1. Chapter 6: Unemployment

2. Historical Data (US)

3. Historical Data (EU)

4. Variations in Unemployment Age White-M White-F Black-MBlack-F 16-19 20+ 14.3 12.836.528.7 3.63.7 8.58.8 Demographic Groups, 1997

5. 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

6. 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

7. 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

8. Frictional Unemployment Unemployment of individuals who are searching for jobs or waiting between jobs Supply-side effect and transitional

9. 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

10. Cyclical Unemployment Unemployment caused by contraction in economic activities (i.e., recession) Needs public policy to increase employment

11. 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%

12. Duration of Unemployment Short-term if frictional Long-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

13. 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

14. Unemployment Rate L = Labor Force E = Employment U = unemployment L = E + U So, E = L – U and U = L – E U/L = Unemployment Rate

15. 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

16. Job 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

17. Employment-Unemployment Transition The rates of job separation and job finding determine the rate of unemployment. Employed Unemployed Job Finding (f) Job Separation (s)

18. 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 = sL U/L = s / s+f

19. 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%

20. Policy 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

21. Policy and Frictional Unemployment Job Fairs: –provide information on job openings, which lowers f and increases U/L

22. 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

23. Wage Rigidity and Unemployment Demand AB W1W1 W2W2 Real Wage Labor Unemployment L1L1 L2L2 Supply Amount of labor willing to workAmount of labor hired

24. Wait Unemployment Unions setting wages higher than the market wage Some union members must remain unemployed Unemployed union members must “wait” for job openings

25. Minimum Wage law Workers are paid a wage rate above the market rate –Help those who are employed –Hurt those who are unemployed

26. Efficiency Wage Firms pay wages above the market values to –Maintain a stable labor force –Attract qualified workers –Improve productivity and profitability