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The unemployment rate over the longer run
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4
5
6
7
8
9
10
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60 65 70 75 80 85 90 95 00 05 10
Unemployment rate
Shaded regions are NBER recessions
Source: Bureau of Labor Statistics (www.bls.gov) and NBER.
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Alternative Measures of Unemployment
Source: Bureau of Labor Statistics (www.bls.gov)
Mean duration of unemployment
3Source: Data from Bureau of Labor Statistics; graph from FRED (St Louis Fed)
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The Current Population Survey (CPS)• Source of data for monthly unemployment, employment,
labor force data. • Overview of the survey
• 50,000 households• “scientifically selected to represent the civilian non-
institutional population”• provides estimates of employment, unemployment, earnings,
hours of work, and other indicators
• Definitions:• Employed = worked for pay or absent from job for cause• Unemployed = not working plus actively looking for work• Labor force = E + U
For further information, see http://www.bls.census.gov/cps/cpsbasic.htm
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How do labor markets respond to shift in demand?
This is on the fault line of modern macro
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Labor supply, employment
W/P
MPL
Original equilibrium
(W/P)1E1 = E*1
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Labor supply, employment
W/P
MPL
Labor demand shift and market clearing
(W/P)1E1 = E*1
E*2
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Labor supply, employment
W/P
MPL
Because wages sticky, have disequilibrium
(W/P)1E1 = E*1
E2
E*2
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Labor supply, employment
W/P
MPL
Because wages sticky, have disequilibrium
(W/P)1E1
E2
- The line E2E1 is unemployment.- Upward shift in L demand leads to vacancies.
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Theories of Unemployment
Market-clearing (Walrasian)• Wages move to clear supply and demand• Workers would be on supply curves; unemployment
would be “voluntary”
Non-market-clearing (non-Walrasian): Wages are not determined in auction markets• In one version, there are flexible-wage, decentralized
markets• In another version, real or nominal wages are “sticky”
- If firms determine employment (are on their demand schedules), then workers may be off curves and jobs rationed.
How do wages respond to a glut of workers?
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0
1
2
3
4
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90 92 94 96 98 00 02 04 06 08
Annual rate of change of construction wages (%)
Recall a glut of tankers. Price of “Dryships” shipping company:
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Classical-Type Theories of Unemployment
• “New classical models”: Unemployment from confusion about relative prices and wages
• Search models: Unemployment arises from “search” and “labor market frictions” (Mortensen-Pissarides model is standard)
• Firms and workers are like molecules, bouncing around looking for jobs or workers.
• This leads to equilibrium “frictional” unemployment depending on various parameters.
• Example: Oil price shock forces workers to move from energy-intensive to other industries.
• However, does not generally give sticky wages or correct cyclical predictions.
• Some (not all) classical models predict that vacancies and unemployment rise together.
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Keynesian Theories of Unemployment
Involuntary and cyclical unemployment arise because of wage stickiness
“Wage stickiness” means that wages do not fully react to shock to supply and demand.
Reasons for wage stickiness :1. Government policies (minimum wages)2. Private contracts (labor union contracts)3. Behavioral factors (morale, custom, efficiency wages)
Predicts that unemployment and vacancies will move in opposite direction.
How much are the unemployed searching
14Alan B. Krueger and Andreas Mueller, “The Lot of the Unemployed: A Time Use Perspective”. “Min” are minutes per day.
Some key empirical regularities of the labor market
Okun’s Law: unemployment moves inversely with Y
Beveridge Curve: Unemployment moves inversely with vacancy rate
Phillips Curve: Inflation moves inversely with unemployment (in short run)
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Okun’s Law over time
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-.08
-.06
-.04
-.02
.00
.02
.04
.06
.08
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4
5
6
7
8
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80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Potential-Actual/ Potential(left scale)
Unemployment rate(right scale)
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Okun’s Law from Keynesian Approach:Change in (unemployment rate – NAIRU)
= α (real GDP growth – potential real GDP growth)or approximately:
Δ U = α x (real GDP growth), where α = -0.3 to -0.5
-3
-2
-1
0
1
2
3
4
-4 -2 0 2 4 6 8
Growth rate real GDP
Chan
ge in
unem
plo
ymen
t ra
te
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Data suggests most movements are as predicted by sticky-wage model.
But periods of turmoil (1980s) have shift in curve.
Source: FRBSF Economic Letter, 2006-08; April 21, 2006, Job Matching: Evidence from the Beveridge Curve
19Source: Robert Shimer, AER, Sept 2007
Final Thoughts on Unemployment
High unemployment is one of the most traumatic of economic outcomes.
Modern macro has not yet succeeded in developing a complete microeconomic theory to explain the phenomena of sticky wages and unemployment.
Stay tuned!
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