1. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster Eco 106 W8B Contrasting Views of Inflation and Unemployment Case-Fair Ch 14 1.Unemployment Types and Flows 2.Classical and Keynesian views of the Labor Market 3.The Phillips Curve 1. Inflation expectations 2. US supply and demand shocks 4.Okun’s Law 5.The Taylor Rule and the FAIR model

2. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 2 of 29 The Labor Market: Basic Concepts The labor force (LF) is the number of employed plus unemployed: LF = E + U unemployment rate The number of people unemployed as a percentage of the labor force. Unemployment rate = U/LF

3. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 3 of 29 The Labor Market: Basic Concepts frictional unemployment The portion of unemployment that is due to the normal working of the labor market; used to denote short-run job/skill matching problems. structural unemployment The portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries. cyclical unemployment The increase in unemployment that occurs during recessions and depressions.

4. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 4 U e Duration Most spells are short but at any moment in time the Unemployed population is dominated by longer term Unemployed. For example suppose: 2 mo. Spells, 60m spells for the year, 10m at any time 1 yr spells, 20m spells, 20m at any time Average spell= (60/80)2 mo+(20/80)12mo=4.5

5. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 5

6. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 6 Change in employment status in a typical month Figure 3.15 Change in employment status in a typical month The US labor market has huge “churn” relative to the net change in employment. Net Change in Employment here is -0.36, that is 1/5 th of one percent of the Employed

7. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 7 Employment Situation Has both Household and Establishment Data Household survey has been showing more job growth. Changes are small in comparison to totals The Employment Situation from the BLSEmployment SituationBLS

8. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 8 BLS retrieved 10 Jan 2009, http://www.bls.gov/LAUhttp://www.bls.gov/LAU

9. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 9 BLS retrieved 10 Jan 2009, http://www.bls.gov/LAUhttp://www.bls.gov/LAU

10. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 10 Big Numbers 2.4 million jobs lost (reduction in employment) over 2008. 1.9m in last 4 months of year (post panic from Lehman Brothers collapse.) 2.6m long term unemployed (27 weeks or more). (Table A-12, Current Employment Situation, Friday Jan 9 2009)

11. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 11 2 sources of employment data household establishment

12. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 2 Classical vs Keynesian Views of the Labor Market

13. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 13 of 29 The Classical View of the Labor Market labor demand curve A graph that illustrates the amount of labor that firms want to employ at each given wage rate. labor supply curve A graph that illustrates the amount of labor that households want to supply at each given wage rate.

14. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 14 of 29 The Classical View of the Labor Market Classical economists believe that the labor market always clears. If the demand for labor shifts from D 0 to D 1, the equilibrium wage will fall from W 0 to W 1. Anyone who wants a job at W 1 will have one.  FIGURE 14.1 The Classical Labor Market

15. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 15 of 29 The Classical View of the Labor Market The Classical Labor Market and the Aggregate Supply Curve The classical idea that wages adjust to clear the labor market is consistent with the view that wages respond quickly to price changes. This means that the AS curve is vertical. When the AS curve is vertical, monetary and fiscal policy cannot affect the level of output and employment in the economy.

16. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 16 Sticky Wages vs Market Clearing With a perfectly functioning market an adverse supply shock will lower wages and employment. With “sticky wages” that shock would cause a greater fall in employment as well as unemployment rather than a falling real wage. S D D’ N W W N S D

17. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 17 Keynesian vs Classical View of Ue K view: shocks to labor demand come from both the supply side (productivity and oil prices) and the demand side (C+I+G+X-IM). sticky wages cause labor demand shocks to become unemployment rather than lower wages. C view: shocks to labor demand come essentially from productivity shocks.

18. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 18 of 29 The Classical View of the Labor Market The Unemployment Rate and the Classical View The unemployment rate is not necessarily an accurate indicator of whether the labor market is working properly. The measured unemployment rate may sometimes seem high even though the labor market is working well.

19. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 19 of 29 Explaining the Existence of Unemployment Sticky Wages sticky wages The downward rigidity of wages as an explanation for the existence of unemployment. If wages “stick” at W 0 instead of falling to the new equilibrium wage of W* following a shift of demand from D 0 to D 1, the result will be unemployment equal to L 0 - L 1.  FIGURE 14.2 Sticky Wages

20. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 20 of 29 Explaining the Existence of Unemployment Sticky Wages social, or implicit, contracts Unspoken agreements between workers and firms that firms will not cut wages. Social, or Implicit, Contracts relative-wage explanation of unemployment An explanation for sticky wages (and therefore unemployment): If workers are concerned about their wages relative to other workers in other firms and industries, they may be unwilling to accept a wage cut unless they know that all other workers are receiving similar cuts.

21. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 21 of 29 Explaining the Existence of Unemployment Sticky Wages explicit contracts Employment contracts that stipulate workers’ wages, usually for a period of 1 to 3 years. Explicit Contracts cost-of-living adjustments (COLAs) Contract provisions that tie wages to changes in the cost of living. The greater the inflation rate, the more wages are raised.

22. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 22 of 29 Explaining the Existence of Unemployment Sticky Wages Explicit Contracts Graduate SchoolApplications inRecessions Graduate School Offers Relief During Economic Recession Oklahoma Daily (U. Oklahoma)

23. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 23 of 29 Explaining the Existence of Unemployment Efficiency Wage Theory efficiency wage theory An explanation for unemployment that holds that the productivity of workers increases with the wage rate. If this is so, firms may have an incentive to pay wages above the market-clearing rate.

24. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 24 of 29 Explaining the Existence of Unemployment Imperfect Information Firms may not have enough information at their disposal to know what the market-clearing wage is. In this case, firms are said to have imperfect information. If firms have imperfect or incomplete information, they may set wages wrong—wages that do not clear the labor market.

25. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 25 of 29 Explaining the Existence of Unemployment Minimum Wage Laws minimum wage laws Laws that set a floor for wage rates—that is, a minimum hourly rate for any kind of labor. An Open Question The aggregate labor market is very complicated, and there are no simple answers to why there is unemployment.

26. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 3 The Phillips Curve

27. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 27 of 29 The Short-Run Relationship Between the Unemployment Rate and Inflation The AS curve shows a positive relationship between the price level (P) and aggregate output (income) (Y).  FIGURE 14.3 The Aggregate Supply Curve In the short run, the unemployment rate (U) and aggregate output (income) (Y) are negatively related.

28. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 28 of 29 The Short-Run Relationship Between the Unemployment Rate and Inflation This curve shows a negative relationship between the price level (P) and the unemployment rate (U). As the unemployment rate declines in response to the economy’s moving closer and closer to capacity output, the price level rises more and more.

29. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 29 of 29 The Short-Run Relationship Between the Unemployment Rate and Inflation inflation rate The percentage change in the price level. Phillips Curve A curve showing the relationship between the inflation rate and the unemployment rate.

30. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 30 of 29 The Short-Run Relationship Between the Unemployment Rate and Inflation The Phillips Curve shows the relationship between the inflation rate and the unemployment rate.

31. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 31 of 29 The Short-Run Relationship Between the Unemployment Rate and Inflation During the 1960s, there seemed to be an obvious trade-off between inflation and unemployment. Policy debates during the period revolved around this apparent trade-off. The Phillips Curve: A Historical Perspective

32. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster In the 1950’s 60’s and 70’s the two political parties were associated with different preferences regarding where the economy should operate on the Phillips curve 32 of 29 Unemployment

33. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 33 of 29 The Short-Run Relationship Between the Unemployment Rate and Inflation From the 1970s on, it became clear that the relationship between unemployment and inflation was anything but simple. The Phillips Curve: A Historical Perspective

34. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 34 of 29 The Short-Run Relationship Between the Unemployment Rate and Inflation Aggregate Supply and Aggregate Demand Analysis and the Phillips Curve  FIGURE 14.8 Changes in the Price Level and Aggregate Output Depend on Shifts in Both Aggregate Demand and Aggregate Supply

35. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster Able and Bernanke Figure 12.01 The Phillips curve and the U.S. economy during the 1960s In the 1960’s the Phillips curve was viewed as a stable trade off Between inflation and unemployment. It is a menu, we thought. Just pick which point you like best.

36. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster US 1942-68

37. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster Demand Pull then Supply Push Pi is the inflation rate. There is a special point on any Phillips curve that shows the natural rate of unemployment and the expected rate of inflation. Unemployment rate

38. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster Demand Pull then Supply Push In the late 60’ the economy stayed above expected inflation and so inflation expectations rose. Unemployment rate Late 60’s Phillips Curve of 1960’s Phillips Curve of 1970’s

39. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 39 of 29 The Short-Run Relationship Between the Unemployment Rate and Inflation Expectations and the Phillips Curve Expectations are self-fulfilling. This means that wage inflation is affected by expectations of future price inflation. Price expectations that affect wage contracts eventually affect prices themselves. Inflationary expectations shift the Phillips Curve up and to the right.

40. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster US 70’s Late 1960’s Demand Pull Inflation

41. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 41 of 29 The Short-Run Relationship Between the Unemployment Rate and Inflation Aggregate Supply and Aggregate Demand Analysis and the Phillips Curve  FIGURE 14.9 The Price of Imports, 1960 I–2007 IV The Role of Import Prices

42. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster US 80’s 1979 Oil Shock and After 2nd Oil Shock

43. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster US 90’s

44. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster End 60’s 73 79 Early 80’s Late 90’s inf Ue Why Can’t I Draw?

45. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 45 of 29 The Short-Run Relationship Between the Unemployment Rate and Inflation Is There a Short-Run Trade-Off between Inflation and Unemployment? There is a short-run trade-off between inflation and unemployment, but other factors besides unemployment affect inflation. Policy involves more than simply choosing a point along a nice smooth curve.

46. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 46 of 29 The Long-Run Aggregate Supply Curve, Potential Output, and the Natural Rate of Unemployment If the AS curve is vertical in the long run, so is the Phillips Curve. In the long run, the Phillips Curve corresponds to the natural rate of unemployment—that is, the unemployment rate that is consistent with the notion of a fixed long-run output at potential output. U* is the natural rate of unemployment.  FIGURE 14.10 The Long-Run Phillips Curve: The Natural Rate of Unemployment

47. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 47 of 29 The Long-Run Aggregate Supply Curve, Potential Output, and the Natural Rate of Unemployment natural rate of unemployment The unemployment that occurs as a normal part of the functioning of the economy. Sometimes taken as the sum of frictional unemployment and structural unemployment.

48. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 48 of 29 The Long-Run Aggregate Supply Curve, Potential Output, and the Natural Rate of Unemployment The Nonaccelerating Inflation Rate of Unemployment (NAIRU) To the left of the NAIRU, the price level is accelerating (positive changes in the inflation rate); to the right of the NAIRU, the price level is decelerating (negative changes in the inflation rate). Only at the NAIRU is inflation constant.

49. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 4 Okun’s Law Only mentioned in passing by Fair, useful for your paper!

50. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 50 Okun’s law How does unemployment vary with output. How does unemployment vary in response to the Growth rate of output? What is the potential growth rate of the economy?

51. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 51 Arthur Okun’s Level Law http://www.amherst.edu/~econ53/Okun.PDF When real GDP is 2 percentage points below the full-employment level of GDP the unemployment rate will exceed the natural rate of unemployment (The NAIRU) by 1 %. The level version as an equation: %GDP gap = 2(u – u natural), where u is measured in percentage points, i.e., u = 5.5%, not.055. F

52. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 52 II. The basic idea underlying the growth rate version is that when output grows more slowly than full employment output, unemployment will rise (i.e., the utilization of productive factors will be falling). This version of Okun’s Law is particularly useful for forecasting: For every 2 percentage points that the rate of growth of real GDP exceeds the rate of growth of full-employment GDP over the course of a year, the unemployment rate will fall by one percentage point. The growth rate version as an equation:  %Y = 3 - 2  u Okun’s Growth Rate Law http://www.amherst.edu/~econ53/Okun.PDF

53. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 53 From Level to Growth Form of Okun’s law (an approximation)

54. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 54 Okun’s law in the United States: 1954-1998

55. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 55 From BEA data In 1974-95 annual data alpha (2.39, 2.86, 3.34) beta (-1.28, -1.84, -1.4) Okun’s law US Data 1974-1995

56. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 56 In 1980-90 annual data alpha (2.4, 2.87, 3.32) beta (-2.57, -2.11, -1.7) Okun’s Law US Data 1980-90

57. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 57 J. Bradford DeLong, 2000 Macroeconomics. DeLong on Okun’s Law

58. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 58 Economagic Okun’s Law 11 data points: to 2001

59. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 59 Krugman: How Fast? Paul Krugman, ‘How Fast Can The US Economy Grow? HBR July/Aug 1997 2.4% Potential Growth Rate

60. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 5 The Taylor Rule and Fair Model 60 of 29

61. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster Taylor Rule Is a “rule” describing rather than prescribing FRB action.

62. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster Interest rate targeting Fairmodel: Central bank can Target only 1: a)Interest rate b)Money supply c)Gov Debt They target (a) Able and Bernanke Ch 14

63. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster Figure 14.05 The discount rate and the Fed funds rate The discount rate and the Fed funds rate

64. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster Fair Model http://fairmodel.econ.yale.eduhttp://fairmodel.econ.yale.edu FAIR MODEL We will look at some of the equations in the Faimodel Which are found in Appendix A (pdf) of the US model.Appendix A (pdf) It contains Table A.1 the 6 sectors of the model. Table A.2 the variables in Alphabetical Order Table A.3 the equations of the model Table A1-Equations 1-30 then follow (this ought to be Table A.4) Table A.5 Sources of raw data

65. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster We will look at Appendix A, Table 3, FairModel’s Equations 1)Spending Behavior equations 1-3 cons/eq 4housing/eq 12 investment 2)Price and Output Behavior eq10 and eq12 3)FRB Behavior eq 30 FAIR MODEL Then we will look at the Forecast Memo http://fairmodel.econ.yale.edu/memo/index.htm After that we will run one experiment with the FairModel by how much will lower interest rates increase inflation?

66. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster FAIR MODEL Then we will look at the Forecast Memo http://fairmodel.econ.yale.edu/memo/index.htm After that we will run one experiment with the FairModel: by how much will lower interest rates increase inflation? Start by naming a data base and copying the base data http://fairmodel.econ.yale.edu/usmodel/index.htm Then pick option 2: monetary policy options allow the interest rate to be exogenous Pushes us to a screen where we put in a new value for the interest rate for future quarters. Hit enter and see the changes on the screen. Then click “commit to changes”.

67. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster FAIR MODEL Now solve the model (option 8) and examine the results. Graph 1: pick graph one per variable pick the comparison dataset UseBase option select the 5 main variables from the US variable list: GDPR, GDPD, RS, M1, UR, SGP Graph 2: GDPD percentage change Graph3: Y, YS (full employment output by firm sector) (In Fairmodel Y and YS referr only to the firm sector.)

68. CHAPTER 14 The Labor Market In the Macroeconomy © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 68 of 29