Transcript MACROECONOMICS

MACROECONOMICS
Chapter 6
Unemployment
Steady State
The labor market is in equilibrium.
 No unemployment = long-run rate of
unemployment.
 Call it “natural rate of unemployment” or
NAIRU – non-accelerating inflation rate of
unemployment.
 Number of unemployed finding a job is the
same as number of employed losing a job.

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Natural Rate Definitions
L  E U
U
UR 
L
# jobsfound
f 
U
# jobslost
s
E
SteadyState :
# jobsfound  # jobslost
fU  sE
fU  s ( L  U )
fU s ( L  U )

L
L
U
U
f
ss
L
L
U
( f  s)  s
L
U
s

L
f s
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 Rate

Either lower s, rate of job separation, or
raise f, rate of job finding.
Can the government make job losses
smaller?
 There are measures government can do to
increase f.

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Frictional Unemployment
Unemployment during search for a job.
 It is the result of

Sectoral shifts
 Bankrupt firms
 Firing
 Skills are obsolete
 Changing careers
 Moving to another location

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Policies to Reduce UN
Retraining to shift workers from declining
industries to growing industries.
 Disseminate information about job
vacancies.
 Make companies pay the full
unemployment insurance for laid-off
workers.
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Policies That Raise UN

Unemployment insurance
The urgency of finding a job – any job – is
diminished.
 For those who need the support to survive, it
is a lifeline.
 It also allows longer search to match skills
and jobs.
 For those who do not care to have a job, it
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 Unemployment

Define it as unemployment resulting from
wage rigidity: real wage above the
equilibrium real wage.
Minimum wage laws
 Unions
 Efficiency wages
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Minimum Wage Laws
In general, a 10% increase in the minimum
wage reduces teenage employment by 13%.
 Earned income tax credit helps the
working poor more.

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Characteristics of Minimum
Wage Workers
http://www.bls.gov/cps/minwage2008.htm
 They are a small percentage of the labor
force. They are young, female, less
educated, part-time, working for
restaurants and bars.
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Unions
Most countries in the EU cover 2/3 or
more of their workers through collective
bargaining.
 US is at 18%, UK at 47%.
 How come Sweden with 83% covered with
collective bargaining did not have high
unemployment?


Government including the outsiders in the
process.
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Unions
http://www.bls.gov/news.release/union2.nr0.htm
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Efficiency Wages
Higher wages influence nutrition in poorer
countries.
 Higher wages lower turnover rates and
retraining costs.
 Higher wages reduce adverse selection.

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
Better workers do not seek higher paying jobs
leaving the firm with worse workers.
Higher wages reduce moral hazard.

Less shirking, more worker effort.
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The US Experience

During 1990 to 2006
38% of unemployed found jobs within a month
 31% were unemployed for more than 15
weeks.
 71% of unemployment time was represented
by the second group while only 7% was from
the first group.

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The US Experience

Example:
Suppose there are 10 people who are
unemployed some time.
 7 of the 10 are unemployed for one month.
 3 are unemployed for 11 months.
 Total time of unemployment: 7+33=40 months.
 Most time of unemployment is from the longterm: 33/40.
 Most unemployed (7/10) have short spells.

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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.
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Productivity, Sluggish Real
Wages and Unemployment
W/P
S
W/P
S’
MPL’
MPL
L
S’
S
MPL’
MPL
L
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Alternative Measures
http://www.bls.gov/news.rel
ease/empsit.t12.htm
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Weeks Unemployed
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Intensity of Unemployment
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European Experience

Western European unemployment has been
higher.

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Generous benefits for unemployed.
Technological impact on the demand for unskilled
labor.
Public spending on active labor market policies
reduces unemployment.

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
Job training
Job search assistance
Subsidized employment
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Misery Index
Starting 1970s a misery index has been
used to indicate the hardship of the
population: UR+π.
 Studies indicate the true misery index
should be UR+0.5π or 2UR+ π (if you
support the opposition! Same measure,
higher number)

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Why Europeans Work Less?

High taxes in Europe make people decide to
give up work.

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Assumes very large labor elasticity
US hours per year haven’t changed yet tax rates
dropped a lot since 1960s.
Underground economy in Europe may be higher
indicating people work off books.
Unions have pushed for more holidays and
vacations.
Europeans prefer more leisure to more income,
maybe.
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