Download - Chapter 6: Unemployment
Chapter 6:UnemploymentChapter 6:Unemployment
Historical Data (US)
Historical Data (EU)
Variations in Unemployment
Age White-M White-F Black-M Black-F
16-19
20+
14.3 12.8 36.5 28.7
3.6 3.7 8.5 8.8
Demographic Groups, 1997
Civilian Labor Force
Individuals between 16 and 64, who are employed for pay or unemployed
Individuals in prisons or mental hospitals, children, and retired are excluded
Unemployment
Members of the labor force who are:– 16 years of age or older– out of work– actively looking for work
Unemployment rate = No. of unemployed workers as a % of the labor force
Discouraged Workers
Members of the labor force who quit looking for jobs (e.g., the homeless)
Unemployment rate is underestimated by 2 to 3% because discouraged workers are excluded
Frictional UnemploymentFrictional UnemploymentFrictional UnemploymentFrictional Unemployment
Unemployment of individuals who are searching for jobs or waiting between jobs
Supply-side effect and transitional
Structural Unemployment
Unemployment due to fundamental economic changes that eliminate some jobs, while creating other jobs for which qualified workers may not be readily available
Normal due to technological advancement and changes in consumer preferences
Cyclical Unemployment
Unemployment caused by contraction in economic activities (i.e., recession)
Needs public policy to increase employment
Natural Rate of Unemployment
An average rate around which the actual unemployment rate fluctuates
The average of last and next 10 years unemployment rate
Future unemployment rate is set at 5.5%
Duration of Unemployment
Short-term if frictionalLong-term if structural or cyclical
Evidence from 1974 is mixed– 60% of the spells of unemployment ended within one
month– 69% of the weeks of unemployment occurred in
spells that lasted two or more months
Duration of Unemployment
If policy goal is to reduce the natural rate of unemployment, we need long-term investment in job creation (education, training, etc.)
If policy goal is to reduce the unemployment rate, we need short-term investment in job retention and information
Unemployment Rate
L = Labor ForceE = EmploymentU = unemploymentL = E + USo,E = L – U and U = L – EU/L = Unemployment Rate
Job Loss
s = the rate of job separation: the fraction of “employed” workers who lose jobs each month
sE = the number of “employed” workers who lose jobs each month
Job GainJob GainJob GainJob Gain
f = the rate of job finding: the fraction of “unemployed” workers who find jobs each month
fU = the number of “unemployed” workers who find jobs each month
Employment-Unemployment Transition The rates of job separation and job finding determine the rate of unemployment.
Employed Unemployed
Job Finding (f)
Job Separation (s)
Steady State Unemployment Rate
In a steady-state labor market: fU = sE
Write:fU = s(L – U)
fU = sL – sU
sU + fU = sL
(s + f)U = sLU/L = s / s+f
Example
s = 0.01: on average, jobs last 100 months
f = 0.20: on average, unemployment lasts 5 months
U/L = 0.01/0.21 = 4.8%
Policy ImplicationsPolicy Implications Policy ImplicationsPolicy Implications
Public policy to reduce the rate of job separation and/or increase the rate of job finding will lower the natural rate of unemployment
Public policy to lower the natural rate of unemployment must either reduce the rate of job separation or increase the rate of job finding
Policy and Frictional Unemployment
Job Fairs:
– provide information on job openings, which lowers f and increases U/L
Policy and Frictional Unemployment
Unemployment Benefits: U/L could increase
– Some unemployed workers may refuse job offers and wait for higher ones, lowering f
– Some employed workers may not care losing jobs since their incomes are partially compensated, increasing s
Wage Rigidity and Unemployment
Demand
A B
W1
W2
Real Wage
Labor
Unemployment
L1L2
Supply
Amount of labor willing to workAmount of labor hired
Wait Unemployment
Unions setting wages higher than the market wage
Some union members must remain unemployed
Unemployed union members must “wait” for job openings
Minimum Wage law
Workers are paid a wage rate above the market rate
– Help those who are employed
– Hurt those who are unemployed
Efficiency Wage
Firms pay wages above the market values to
– Maintain a stable labor force
– Attract qualified workers
– Improve productivity and profitability