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Unemployment
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Categories of the population• employed
working at a paid job
• unemployed not employed but looking for a job
• labor force the amount of labor available for producing goods and services; all employed plus unemployed persons
• not in the labor forcenot employed, not looking for work
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Categories of the population
• How do we know? 2 sources:
• 1)Every month BLS does a detailed survey asking a sample of people about what they have been doing with regard to work over the previous month. From their answers, they are categorized as E, U or Not in the Labor Force, and this is used to estimate how many are in these categories in the population as a whole.
• 2) The BLS obtains a second measure of employment by surveying businesses, called the Establishment Survey, asking how many workers are on their payrolls.
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Categories of the population
• Neither measure is perfect, and they occasionally diverge due to:
– treatment of self-employed persons
– new firms not counted in establishment survey
– technical issues involving population inferences from sample data
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Important labor force concepts
• unemployment rate percentage of the labor force that is unemployed
• labor force participation rate the fraction of the adult population that “participates” in the labor force, i.e. is working or looking for work
• employment-to-population ratio The fraction of the adult population that is employed
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NOW YOU TRY
Computing labor statistics
6
U.S. adult population by group, Dec 2014
Number employed = 147.4 million
Number unemployed = 8.7 million
Adult population = 243.0 million
Use the above data to calculate
the labor force
the number of people not in the labor force
the labor force participation rate
the unemployment rate
the employment-to-population ratio
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Different Kinds of Unemployment
• The natural rate of unemployment
– Rate that would prevail if the economy were in neither a boom nor a bust
• Cyclical unemployment
– The difference between the actual rate and the natural rate
– Associated with short-run fluctuations in output
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Anatomy of Unemployment
• Large variations across groups (age, race, education, experience)
• High turnover
• Most people who are unemployed are unemployed for a short time.
• Much of total unemployment consists of people who will be unemployed for a long time.
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Average Monthly Flows between Employment,
Unemployment, and Nonparticipation in the
United States, 1994 to 2011 (millions)(from Blanchard and Johnson 2013)
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Movements in UnemploymentMovements in the U.S. Unemployment Rate, 1948–2010
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Movements in UnemploymentThe Unemployment Rate and the Proportion of Unemployed Finding Jobs, 1994–2010
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Movements in UnemploymentThe Unemployment Rate and the Monthly Separation Rate from Employment, 1994–2010
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Natural rate of unemployment
• Natural rate of unemployment: The average rate of unemployment around which the economy fluctuates.
• In a recession, the actual unemployment rate rises above the natural rate.
• In a boom, the actual unemployment rate falls below the natural rate.
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0
2
4
6
8
10
12
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Pe
rce
nt
of
lab
or
forc
e
Actual and natural rates of unemployment, U.S., 1960–2012
Unemployment rate
Natural rate of
unemployment
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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
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Assumptions:1. L is exogenously fixed.
2. During any given month,
s = rate of job separations, fraction of employed workers that become separated from their jobs
f = rate of job finding, fraction of unemployed workers that find jobs
s and f are exogenous
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The transitions between employment and unemployment
Employed Unemployed
s E
f U
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The steady state condition
• Definition: the labor market is in steady state, or long-run equilibrium, if the unemployment rate is constant.
• The steady-state condition is:s E = f U
# of employed
people who
lose or leave
their jobs
# of unemployed
people who find
jobs
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Finding the “equilibrium” U rate
f U = sE
= s(L –U )
= sL – sU
Solve for U/L:
(f + s)U = sL
so,
U s
L s f
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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
..
. .
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Policy implication
• A policy will reduce the natural rate of unemployment only if it lowers s or increases f.
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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 search
2. wage rigidity
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Job search & frictional unemployment
• frictional unemployment: caused by the time it takes workers to search for a job
• occurs even when wages are flexible and there are 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 imperfect
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Sectoral shifts• def: Changes in the composition of demand
among industries or regions.
• example: Technological change more jobs repairing computers, fewer jobs repairing typewriters
• example: A new international trade agreement labor demand increases in export sectors, decreases in import-competing sectors
• These scenarios result in frictional unemployment
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CASE STUDY:
Structural change over the long run
4.2%
28.0%9.9%
57.9%
Agriculture
Manufacturing
Other industry
Services
1960
1.0%
12.8%
7.2%
79.0%
2009
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More examples of sectoral shifts• Industrial revolution (1800s):
agriculture declines, manufacturing soars
• Energy crisis (1970s): demand shifts from larger cars to smaller ones
• Health care spending as % of GDP:1960: 5.2 2000: 13.81980: 9.1 2010: 17.9
In our dynamic economy,
smaller sectoral shifts occur frequently,
contributing to frictional unemployment.
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Public policy and job search
Govt programs affecting unemployment include:
– Govt employment agencies
disseminate info about job openings to better
match workers & jobs.
– Public job training programs
help workers displaced from declining industries
get skills needed for jobs in growing industries.
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Unemployment insurance (UI)• UI pays part of a worker’s former wages for a limited
time after the worker loses 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 average spell of unemployment.
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Benefits of UI
• By allowing workers more time to search,
UI may lead to better matches between jobs and workers,
which would lead to greater productivity and higher incomes.
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Why is there unemployment?
• Two reasons why f < 1:
1. job search
2. wage rigidity
U s
L s f
DONE
Next
The natural rate of unemployment:
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Unemployment from real wage rigidity
Labor
Real
wage
Supply
Demand
Unemployment
Rigid
real
wage
Amount of labor
willing to work
Amount of
labor hired
If real wage
is stuck
above its
eq’m level,
there aren’t
enough
jobs to go
around.
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Unemployment from real wage rigidity
Then, firms must ration the
scarce jobs among workers.
Structural unemployment:
The unemployment resulting
from real wage rigidity and
job rationing.
If real wage
is stuck
above its
eq’m level,
there aren’t
enough
jobs to go
around.
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Reasons for wage rigidity
1. Minimum wage laws
2. Labor unions
3. Efficiency wages
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1. The minimum wage
• The min. wage may exceed the eq’m wage of unskilled workers, especially teenagers.
• Studies: a 10% increase in min. wage reduces teen employment by 1–3%
• But, the min. wage cannot explain the majority of the natural rate of unemployment, as most workers’ wages are well above the min. wage.
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2. Labor unions
• Unions exercise monopoly power to secure higher wages for their members.
• When the union wage exceeds the eq’m wage, unemployment results.
• Insiders: Employed union workers whose interest is to keep wages high.
• Outsiders: Unemployed non-union workers who prefer eq’m wages, so there would be enough jobs for them.
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104,737Private sector (total)
20,450Government (total)
15,835Health care
4,020Education
12,171Professional services
6,111Finance, insurance
4,355Transportation
14,582Retail trade
13,599Manufacturing
780Mining
122.6
121.1
114.9
112.6
99.1
90.2
123.5
102.4
107.2
96.4
151.7
6.9
37.0
7.5
13.0
2.1
1.1
20.4
4.9
10.5
7.2
14.06,244Construction
wage ratioU % of total# employed
(1000s)industry
wage ratio = 100 (union wage) / (nonunion wage)
Union membership and wage ratios by industry, 2011
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3. Efficiency wages
• Theories in which higher wages increase worker productivity by: – attracting higher quality job applicants
– increasing worker effort, reducing “shirking”
– reducing turnover, which is costly to firms
– improving health of workers (in developing countries)
• Firms willingly pay above-equilibrium wages to raise productivity.
• Result: structural unemployment.
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Focus: Henry Ford and Efficiency Wages
Table 1 Annual Turnover and Layoff Rates (%) at Ford, 1913–1915
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The Median Duration of UnemploymentW
eeks
0
5
10
15
20
250
1/1
96
5
01
/19
68
01
/19
71
01
/19
74
01
/19
77
01
/19
80
01
/19
83
01
/19
86
01
/19
89
01
/19
92
01
/19
95
01
/19
98
01
/20
01
01
/20
04
01
/20
07
The duration of unemployment
typically rises in recessions—but its
rise in 2008–2010 is unprecedented.
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Unemployment in Europe, 1960–2011P
erc
ent
of
labor
forc
e
0
2
4
6
8
10
12
1970 1975 1980 1985 1990 1995 2000 2005 2010
France
Germany
Italy
United Kingdom
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Why unemployment rose in Europe but not the U.S.
Shock Technological progress has shifted labor demand from unskilled to skilled workers in recent decades.
Effect in United StatesAn increase in the “skill premium” – the wage gap between skilled and unskilled workers.
Effect in EuropeHigher unemployment, due to generous govt benefits for unemployed workers and strong union presence.
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Percent of workers covered by collective bargaining, selected countries
United States 13%
United Kingdom 35
Switzerland 48
Spain 80
Sweden 92
Germany 63
France 95
Greece 85
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Beveridge Curve
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Beveridge Curve since 1950
• Counter-cyclical movements are typical
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NAIRU
• Another way to think about the natural rate of unemployment.
• The natural rate is the rate that is consistent with a steady rate of inflation – Non-Accelerating Inflation Rate of Unemployment.
• That is, the lowest unemployment can go before we see changes in the rate of inflation.
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Relationship between unemployment rate and wage growth.
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NAIRU Estimates for 2000
Nairu
Estimates
for 2000
1994 5.4%
1995 5.7%
1996 5.8%
1999 5.6%
2000 5.2%
2007 5.0%
2008 4.8%
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Unemployment and Various Measures of Inflation 1995-2001
Unempl
oyment
C.P.I Core
C.P.I.
G.D.P.
Price
Index
P.C.E.
Less
Food/E
nergy
1995 5.6% 2.5% 3.0% 2.1% 2.3%
1996 5.4% 3.3% 2.6% 1.9% 1.9%
1997 4.9% 1.7% 2.2% 1.8% 1.9%
1998 4.5% 1.6% 2.4% 1.1% 1.5%
1999 4.2% 2.7% 1.9% 1.5% 1.5%
2000 4.0% 3.4% 2.6% 2.2% 1.7%
2001 4.7% 1.6% 2.7% 2.3% 1.8%