vu).+ +frequency+of+job+offers+(p)+leads+to+a++in+(Vu).+
+p+is+exogenous+in+the+model.+
The+Value+of+Being+Employed:++In+the+SeparaMon+Rate+(s)+or+an++in+the+
Wage+Tax.+Ve(w)+
w+
Ve(w)+
V’e(w)+
ReservaMon+Wage+
Ve(w)+
w+
Ve(w)+
+++++++Vu+
w*+
w*+is+the+reservaMon+wage+or+the+wage+that+is+sufficiently+high+for+the+unemployed+worker+to+accept+a+job+offer.+
w*+is+the+wage+that+sets++Ve(w)+≥+Vu.++
ReservaMon+Wage+with+an+Increase+in+Unemployment+Benefits+(b)+
Ve(w)+
w+
Ve(w)+
+++++++Vu+
w*+
+++++++V’u+
w’*+
DeterminaMon+of+the+Unemployment+Rate+
• s(1%U)'=+flow+of+workers+to+the+unemployment+rate.+
• H(w)'='fracMon+of+unemployed+workers+receiving+a+job+offer+with+a+wage++greater+than+some+w.+
• H(w*)'='fracMon'of+unemployed+workers+receiving+a+job+offer+with+a+wage+greater+than+the+reservaMon+wage+(w*).+
• UpH(w*)'=+flow+of+workers+from+unemployment+to+employment,+where+p+is+the+frequency+of+job+offers+or+the+fracMon+of+workers+receiving+an+offer.+
DeterminaMon+of+the+Unemployment+Rate+
• In a long run equilibrium, the flow of workers from unemployment to employment must equal the flow of workers from employment to unemployment.
€
s(1−U) =UpH(w*)
U =s
pH(w*) + s
DeterminaMon+of+the+Unemployment+Rate+
+++U++++1++++(0,0)+
+++s(1nU)+
UpH(w*)+
++++U*+
+++s(1nU),+UpH(w*)+
A+Rise+in+Unemployment+Benefits+(b)+
+++U++++1++++(0,0)+
+++s(1nU)+
UpH(w1*)+
++U1+
UpH(w2*)+
++U2+
b+:+a)+Vu,+++b)+w*, c)+H(w*), d)+U+
A+Rise+in+Wage+Taxes+(τw)+
+++U++++1++++(0,0)+
+++s(1nU)+
UpH(w1*)+
++U1+
UpH(w2*)+
++U2+
τw+:+a)+Ve(w),+++b)+w*, c)+H(w*), d)+U+
An+Increase+in+the+Job+Offer+Rate+(p)+
+++U++++1++++(0,0)+
+++s(1nU)+
Up1H(w*)+
++++++U1+
Up2H(w*)+
+++++++U2+
Efficiency+Wage+• Firms+may+pay+higher+wages+due+to+adverse+selecMon.+++
• Consider+two+types+of+workers,+one+with+high+ability+and+one+with+low+ability.++
• The+worker+with+high+ability+demands+a+higher+reservaMon+wage.+
• If+the+firm+wants+the+high+ability+worker,+they+will+have+to+pay+a+higher+wage.+
Efficiency+Wage+• In+order+to+induce+worker+effort,+a+firm+must+pay+a+wage+higher+than+the+market+clearing+wage.+++– Employees+can’t+perfectly+observe+worker+effort,+so+there+is+an+incenMve+to+shirk.+
– Also+workers+wouldn’t+care+about+being+fired+if+caught+shirking+because+they+could+get+another+job+at+the+same+wage.++
– So+now+firms+pay+higher+than+the+“going”+wage+so+that+workers+fear+the+probability+of+being+caught+shirking+and+facing+unemployment+or+employment+at+a+lower+wage.+
Efficiency+Wage:+Unemployment+Rate+
Labor+Supply+
Labor+Demand+
++++++w+(market+clearing)+
++++++wr+
L+++++L*+
++++++w*+(efficiency+wage)+
Unemployment+
++++LS+++++LD+
Efficiency+Wage+
e(w)+
e(w)+
w+
At+low+levels+of+wages,+workers+will+respond+to+wage+increases+with+greater+changes+in+effort+than+at+high+levels+of+wages.+
As+a+percent+of+your+income,+a+wage+increase+is+larger+when+you+have+low+wages.+
Efficiency+Wages+
• The+firm’s+decision+problem+is+now+as+follows:+• Choose+the+wage+that+maximises+profits;+once+the+wage+is+chosen+choose+the+employment+level+that+maximises+profits.+
€
π = F(e(w)L) − wL
Efficiency+Wage+
€
L,wMax π = F(e(w)L) − wL
F '(e(w)L)e(w) − w = 0F '(e(w)L)Le'(w) − L = 0
F '(e(w)L) =we(w)
we'(w)e(w)
=1
Efficiency+Wages+
€
we'(w)e(w)
=1
e'(w) =dedw
=e(w)w
We+can+rewrite+this:++
+ + + + +As:++
So+we+will+choose+a+(w)+that+maximizes+the+change+in+effort+with+respect+to+changes+in+wages,+or+the+marginal+increase+in+effort+for+an+increase+in+wages.++This+saMsfies+the+Solow+CondiMon.+
Solow+CondiMon+
Efficiency+Wage+
e(w)+
e(w)+
w+
An+increase+in+wages+increases+effort,+but+it+also+increases+cost.+
Firms+want+to+maximize+the+effort+received+from+the+worker+per+unit+of+real+wages+
+paid+to+the+work:+
We+want+where+the+line+drawn+from+the+origin+is+tangent+to+the+effort+funcMon.+€
e(w)w
++w*+
€
e(w*)w *
+++++++++Slope+=++
€
e(w1)w1
++w1+
+++Slope+=++
Efficiency+Wage:+Unemployment+Rate+
LS(r)+
LD+
++++++wr+
L+
Unemployment+
+++++LD(w*)+
In+the+efficiency+wage+model,+labor+demand+will+decide+the+employment+level.+
L(r)+is+the+labor+supply+dependent+on+the+interest+rate.++Labor+demand+is+not+effect+by+the+interest+rate.+
++++++w*r+
Output+In+the+Intertemporal+Supply+and+Demand+++(Graph+Real+Terms+–+Prices+Constant)+
++++++r+
Y+
The+demand+curve+is+downward+sloping+because+as+interest+rates+go+down,+Investment+and+ConsumpMon+increase.+
The+supply+curve+is+upward+sloping+because+as+interest+rates+rise,+the+supply+of+labor+increases+in+order+to+make+more+money+to+earn+a+return+from+savings.+
YD+ YS+
+++Y*+
Efficiency+Wage:+Output+In+the+Intertemporal+Supply+and+Demand+++
(Graph+Real+Terms+–+Prices+Constant)+
++++++r+
Y+
Because+employment+is+decided+by+the+labor+demand+curve+and+hence+output+is+decided+by+the+labor+demand+curve,+the+aggregate+supply+is+invariant+to+changes+in+the+interest+rate.++Hence+only+shius+in+the+supply+curve+will+affect+output+here.+
YD+YS+
+++Y*+
Efficiency+Wage:+An+Increase+In+Government+Spending+
LS(r1)+
LD+
++++++wr+
L++++++LD(w*)+
LS(r1)+
LS(r2)+
A
A
B
B
+C+
CA+to+B+from+a+negaMve+wealth+effect.+Unemployment+Rises.+
B+to+C+from+higher+interest+rates+(previous+slide)+causing+a+subsMtuMon+of+current+leisure+for+future+leisure.+Unemployment+Rises.+
w*r+
Efficiency+Wage:+An+Increase+In+TFP+LS(r2)+
L1D+
++++++wr+
L++++L1D(w*)+
LS(r1)+
L2D+
w*r+
An+increase+in+TFP+shius+the+verMcal+aggregate+supply+curve+right,+resulMng+in+increased+employment+and+output+with+a+lower+interest+rate.+
LS(r1)+LS(r2)+
U1+
++U2+
+++L2D(w*)+
