Chapter 6 : Unemployment

Transcription

1 Chapter 6 : : 4.6% in August 2007 slide 0 A model of unemployment Focus on natural rate of unemployment Notation: L = # of workers in labor force E = # of employed workers U = # of unemployed U/L = unemployment rate slide 1 Assumptions: 1. L is exogenously fixed. 2. During any given month, s = fraction of employed workers that become separated from ir jobs, f = fraction of unemployed workers that find jobs. s = rate of job separations f = rate of job finding (both exogenous) slide 2 1

2 The transitions between employment and unemployment s E Employed Unemployed f U slide 3 The steady state condition Definition: labor market is in steady state, or long-run equilibrium, if unemployment rate is constant. The steady-state condition is: s E = f U # of employed people who lose or leave ir jobs # of unemployed people who find jobs slide 4 Solving for equilibrium U rate f U = s E = s (L U ) = s L s U Solve for U/L: U s = (f + s) U = s L L s + f IMPLICATION: A policy that aims to reduce natural rate of unemployment will succeed only if it lowers s or increases f. slide 5 2

3 WHY IS THERE UNEMPLOYMENT? If job finding were instantaneous (f = 1), n all spells of unemployment would be brief, and natural rate would be small There are two reasons why f < 1: 1. job search 2. wage rigidity slide 6 1. Job Search & Frictional frictional unemployment: caused by time it takes workers to search for a job occurs because workers have different abilities, preferences jobs have different skill requirements geographic mobility of workers not instantaneous flow of information about vacancies and job candidates is imperfect slide 7 Sectoral shifts Changes in composition of demand among industries or regions Example: Technological change increases demand for computer repair persons, decreases demand for typewriter repair persons It takes time for workers to change sectors, so sectoral shifts cause frictional unemployment. more examples: Late 1800s: decline of agriculture, increase in manufacturing Late 1900s: relative decline of manufacturing, increase in services Smaller sectoral shifts occur frequently, contributing to frictional unemployment. slide 8 3

4 Public Policy and Job Search Govt programs affecting unemployment Govt employment agencies: disseminate info about job openings to better match workers & jobs Public job training programs: help workers displaced from declining industries get skills needed for jobs in growing industries insurance (UI) UI pays part of a worker s former wages for a limited time after losing his/her job. UI increases search unemployment, because it: reduces opportunity cost of being unemployed reduces urgency of finding work (hence f) Studies: The longer a worker is eligible for UI, longer duration of average spell of unemployment. By allowing workers more time to search, UI may lead to better matches between jobs and workers, which would lead to greater productivity and higher incomes. 2. and wage rigidity If real wage is stuck above eq m level, n re aren t enough jobs to go around. Real wage Rigid real wage Amount of labor hired Supply Demand Labor Amount of labor willing to work slide 11 4

5 REASONS FOR WAGE RIGIDITY 1. Minimum wage laws 2. Labor unions 3. Efficiency wages slide The minimum wage minimum wage may exceed eq m wage of unskilled workers, especially teenagers. Sept 96, minimum wage was raised from $4.25 to $4.75 rates, before & after Teenagers Single mors All workers 3 rd Q % 8.5% 5.3% 1 st Q % 9.1% 5.3% Or studies: A 10% increase in minimum wage increases teenage unemployment by 1-3%. slide Labor unions Unions exercise monopoly power to secure wages higher than eq m wage for ir members. Employed union workers are insiders whose interest is to keep wages high. Unemployed non-union workers are outsiders and would prefer wages to be lower (so that labor demand would be high enough for m to get jobs). Data support for this slide 14 5

6 3. Efficiency Wage Theory High wages might increase worker productivity: attract higher quality job applicants increase worker effort and reduce shirking reduce turnover, which is costly improve health of workers The increased productivity justifies cost of paying above-equilibrium wages. The result: unemployment slide 15 THE DURATION OF U.S. UNEMPLOYMENT average over # of weeks unemployed or more # of unemployed persons as % of total # of unemployed 39% 31% 30% amount of time se workers spent unemployed as % of total time all workers spent unemployed 6.5% 20.5% 73.0% slide 16 The duration of unemployment The data: More spells of unemployment are short-term than medium-term or long-term. Yet, most of total time spent unemployed is attributable to long-term unemployed. This long-term unemployment is probably structural and/or due to sectoral shifts among industries. Knowing this is important for policy purposes slide 17 6

7 $ per hour EXPLAINING THE TREND: The minimum wage The The trend trend in in real real minimum minimum 4 wage wage is is similar similar to to behavior behavior of of 3 natural natural rate rate of of unemployment. unemployment nominal (in current dollars) real (in today's dollars) slide 18 EXPLAINING THE TREND: Union membership Union membership selected years year percent of labor force % % % % % % Since early 1980s, natural rate of of unemployment and union membership have both fallen. But, from 1950s to to about 1980, natural rate rose while union membership fell. slide 19 Oil price (per barrel) EXPLAINING THE TREND: Sectoral shifts in current dollars (nominal) in today's dollars (real) Since mid-1980s, oil oil prices less volatile, so so fewer sectoral shifts. slide 20 7

8 Digression: The high European Two explanations: 1. generous social insurance programs. 2. Skill-biased technological change. Demand shift occurred in U.S., too. But wage rigidity is less of a problem here, so shift caused an increase in skilledto-unskilled wage gap instead of an increase in unemployment. slide 21 8