Class Slides for EC 204Spring 2006

To Accompany Chapter 6

Job Loss, Job Finding, and the Natural Rate of Unemployment

Labor Force = # Employed + # UnemployedL = E + U

Unemployment Rate = U/L

Rate of Job Finding = Rate of Job Separation fU = sE

Substitute for E:fU = s(L - U)

Divide by L:f(U/L) = s{1 - (U/L)}

Solve for U/L:(U/L) = s/(f + s)

Suppose 1 percent of employed lose their jobeach month (average job lasts 100 months), s = 0.01And 20 percent of unemployed find a job each month(average spell of unemployment is 5 months), f = 0.2Then, U/L = 0.01/(0.01 + 0.2) = 0.0476

Job Search and Frictional Unemployment

Takes time to search for a job as a person must learn about opportunities, may have to move to a new location, may not want to take the first job that is offered

Shifts in the composition of demand occur among industries or regions may occur and lead to shifts in demand for certain skills

Natural consequence of continually changing demand and supply for labor

Public Policy and Frictional Unemployment

Unemployment Insurance may lead to a higher natural rateof unemployment

Experience Rating may lower the distortionary effect of suchinsurance

Illinois’ experiment with “bonus” for finding work sooner

Real-Wage Rigidity and Structural Unemployment

Labor market doesn’t clear

Real wage is “stuck” above its equilibrium level

Supply of labor exceeds demand for labor

Workers are waiting for jobs to become available

Reasons for Wage Rigidity

1. Minimum-Wage Laws

2. Unions and Collective Bargaining--role of “Insiders and “Outsiders”

3. Efficiency Wages: High Wages make workers more productive

Minimum Wage and Average Hourly Earnings

0

2

4

6

8

10

12

14

16

18

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Dollars

Minimum Wage

Average Hourly Earnings

How Do Wages Affect Productivity?

A. Nutrition Effect

B. Reduction in Labor Force Turnover

C. Higher Quality of Work Force--Adverse Selection

D. Improves Worker Effort--Monitoring Problem Moral Hazard

Patterns of Unemployment

Average Spell of Unemployment is Short

Most Time Unemployed is Borne by Relatively Few Workers

Variation is Great Across Demographic Groups

Trend Over Time in U.S. Unemployment Rate is Not Completely Understood:

--Demographics--Sectoral Shifts--Productivity

Duration of Unemployment

0

5

10

15

20

25

1990 1993 1996 1999 2002 2005

Weeks

Average

Median

Share of Unemployment by Duration

0

10

20

30

40

50

60

70

80

90

100

1990199119921993199419951996199719981999200020012002200320042005

Percent

27 Weeks and Over

15 to 26 Weeks

5 to 14 Weeks

Less than 5 Weeks

Unemployment and Duration(January 1969 to December 2005)

0

2

4

6

8

10

12

1969 1973 1977 1981 1985 1989 1993 1997 2001 2005

Percent

0

2

4

6

8

10

12

14

Weeks

Unemployment Rate(left axis)

Median Duration(right axis)

Discouraged Workers

Alternative Measures of Unemployment

Transitions into and out of the Labor Force

Alternative Measures of Unemployment2005

U-1 Persons unemployed 15 weeks or longer, as a percent of the civilian labor force 1.8

U-2 Job losers and persons who completed temporary jobs, as a percent of the civilian labor force 2.5

U-3 Total unemployed, as a percent of the civilian labor force (official unemployment rate) 5.1

U-4 Total unemployed plus discouraged workers, as a of the civilian labor force plus discouraged workers 5.4

U-5 Total unemployed, plus discouraged workers, plus all other marginally attached workers, as a percent of the civilian labor force plus all marginally attached workers 6.1

U-6 Total unemployed, plus all marginally attached workers, plus total employed part timefor economic reasons, as a percent of the civilian labor force plus all marginally attached workers 8.9

Alternative Unemployment Rates

0

2

4

6

8

10

12

14

1994 1996 1998 2000 2002 2004

UrateU-4U-5U-6

European Unemployment: Why So Much Higher?

Generous Benefits for Unemployed

Decline in Demand for Unskilled RelativeTo Skilled Workers

Unemployment Rate for the European Community