Unemployment62010UPDATEInthischapter,youwilllearn:…aboutthenaturalrateofunemployment:whatitmeanswhatcausesitunderstandingitsbehaviorintherealworldNaturalrateofunemploymentNaturalrateofunemployment:

Theaveragerateofunemploymentaroundwhichtheeconomyfluctuates.Inarecession,theactualunemploymentraterisesabovethenaturalrate.Inaboom,theactualunemploymentratefallsbelowthenaturalrate.Actualandnaturalratesofunemployment,U.S.,1960-2010PercentoflaborforceUnemploymentrateNaturalrateofunemploymentAfirstmodelofthenaturalrateNotation:

L=#ofworkersinlaborforce

E=#ofemployedworkers U=#ofunemployed U/L=unemploymentrateAssumptions:1. Lisexogenouslyfixed.2. Duringanygivenmonth,

s=rateofjobseparations,

thefractionofemployedworkers

thatbecomeseparatedfromtheirjobs

f

=rateofjobfinding,

fractionofunemployedworkers

thatfindjobs

sandf

areexogenousThetransitionsbetweenemploymentandunemploymentEmployedUnemployedsEfUThesteadystateconditionDefinition:thelabormarketisin

steadystate,orlong-runequilibrium,

iftheunemploymentrateisconstant.Thesteady-stateconditionis:s

E

=

fU#ofemployedpeoplewholoseorleavetheirjobs#ofunemployedpeoplewhofindjobsFindingthe“equilibrium”Urate

fU =

s

E

=

s

(L–

U)

=

s

L–

s

USolveforU/L:

(f+s)

U

=s

Lso,Example:Eachmonth,1%ofemployedworkerslosetheirjobs

(s=0.01)19%ofunemployedworkersfindjobs

(f=0.19)Findthenaturalrateofunemployment:PolicyimplicationApolicywillreducethenaturalrateofunemploymentonlyifitlowerssorincreasesf.Whyisthereunemployment?Ifjobfindingwereinstantaneous(f=1),

thenallspellsofunemploymentwouldbebrief,andthenaturalratewouldbenearzero.Therearetworeasonswhyf<1:1.jobsearch2.wagerigidityJobsearch&frictionalunemploymentfrictionalunemployment:causedbythetime

ittakesworkerstosearchforajoboccursevenwhenwagesareflexibleandthereareenoughjobstogoaroundoccursbecauseworkershavedifferentabilities,preferencesjobshavedifferentskillrequirementsgeographicmobilityofworkersnotinstantaneousflowofinformationaboutvacanciesandjobcandidatesisimperfectSectoralshiftsdef:Changesinthecompositionofdemandamongindustriesorregions.example:Technologicalchange

morejobsrepairingcomputers,

fewerjobsrepairingtypewritersexample:Anewinternationaltradeagreement

labordemandincreasesinexportsectors,decreasesinimport-competingsectorsThesescenariosresultinfrictionalunemploymentCASESTUDY:

StructuralchangeoverthelongrunMoreexamplesofsectoralshiftsIndustrialrevolution(1800s):

agriculturedeclines,manufacturingsoarsEnergycrisis(1970s):

demandshiftsfromlargercarstosmalleronesHealthcarespendingas%ofGDP:

1960:5.2% 2000:13.8%

1980:9.1% 2008:16.2%Inourdynamiceconomy,

smallersectoralshiftsoccurfrequently,contributingtofrictionalunemployment.PublicpolicyandjobsearchGovtprogramsaffectingunemploymentinclude:Govtemploymentagencies

disseminateinfoaboutjobopeningstobettermatchworkers&jobs.Publicjobtrainingprograms

helpworkersdisplacedfromdecliningindustriesgetskillsneededforjobsingrowingindustries.Unemploymentinsurance(UI)UIpayspartofaworker’sformerwagesforalimitedtimeafterlosinghis/herjob.UIincreasessearchunemployment,

becauseitreducestheopportunitycostofbeingunemployedtheurgencyoffindingworkfStudies:ThelongeraworkeriseligibleforUI,

thelongerthedurationoftheaveragespellofunemployment.Byallowingworkersmoretimetosearch, UImayleadtobettermatchesbetween

jobsandworkers, whichwouldleadtogreaterproductivityandhigherincomes.BenefitsofUIWhyisthereunemployment?Tworeasonswhyf<1:1.

jobsearch2.

wagerigidityDONE

Next

Thenaturalrateofunemployment:UnemploymentfromrealwagerigidityLaborRealwageSupplyDemandUnemploymentRigid

real

wageAmountoflaborwillingtoworkAmountof

laborhiredIfrealwageisstuckaboveitseq’mlevel,thentherearen’tenoughjobstogoaround.UnemploymentfromrealwagerigidityThen,firmsmustrationthescarcejobsamongworkers.Structuralunemployment:Theunemploymentresultingfromrealwagerigidityand

jobrationing.Ifrealwageisstuckaboveitseq’mlevel,thentherearen’tenoughjobstogoaround.Reasonsforwagerigidity1. Minimumwagelaws2. Laborunions3. Efficiencywages1.TheminimumwageThemin.wagemayexceedtheeq’mwage

ofunskilledworkers,especiallyteenagers.Studies:a10%increaseinmin.wage

reducesteenunemploymentby1-3%But,themin.wagecannotexplainthe

majorityofthenaturalrateofunemployment,

asmostworkers’wagesarewellabove

themin.wage.2.LaborunionsUnionsexercisemonopolypowertosecurehigherwagesfortheirmembers.Whentheunionwageexceedstheeq’mwage,unemploymentresults.Insiders:Employedunionworkerswhoseinterestistokeepwageshigh.Outsiders:Unemployednon-unionworkerswhoprefereq’mwages,sotherewouldbeenoughjobsforthem.108,073Privatesector(total)21,305Government(total)15,184Healthcare3,657Education11,967Professionalservices6,536Finance,insurance4,639Transportation14,987Retailtrade15,131Manufacturing776Mining123.2120.5116.0117.197.488.7126.3106.6108.6102.1151.87.6%36.88.013.82.11.321.35.211.46.915.67,652ConstructionwageratioU%oftotal#employed(1000s)industrywageratio=100(unionwage)/(nonunionwage)slide25Unionmembershipandwageratiosbyindustry,20083.EfficiencywagetheoryTheoriesinwhichhigherwagesincreaseworkerproductivityby:attractinghigherqualityjobapplicantsincreasingworkereffort,reducing“shirking”reducingturnover,whichiscostlytofirmsimprovinghealthofworkers

(indevelopingcountries)Firmswillinglypayabove-equilibriumwagestoraiseproductivity.Result:structuralunemployment.NOWYOUTRY:

QuestionforDiscussionUsethematerialwe’vejustcoveredtocomeupwithapolicyorpolicies

totrytoreducethenaturalrateofunemployment.Notewhetheryourpolicytargetsfrictionalorstructuralunemployment.ThedurationofU.S.unemployment,

average,1960–2009#ofweeksunemployed#ofunemployedpersonsingroup

(%ofall

unemployedpersons)timespentunemployed

bythisgroup

(%oftimespentunemployed

byallgroups)1-442%8.1%5-1430%21.5%15ormore27%70.4%ThedurationofunemploymentThedata:Morespellsofunemploymentareshort-termthanmedium-termorlong-term.Yet,mostofthetotaltimespentunemployedisattributabletothelong-termunemployed.Thislong-termunemploymentisprobablystructuraland/orduetosectoralshiftsamongvastlydifferentindustries.Knowingthisisimportantbecauseitcanhelpuscraftpoliciesthataremorelikelytowork.TREND:Thenaturalraterisesover1960-84,thenfallsover1985-2005PercentoflaborforceEXPLAININGTHETREND:

TheminimumwageDollarsperhour$0$1$2$3$4$5$6$7$8$91950195519601965197019751980198519901995200020052010minimumwageincurrentdollarsminimumwagein2009dollarsTherealminimumwageandnaturalu-ratehavesimilartrends.EXPLAININGTHETREND:

UnionmembershipSinceearly1980s,thenaturalrateandunionmembership

havebothfallen.But,from1950s

toabout1980,

thenaturalraterosewhileunionmembershipfell.Unionmembership

selectedyearsyearpercentoflaborforce193012%194535%195435%197027%198320.1%200812.3%EXPLAININGTHETREND:

Sectoralshifts1970-1986:volatileoilpricescreatejarringsectoralshifts1986-2005:oilpriceslessvolatile,sofewersectoralshifts2006-2009:

oilpricevolatilityincreases–

willthenaturalu-rateriseagain?Priceperbarrelofoil,

in2009dollarsEXPLAININGTHETREND:

Demographics1970s:

TheBabyBoomerswereyoung.

Youngworkerschangejobsmorefrequently(highvalueofs).Late1980sthroughtoday:

BabyBoomersaged.Middle-agedworkerschangejobslessoften(lows).

UnemploymentinEurope,1960-2009PercentoflaborforceWhyunemploymentroseinEurope

butnottheU.S.Shock

Technologicalprogresshasshiftedlabordemandfromunskilledtoskilledworkersinrecentdecades.EffectinUnitedStates

Anincreaseinthe“skillpremium”–thewagegapbetweenskilledandunskilledworkers.EffectinEurope

Higherunemployment,duetogenerousgovtbenefitsforunemployedworkersandstrongunionpresence.Percentofworkerscoveredbycollectivebargaining,selectedcountriesUnitedStates18%UnitedKingdom47Switzerland53Spain68Sweden83Germany90France92Austria98ChapterSummary1. Thenaturalrateofunemp