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PowerPointPowerPoint®® Slides by Ron Cronovich Slides by Ron Cronovich
NN. . GGREGORY REGORY MMANKIWANKIW
Unemployment
6
CHAPTER 6 Unemployment slide 1
In this chapter, you will learn…
…about the natural rate of unemployment:
what it means
what causes it
understanding its behavior in the real world
CHAPTER 6 Unemployment slide 2
Natural rate of unemployment
Natural rate of unemployment:The average rate of unemployment around whichthe economy fluctuates.
In a recession, the actual unemployment rate risesabove the natural rate.
In a boom, the actual unemployment rate falls belowthe natural rate.
CHAPTER 6 Unemployment slide 3
Actual and natural rates ofunemployment in the U.S., 1960-2006
Per
cent
of l
abor
forc
e
0
2
4
6
8
10
12
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Unemployment rate
Natural rate ofunemployment
CHAPTER 6 Unemployment slide 4
A first model of the natural rate
Notation:
L = # of workers in labor force
E = # of employed workers
U = # of unemployed
U/L = unemployment rate
CHAPTER 6 Unemployment slide 5
Assumptions:
1. L is exogenously fixed.
2. During any given month,s = fraction of employed workersthat become separated from their jobs
s is called the rate of job separationsf = fraction of unemployed workersthat find jobs
f is called the rate of job findings and f are exogenous
2
CHAPTER 6 Unemployment slide 6
The transitions betweenemployment and unemployment
Employed Unemployed
s ×E
f ×U
CHAPTER 6 Unemployment slide 7
The steady state condition
Definition: the labor market is insteady state, or long-run equilibrium,if the unemployment rate is constant.
The steady-state condition is:
s ×E = f ×U
# of employedpeople wholose or leavetheir jobs
# of unemployedpeople who findjobs
CHAPTER 6 Unemployment slide 8
Finding the “equilibrium” U rate
f ×U = s × E
= s × (L – U )
= s × L – s × U
Solve for U/L:
(f + s) × U = s × L
so,=
+
U s
L s f
CHAPTER 6 Unemployment slide 9
Example:
Each month, 1% of employed workers lose their jobs
(s = 0.01) 19% of unemployed workers find jobs
(f = 0.19)
Find the natural rate of unemployment:
0 010 05, or 5%
0 01 0 19
U s
L s f= = =
+ +
..
. .
CHAPTER 6 Unemployment slide 10
Policy implication
A policy will reduce the natural rate ofunemployment only if it lowers s or increases f.
CHAPTER 6 Unemployment slide 11
Why is there unemployment?
If job finding were instantaneous (f = 1),then all spells of unemployment would be brief,and the natural rate would be near zero.
There are two reasons why f < 1:1. job search2. wage rigidity
3
CHAPTER 6 Unemployment slide 12
Job search & frictional unemployment
frictional unemployment: caused by the timeit takes workers to search for a job
occurs even when wages are flexible and thereare enough jobs to go around
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 imperfectCHAPTER 6 Unemployment slide 13
Sectoral shifts
def: Changes in the composition of demandamong industries or regions.
example: Technological changemore jobs repairing computers,fewer jobs repairing typewriters
example: A new international trade agreementlabor demand increases in export sectors,decreases in import-competing sectors
Result: frictional unemployment
CHAPTER 6 Unemployment slide 14
CASE STUDY:Structural change over the long run
4.2%
28.0%
9.9%
57.9%
Agriculture
Manufacturing
Other industry
Services
1960
1.6%
17.2%7.7%
73.5%
2000
CHAPTER 6 Unemployment slide 15
More examples of sectoral shifts
Late 1800s: decline of agriculture,increase in manufacturing
Late 1900s: relative decline of manufacturing,increase in service sector
1970s: energy crisis caused a shift in demandaway from gas guzzlers toward smaller cars.
In our dynamic economy,smaller sectoral shifts occur frequently,contributing to frictional unemployment.
CHAPTER 6 Unemployment slide 17
Unemployment insurance (UI)
UI pays part of a worker’s former wages for alimited time after losing his/her job.
UI increases search unemployment,because it reduces the opportunity cost of being unemployed the urgency of finding work f
Studies: The longer a worker is eligible for UI,the longer the duration of the average spell ofunemployment.
CHAPTER 6 Unemployment slide 18
By allowing workers more time to search,UI may lead to better matches betweenjobs and workers,which would lead to greater productivity andhigher incomes.
Benefits of UI
4
CHAPTER 6 Unemployment slide 19
Why is there unemployment?
Two reasons why f < 1:1. job search2. wage rigidity
U s
L s f=
+
DONE Next
The natural rate of unemployment:
CHAPTER 6 Unemployment slide 20
Unemployment from real wagerigidity
Labor
Realwage
Supply
Demand
Unemployment
Rigidrealwage
Amount of laborwilling to work
Amount oflabor hired
If real wageis stuckabove itsequilibriumlevel, thenthere aren’tenough jobsto go around.
CHAPTER 6 Unemployment slide 21
Unemployment from real wagerigidity
Then, firms must ration thescarce jobs among workers.
Structural unemployment:The unemployment resultingfrom real wage rigidity andjob rationing.
If real wageis stuckabove itsequilibriumlevel, thenthere aren’tenough jobsto go around.
CHAPTER 6 Unemployment slide 22
Reasons for wage rigidity
1. Minimum wage laws
2. Labor unions
3. Efficiency wages
CHAPTER 6 Unemployment slide 23
1. The minimum wage
The min. wage may exceed the equilibriumwage of unskilled workers, especially teenagers.
But, the min. wage cannot explain themajority of the natural rate of unemployment,as most workers’ wages are well abovethe min. wage.
CHAPTER 6 Unemployment slide 24
2. Labor unions
Unions exercise monopoly power to secure higherwages for their members.
When the union wage exceeds the equilibriumwage, unemployment results.
Insiders: Employed union workers whose interestis to keep wages high.
Outsiders: Unemployed non-union workers whoprefer equilibrium wages, so there would beenough jobs for them.
wage ratio = 100×(union wage)/(nonunion wage) slide 25
Union membership and wage ratios by industry, 2005
CHAPTER 6 Unemployment slide 26
3. Efficiency wage theory
Theories in which higher wages increase workerproductivity by: attracting higher quality job applicants increasing worker effort, reducing “shirking” reducing turnover, which is costly to firms improving health of workers