Labor Market macroeoconomics
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1 Labor Market macroeoconomics Seyed Ali Madanizadeh Sharif U. of Tech. May 16, 2014 Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
2 Outline Motivation and facts long term Unemployment across countries: time series and cross country evidence Unemployment duration Unemployment benefit: levels and effects Questions about unemployment Definitions School of thoughts on unemployment Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
3 Outline Unemployment and business cycles: hours and... Models: Facts Explanations Vacancy, Job finding and separation: definitions andrelationships Beveridge Curves Small model of Barro Simple two-state model of Shimer or Raphael Labor Wedge model Hansen and Rogerson DMP Island model Sargent Prescott Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
4 Unemployment Facts Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
5 Unemployment Facts Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
6 Unemployment Facts Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
7 Unemployment Facts Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
8 Unemployment Facts Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
9 Unemployment Facts From Jurajda and Tannery (2003) Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
10 Unemployment Facts Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
11 Questions Questions: Causes A large body of papers tries to explain the European unemployment problem Consequences Solutions Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
12 School of thoughts Neoclassical (or classical) economics: argue against interventions imposed on the labor market from the outside, such as unionization, bureaucratic work rules, minimum wage laws, taxes, and other regulations that they claim discourage the hiring of workers. Keynesian economics government interventions during recessions. Cause: recurrent shocks that suddenly reduce aggregate demand for goods and services and thus reduce demand for workers. Recommend government interventions designed to increase demand for workers; these can include financial stimuli, publicly funded job creation, and expansionist monetary policies. Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
13 Unemployment Definitions Fact Labor Force: people who are seeking for a work Unemployment rate: Fraction of labor force that are unempololyed U = Unemployed Labor Force 100 Structural Unemployment Skill mismatch Frictional Unemployment Voluntary unemployment decision Mismatch in location, attitude, characteristics, skills,... Search frictions Pissaridies (2000) Job matching in real economies does not take place instantaneously because of heterogeneities in the qualities of jobs and workers, differences in their location, and imperfect information about these and other parameters. Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
14 Labor Force, Employment and Unemployment In our market clearing model L (labor force) = LS = LD. But: LD > employment: job vacancies. vacancy ratio = # of vacancies/total number of jobs employers want filled Labor force > employment: unemployment unemployment rate u = # unemployed/labor force employment rate = # employed/labor force = 1 u employment = labor force x (1 u) Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
15 Labor Force sd = 0.40% corr = 0.31 Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
16 Total Hours of Work The number of hours worked per year is procyclical. Seyed Fact Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
17 Employment sd = 0.70% corr = 0.88 Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
18 Labor Force, Employment and Unemployment Employment is more variable and more correlated with the cyclical part of real GDP. What about hours worked? Total hrs worked = employment x hrs worked per worker Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
19 Labor Force, Employment and Unemployment sd = 0.40% corr = 0.74 Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
20 Labor Force, Employment and Unemployment Want to explain why the levels of unemployment and vacancies are greater than zero. Want to understand how unemployment and vacancies vary over time. Friction and search in labor markets. Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
21 Job Separations, Job Finding, and the Natural Unemployment Rate L number of employed job separation (3%) U number unemployed Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
22 Job Separations, Job Finding, and the Natural Unemployment Rate Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
23 Job Separations, Job Finding, and the Natural Unemployment Rate L number of employed job separation (3%) job finding (50%) U number unemployed Ignoring discouraged workers Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
24 Job Separations, Job Finding, and the Natural Unemployment Rate Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
25 Unemployment Facts Fact 1) Unemployment fluctuations account for 2/3 of hours fluctuations 2) Fluctuations in duration account for most fluctuations in unemployment 3) Fluctuations in vacancies account for most fluctuations in duration 4) Looks as if there is a cyclical labor wedge Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
26 Unemployment Facts Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
27 Unemployment Facts Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
28 Unemployment Facts Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
29 Unemployment Facts Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
30 Unemployment Facts Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
31 Unemployment Facts Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
32 Job Separations, Job Finding, and the Natural Unemployment Rate Let w/p be the wage offer. A potential worker can either accept the offer or continue searching for a better wage offer. The worker has some expectation of the distribution of potential wage offers. ω is the effective real income while unemployed. Let (w/p) be the worker s reservation wage. Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
33 Job Separations, Job Finding, and the Natural Unemployment Rate Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
34 Job Separations, Job Finding, and the Natural Unemployment Rate What explains the reservation wage, (w/p) and therefore unemployment? Incomplete information. The level of ω. Effect on job finding rate and duration of unemployment. Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
35 Job Separations, Job Finding, and the Natural Unemployment Rate What leads to job separations? Negative shock to firm s production function lowers a worker s MPL so worker is fired. Workers experience changes or circumstances change so worker quits. How strong the match was to begin with. Job was temporary to begin with. Job separation rate may depend on: experience level of workers age of workers type of industry: is it subject to frequent shocks Seyed Ali Madanizadeh (Sharif U. of Tech.) Labor Market macroeoconomics May 16, / 35
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