MACROECONOMICS

1
MACROECONOMICS

• Chapter 6
• Unemployment

2
Steady State

• The labor market is in equilibrium.
• No unemployment long-run rate of unemployment.
• Call it natural rate of unemployment or NAIRU
  non-accelerating inflation rate of unemployment.
• Number of unemployed finding a job is the same as
  number of employed losing a job.

3
Natural Rate Definitions
The natural rate of unemployment (the rate when
the labor market is in long run equilibrium) can
be calculated by s/(fs) rate of jobs lost over
rate of jobs lost plus rate of jobs found.
Suppose during steady state 2 of the employed
lose jobs per month and 30 of the unemployed
find a job. .02/.32 1/16 6.7
4
How To Reduce Natural Rate

• Either lower s, rate of job separation, or raise
  f, rate of job finding.
• Can the government make job losses smaller?
• There are measures government can do to increase
  f.

5
Frictional Unemployment

• Unemployment during search for a job.
• It is the result of
• Sectoral shifts
• Bankrupt firms
• Firing
• Skills are obsolete
• Changing careers
• Moving to another location

6
Policies to Reduce UN

• Retraining to shift workers from declining
  industries to growing industries.
• Disseminate information about job vacancies.
• Make companies pay the full unemployment
  insurance for laid-off workers.

7
Policies That Raise UN

• Unemployment insurance
• The urgency of finding a job any job is
  diminished.
• For those who need the support to survive, it is
  a lifeline.
• It also allows longer search to match skills and
  jobs.
• For those who do not care to have a job, it may
  delay their job finding.

8
Even five years after losing his job, a sacked
Norwegian worker can expect to take home almost
three-quarters of what he did while employed,
according to the OECD. The corresponding fraction
is nearly two-thirds in Belgium, but is much
lower in most other OECD countries. Benefits in
America are not only less generous to begin with,
but also expire after one year. Sweden and France
both pay an unemployed person around two-thirds
of his previous income in the first year of
joblessness. But although a French worker can
expect benefits to provide nearly a third of what
he earned in his last job even five years after
he lost it, a Swede can expect only 8 of his
previous income to be replaced.
http//www.economist.com/markets/indicators/displa
ystory.cfm?story_id14513958
9
Structural Unemployment

• Define it as unemployment resulting from wage
  rigidity real wage above the equilibrium real
  wage.
• Minimum wage laws
• Unions
• Efficiency wages

10
Minimum Wage Laws

• In general, a 10 increase in the minimum wage
  reduces teenage employment by 1-3.
• Earned income tax credit helps the working poor
  more.

11
Characteristics of Minimum Wage Workers

• http//www.bls.gov/cps/minwage2008.htm
• They are a small percentage of the labor force.
  They are young, female, less educated, part-time,
  working for restaurants and bars.

12
Unions

• Most countries in the EU cover 2/3 or more of
  their workers through collective bargaining.
• US is at 18, UK at 47.
• How come Sweden with 83 covered with collective
  bargaining did not have high unemployment?
• Government including the outsiders in the process.

13
Unions
http//www.bls.gov/news.release/union2.nr0.htm
14
Efficiency Wages

• Higher wages influence nutrition in poorer
  countries.
• Higher wages lower turnover rates and retraining
  costs.
• Higher wages reduce adverse selection.
• Better workers do not seek higher paying jobs
  leaving the firm with worse workers.
• Higher wages reduce moral hazard.
• Less shirking, more worker effort.

15
The US Experience

• During 1990 to 2006
• 38 of unemployed found jobs within a month
• 31 were unemployed for more than 15 weeks.
• 71 of unemployment time was represented by the
  second group while only 7 was from the first
  group.

16
The US Experience

• Example
• Suppose there are 10 people who are unemployed
  some time.
• 7 of the 10 are unemployed for one month.
• 3 are unemployed for 11 months.
• Total time of unemployment 73340 months.
• Most time of unemployment is from the long-term
  33/40.
• Most unemployed (7/10) have short spells.

17
Unemployment Rates in 2008 Unemployment Rates in 2008 Unemployment Rates in 2008
Men Women
Total 6.1 5.4
White 5.5 4.9
Black 11.4 8.9
Typically, the unemployment rates between groups
have been very consistent 2WB, 2BWta,
2WtaBta.
18
Productivity, Sluggish Real Wages and Unemployment
W/P
W/P
S
S
S
S
MPL
MPL
MPL
MPL
L
L
19
Alternative Measures
http//www.bls.gov/news.release/empsit.t12.htm
20
Weeks Unemployed
21
Intensity of Unemployment
22
European Experience

• Western European unemployment has been higher.
• Generous benefits for unemployed.
• Technological impact on the demand for unskilled
  labor.
• Public spending on active labor market policies
  reduces unemployment.
• Job training
• Job search assistance
• Subsidized employment

23
Misery Index

• Starting 1970s a misery index has been used to
  indicate the hardship of the population URp.
• Studies indicate the true misery index should be
  UR0.5p or 2UR p (if you support the opposition!
  Same measure, higher number)

24
Why Europeans Work Less?

• High taxes in Europe make people decide to give
  up work.
• Assumes very large labor elasticity
• US hours per year havent changed yet tax rates
  dropped a lot since 1960s.
• Underground economy in Europe may be higher
  indicating people work off books.
• Unions have pushed for more holidays and
  vacations.
• Europeans prefer more leisure to more income,
  maybe.