source: mankiw (2000) macroeconomics, chapter 6, p. 132-153, fourth edition 1 topic: unemployment...
Post on 21-Dec-2015
233 views
TRANSCRIPT
![Page 1: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/1.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
1
Topic: Unemployment
Macroeconomy in the Long Run
![Page 2: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/2.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
2
Introduction
• Study unemployment:– Identify its causes– Improve public policies that affect the
unemployed
• Rate of unemployment = percentage of the labour force unemployed
• There is always some unemployment– What determines its level?
![Page 3: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/3.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
3
Natural Rate of Unemployment
• Natural rate of unemployment = – The average rate of unemployment around
which the economy fluctuates– The steady-state rate of unemployment– Rate towards which the economy gravitates in
the long run
![Page 4: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/4.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
4
Job loss, Job finding and the Natural rate of unemployment
• What determines the natural rate of unemployment?
• Notation: L = labour force E = number of employed workers U = number of unemployed workersL = E + URate of unemployment = U/L
![Page 5: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/5.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
5
• Assume labour force is fixed• Focus on the transition of individuals between
employment and unemployment
s = rate of job separation: fraction of employed people who lose this job each month
f = rate of job finding: fraction of unemployed people who can find a job each month
• S and f determine the rate of unemployment
Job loss, Job finding and the Natural rate of unemployment
![Page 6: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/6.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
6
Job loss, Job finding and the Natural rate of unemployment
![Page 7: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/7.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
7
Job loss, Job finding and the natural rate of unemployment
• If unemployment rate is staying the same i.e. not rising or falling = labour market is in steady state = – Number of people finding jobs = number of
people losing jobs
• fU = number of people finding jobs
• sE = number of people losing jobs
• Steady-state condition: fU = sE
![Page 8: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/8.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
8
Job loss, Job Finding and the Natural Rate of Unemployment
• Finding the steady-state unemployment rate:– We know: E = L – U
i.e. number employed =
Labour force minus number unemployed– We know: fU = sE– Substitute (L – U) for E:
fU = s(L – U)
![Page 9: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/9.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
9
Natural rate of unemployment
• To solve for the unemployment rate (U/L) in the steady state divide both sides of the equation by L:fU/L = s(1 – U/L)
• Solve for U/L:U/L = s/s+f
• Steady-state rate of unemployment (U/L) depends on the rates of job separation (s) and job finding (f)
![Page 10: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/10.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
10
Natural Rate of Unemployment
• Higher the rate of job separation = higher the unemployment rate
• Higher the rate of job finding = lower the unemployment rate
• To lower the natural rate of unemployment either:– Reduce rate of job separation or– Increase rate of job finding
![Page 11: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/11.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
11
Natural Rate of Unemployment
• Why is there unemployment?
• Model above assumes job finding is not instantaneous but why is it not?
![Page 12: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/12.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
12
Job Search and Frictional Unemployment
• One reason for unemployment: takes time to match workers and jobs
• Frictional unemployment: – the time it takes workers to search for a job– It’s inevitable in a changing economy– As long as supply and demand of labour
among firms is changing, frictional unemployment will be present
![Page 13: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/13.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
13
Public policy and frictional unemployment
• Public policy: seeks to decrease the natural rate of unemployment by reducing frictional unemployment:Examples:– Disseminating info on job vacancies– Retraining programs
• Unemployment Assistance/Benefit
![Page 14: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/14.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
14
Real-Wage Rigidity and Wait Unemployment
• Second reason for unemployment: wage rigidity
• Wage rigidity = – The failure of wages to adjust until labour
supply equals labour demand– Wages are not always flexible
![Page 15: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/15.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
15
![Page 16: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/16.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
16
Real-Wage Rigidity and Wait Unemployment
• Real-wage rigidity – reduces the rate of job finding and – Increases the level of unemployment
• Wait unemployment:– Unemployed not because they are searching
for jobs that suits their skills best but because at the going wage rate, supply of labour > demand for labour
– Waiting for jobs to become available
![Page 17: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/17.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
17
Causes of wage rigidity
• Wait unemployment arises because firms fail to reduce wages
• Why?
• Three causes of wage rigidity:1. Minimum-wage laws
2. Monopoly power of unions
3. Efficiency wages
![Page 18: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/18.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
18
1. Minimum-wage Laws
• Government prevents wages from falling to equilibrium levels
• In Ireland: National Minimum Wage Act, 2000:– From 1st May 2005, minimum wage = €7.65 per hour– Before May: €7.00 per hour– Applies to an experienced adult employee = an
employee who has any employment whatsoever in any two years over the age of 18
– Wage rate reviewed at regular intervals
![Page 19: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/19.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
19
Minimum-Wage Laws
• For most employees it doesn’t apply because employer pays above the minimum wage
• But for some workers, e.g. unskilled or inexperienced workers the minimum wage raises their wage above its equilibrium level and reduces quantity demanded by firms
![Page 20: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/20.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
20
Minimum-wage Laws
• Advocates of higher minimum-wage:– A means of raising the income of the working
poor– The cost of having more unemployment is
worth it to raise others out of poverty
• Opponents of higher minimum-wage:– Raises unemployment– Other ways of increasing incomes of the
working poor e.g. tax credits
![Page 21: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/21.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
21
2. Unions and Collective Bargaining
• Monopoly power of unions :– Wages of unionised workers determined not by the
equilibrium of supply and demand but by collective bargaining
– Agreement often raises the wage rate above the equilibrium level
• Insiders: workers employed by a firm try to keep wages high
• Outsiders: the unemployed pay the cost of that because at a lower wage they may be hired
![Page 22: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/22.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
22
Unions and Collective Bargaining
• In US wage bargaining takes place at the firm level – ‘outsiders’ have no influence
• In Ireland wage bargaining takes place at the national level – Social Partnership – unions, employers,
community and voluntary groups, farmers and government
– Includes ‘outsiders’ and ‘insiders’
![Page 23: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/23.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
23
Unions and Collective Bargaining
• Social Partnership in Ireland (cont’d) - Six national agreements to date:– 1988 Programme for National Recovery– 1991 Programme for Economic and Social Progress– 1994 Programme for Competitiveness and Work– 1997 Partnership 2000– 2000 Programme for Prosperity and Fairness– 2003 Sustaining Progress
![Page 24: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/24.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
24
3. Efficiency Wages
• Efficiency wage theories:– High wages make workers more productive – Influence of wages on worker efficiency may
explain failure of firms to cut wages despite an excess supply of labour
– Lower wages may reduce costs for firms but it would also lower worker productivity and thus a firm’s profits
![Page 25: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/25.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
25
Efficiency Wages
• Theories:– Firms pay wages above equilibrium to
maintain a healthy workforce– Higher wages reduce labour turnover– Average quality of a firm’s workforce depends
on the wage it pays to its employees• Adverse selection
– Higher wages improves worker effort• Moral hazard
![Page 26: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/26.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
26
Efficiency wages
• If a firm pays its workers a high wage, the firm operates more efficiently and the firm may find it more profitable to keep wages above the level that balances supply and demand
![Page 27: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/27.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
27
Summary
• An economy’s steady-state unemployment rate depends on:– Rate of job separation and rate of job finding
• Two reasons for unemployment i.e. that job finding is not instantaneous:– Process of job search leading to frictional
unemployment– Wage rigidity leading to wait unemployment
• Wage rigidity arises from– Minimum-wage laws, unionisation and efficiency
wages
![Page 28: Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment Macroeconomy in the Long Run](https://reader035.vdocuments.us/reader035/viewer/2022062308/56649d595503460f94a39c90/html5/thumbnails/28.jpg)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
28
Patterns of unemployment
• Duration of unemployment– Short-term unemployment more likely to be
frictional unemployment– Long-term unemployment more likely to be
wait unemployment
• Variations in unemployment rates across demographic groups e.g. younger vs. older people