1 31 March 2016

Unemployment rate

• Important rates in an economy: interest rate, ex-change rate, inflation rate, and unemployment rate.

• Employment = number of people having a job.

• Unemployment = number of people not having ajob but looking for one.

• Labour force = Employment + Unemployment

• Unemployment rate =

• Participation rate =

Unemployment

Labour forceLabour force

Economically active population

2 31 March 2016

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

IV/2014

III/2014

II/2014

I/2014

IV/2013

III/2013

II/2013

I/2013

IV/2012

III/2012

II/2012

I/2012

IV/2011

III/2011

II/2011

I/2011

IV/2010

III/2010

II/2010

I/2010

IV/2009

III/2009

II/2009

I/2009

IV/2008

III/2008

II/2008

I/2008

IV/2007

III/2007

II/2007

I/2007

IV/2006

III/2006

II/2006

I/2006

IV/2005

III/2005

II/2005

I/2005

IV/2004

III/2004

II/2004

I/2004

IV/2003

III/2003

II/2003

I/2003

IV/2002

III/2002

II/2002

I/2002

IV/2001

III/2001

II/2001

I/2001

Catalonia, participation rate, 2001I-2014IVhttp://www.idescat.cat/economia/inec?tc=5&id=0608&lang=es&cp=04&x=7&y=10

TOTAL

MEN

DONES

16-24

SPAIN

3 31 March 2016

Basic types of unemployment

• Actual unemployment is divided into three catego-ries (the first two define “natural unemployment”).

• Frictional. Occurs while workers are changing jobs.

• Structural. Due to structural changes in theeconomy that create and eliminate jobs and to theinstitutions that match workers and firms (firingand hiring costs, minimum wages, unemploymentbenefits, mobility restrictions, lack of training…).

• Cyclical. Generated by the short-run fluctuations ofGDP (rises with recessions, falls with booms).

4 31 March 2016

00,10,20,30,40,50,60,70,80,91

1,11,21,31,41,51,61,71,81,92

2,12,22,32,42,52,62,72,82,93

3,13,23,33,43,53,63,73,83,94

4,14,24,34,44,54,64,74,84,95

5,1

1996M01

1996M05

1996M09

1997M01

1997M05

1997M09

1998M01

1998M05

1998M09

1999M01

1999M05

1999M09

2000M01

2000M05

2000M09

2001M01

2001M05

2001M09

2002M01

2002M05

2002M09

2003M01

2003M05

2003M09

2004M01

2004M05

2004M09

2005M01

2005M05

2005M09

2006M01

2006M05

2006M09

2007M01

2007M05

2007M09

2008M01

2008M05

2008M09

2009M01

2009M05

2009M09

2010M01

2010M05

2010M09

2011M01

2011M05

2011M09

2012M01

2012M05

2012M09

2013M01

2013M05

2013M09

2014M01

2014M05

2014M09

2015M01

Spain, registered unemployment, 1996M1-2015M2 (millions of persons)http://www.ine.es/jaxi/tabla.do?path=/t38/bme2/t22/a061/l0/&file=0202001.px&type=pcaxis&L=0

TOTAL

MEN

WOMEN

5 31 March 2016

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2200

2400

2600

2800

3000

3200

3400

3600

3800

4000

1976TIII

1977TII

1978TI

1978TIV

1979TIII

1980TII

1981TI

1981TIV

1982TIII

1983TII

1984TI

1984TIV

1985TIII

1986TII

1987TI

1987TIV

1988TIII

1989TII

1990TI

1990TIV

1991TIII

1992TII

1993TI

1993TIV

1994TIII

1995TII

1996TI

1996TIV

1997TIII

1998TII

1999TI

1999TIV

2000TIII

2001TII

2002TI

2002TIV

2003TIII

2004TII

Spain, estimated unemployment, 1976III-2004IV (thousands of persons)http://www.ine.es/jaxi/menu.do?type=pcaxis&path=/t22/e308/meto_02/pae/px/&file=pcaxis

TOTAL

MEN

WOMEN

6 31 March 2016

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

5

5,5

6

6,5

20

05

-I

20

05

-II

20

05

-III

20

05

-IV

20

06

-I

20

06

-II

20

06

-III

20

06

-IV

20

07

-I

20

07

-II

20

07

-III

20

07

-IV

20

08

-I

20

08

-II

20

08

-III

20

08

-IV

20

09

-I

20

09

-II

20

09

-III

20

09

-IV

20

10

-I

20

10

-II

20

10

-III

20

10

-IV

20

11

-I

20

11

-II

20

11

-III

20

11

-IV

20

12

-I

20

12

-II

20

12

-III

20

12

-IV

20

13

-I

20

13

-II

20

13

-III

20

13

-IV

ESTIMATED

REGISTERED

Spain, registered and estimated unemployment(millions of persons)

http://www.ine.es/jaxi/tabla.do?path=/t38/bme2/t22/a061/l0/&file=0202001.px&type=pcaxis&L=0

http://www.ine.es/jaxiBD/tabla.do?per=03&type=db&divi=EPA&idtab=2193#nogo

7 31 March 2016

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

11000

12000

13000

14000

15000

16000

17000

18000

19000

20000

21000

22000

23000

24000

25000

26000

27000

28000

29000

30000

31000

32000

33000

34000

35000

1976TIII

1977TII

1978TI

1978TIV

1979TIII

1980TII

1981TI

1981TIV

1982TIII

1983TII

1984TI

1984TIV

1985TIII

1986TII

1987TI

1987TIV

1988TIII

1989TII

1990TI

1990TIV

1991TIII

1992TII

1993TI

1993TIV

1994TIII

1995TII

1996TI

1996TIV

1997TIII

1998TII

1999TI

1999TIV

2000TIII

2001TII

2002TI

2002TIV

2003TIII

2004TII

Spain, 1976III-2004IV (thousands of persons)http://www.ine.es/jaxi/menu.do?type=pcaxis&path=/t22/e308/meto_02/pae/px/&file=pcaxis

POPULATION

LABOUR FORCE

UNEMPLOYED

8 31 March 2016

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

5500

6000

6500

7000

7500

8000

8500

9000

9500

10000

10500

11000

11500

12000

12500

13000

13500

14000

14500

15000

15500

16000

16500

17000

17500

1976TIII

1977TII

1978TI

1978TIV

1979TIII

1980TII

1981TI

1981TIV

1982TIII

1983TII

1984TI

1984TIV

1985TIII

1986TII

1987TI

1987TIV

1988TIII

1989TII

1990TI

1990TIV

1991TIII

1992TII

1993TI

1993TIV

1994TIII

1995TII

1996TI

1996TIV

1997TIII

1998TII

1999TI

1999TIV

2000TIII

2001TII

2002TI

2002TIV

2003TIII

2004TII

Spain, employment, 1976III-2004IV (thousands of persons)http://www.ine.es/jaxi/menu.do?type=pcaxis&path=/t22/e308/meto_02/pae/px/&file=pcaxis

TOTAL

MEN

WOMEN

9 31 March 2016

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2200

2400

2600

2800

3000

3200

3400

3600

3800

4000

4200

4400

4600

4800

5000

5200

1976TIII

1977TII

1978TI

1978TIV

1979TIII

1980TII

1981TI

1981TIV

1982TIII

1983TII

1984TI

1984TIV

1985TIII

1986TII

1987TI

1987TIV

1988TIII

1989TII

1990TI

1990TIV

1991TIII

1992TII

1993TI

1993TIV

1994TIII

1995TII

Catalonia, 1976III-1995IV (thousands of persons)http://www.ine.es/jaxi/menu.do?type=pcaxis&path=/t22/e308/meto_02/pae/px/&file=pcaxis

POBLACIÓ

EMPLOYMENTTOTAL

EMPLOYMENTWOMEN

10 31 March 2016

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

1976TIII

1977TII

1978TI

1978TIV

1979TIII

1980TII

1981TI

1981TIV

1982TIII

1983TII

1984TI

1984TIV

1985TIII

1986TII

1987TI

1987TIV

1988TIII

1989TII

1990TI

1990TIV

1991TIII

1992TII

1993TI

1993TIV

1994TIII

1995TII

Catalonia 1976III-1995IV, unemployment ratehttp://www.ine.es/jaxi/menu.do?type=pcaxis&path=/

t22/e308/meto_02/pae/px/&file=pcaxis

TOTAL

MEN

WOMEN

11 31 March 2016

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

2015T4

2015T3

2015T2

2015T1

2014T4

2014T3

2014T2

2014T1

2013T4

2013T3

2013T2

2013T1

2012T4

2012T3

2012T2

2012T1

2011T4

2011T3

2011T2

2011T1

2010T4

2010T3

2010T2

2010T1

2009T4

2009T3

2009T2

2009T1

2008T4

2008T3

2008T2

2008T1

2007T4

2007T3

2007T2

2007T1

2006T4

2006T3

2006T2

2006T1

2005T4

2005T3

2005T2

2005T1

2004T4

2004T3

2004T2

2004T1

2003T4

2003T3

2003T2

2003T1

2002T4

2002T3

2002T2

2002T1

Spain, unemployment rate, 2002I-2015IVhttp://www.ine.es/dynt3/inebase/index.htm?padre=979

TOTAL

MEN

WOMEN

12 31 March 2016

0246810121416182022242628303234363840424446485052545658606264666870727476

2002T1

2002T2

2002T3

2002T4

2003T1

2003T2

2003T3

2003T4

2004T1

2004T2

2004T3

2004T4

2005T1

2005T2

2005T3

2005T4

2006T1

2006T2

2006T3

2006T4

2007T1

2007T2

2007T3

2007T4

2008T1

2008T2

2008T3

2008T4

2009T1

2009T2

2009T3

2009T4

2010T1

2010T2

2010T3

2010T4

2011T1

2011T2

2011T3

2011T4

2012T1

2012T2

2012T3

2012T4

2013T1

2013T2

2013T3

2013T4

2014T1

2014T2

2014T3

2014T4

Spain, unemployment rate, 2002I-2014IVhttp://www.ine.es/jaxiT3/Datos.htm?t=4086

TOTAL

16-19

20-24

25-29

13 31 March 2016

0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

30

32

34

36

38

40

42

44

46

48

50

52

54

IV/2015

III/2015

II/2015

I/2015

IV/2014

III/2014

II/2014

I/2014

IV/2013

III/2013

II/2013

I/2013

IV/2012

III/2012

II/2012

I/2012

IV/2011

III/2011

II/2011

I/2011

IV/2010

III/2010

II/2010

I/2010

IV/2009

III/2009

II/2009

I/2009

IV/2008

III/2008

II/2008

I/2008

IV/2007

III/2007

II/2007

I/2007

IV/2006

III/2006

II/2006

I/2006

IV/2005

III/2005

II/2005

I/2005

IV/2004

III/2004

II/2004

I/2004

IV/2003

III/2003

II/2003

I/2003

IV/2002

III/2002

II/2002

I/2002

IV/2001

III/2001

II/2001

I/2001Catalonia, unemployment rate, 2001I-2015IVhttp://www.idescat.cat/economia/inec?tc=5&id=0608&lang=es&cp=04&x=7&y=10

TOTAL

MEN

WOMEN

16-24

14 31 March 2016

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

1976TIII

1977TII

1978TI

1978TIV

1979TIII

1980TII

1981TI

1981TIV

1982TIII

1983TII

1984TI

1984TIV

1985TIII

1986TII

1987TI

1987TIV

1988TIII

1989TII

1990TI

1990TIV

1991TIII

1992TII

1993TI

1993TIV

1994TIII

1995TII

1996TI

1996TIV

1997TIII

1998TII

1999TI

1999TIV

2000TIII

2001TII

2002T1

2002T4

2003T3

2004T2

2005T1

2005T4

2006T3

2007T2

2008T1

2008T4

2009T3

2010T2

2011T1

2011T4

2012T3

2013T2

2014T1

2014T4

2015T3

Spain, unemployment rate, 1976III-2015IVhttp://www.ine.es/jaxi/tabla.do?path=/t22/e308/meto_02/pae/px/l0/&file=01011.px&type=pcaxishttp://www.ine.es/jaxi/tabla.do?path=/t22/e308/meto_05/rde/px/l0/&file=04002.px&type=pcaxis

http://www.ine.es/jaxiT3/Datos.htm?t=4086

15 31 March 2016

AD(aggregate

expenditure)

Y(aggregate

production)

�(unemployment

rate)

(inflation

rate)

16 31 March 2016

Okun’s law

• Okun’s law is an empirical relationship suggestedin 1962 by the US economist Arthur Okun (1928-80).

• Okun’s law: there is a negative relationship betwe-en the change ∆� = � − ��� in the unemployment

rate and �� =� � ���

���, the rate of growth of real GDP

�. A simple formal expression of the law is

∆� = � − � · ��

where � and � are positive constants that dependon the economy considered and the period withrespect to which variables � and �� are measured.

17 31 March 2016

��

D�

�

� = slope(in absolute value)

D� = � − � · ��

18 31 March 2016

��

D��

�

�= slope

(in absolute value)

�� =�

� −

�

�· D�

19 31 March 2016

Okun’s law (US version) /1

• Expressing the variables as annual percentages, inthe US, � ≈ 1.5 and � ≈ 0.5. Therefore:

∆� = 1.5 − ��/2 or � = ��� + 1.5 − ��/2.

• � represents the increase in � that occurs when theeconomy does not grow: if �� = 0, then ∆� = �.

• For instance, if ��� = 2% and �� = 0, then � = ��� +� − ��/2 = 2 + 1.5 − 0/2 = 3.5. Hence, if the unem-ployment rate at the beginning of the year is 2%and the economy does not grow, then at the end ofthe year the rate is 3.5%.

20 31 March 2016

Okun’s law (US version) /2

• � measures the ability of the economy to transformGDP growth into a smaller unemployment rate:� ≈ 0.5 means that increasing �� by one pointreduces � by 0.5 points.

• If �� = 2%, then � = ��� + 1.5 − ��/2 = ��� + 1.5 −2/2 = ��� + 0.5. If �� = 3%, then � = ��� + 1.5 −��/2 = ��� + 1.5 − 3/2 = ���.

• Therefore, increasing �� from 2% to 3% reduces �from ��� + 0.5 to ���. There is a gain of 0.5 points:an additional 1% in �� reduces � by 0.5 points.

21 31 March 2016

Okun’s law, US, 1951-2003

Okun’s law, US, 1951-2008https://www2.bc.edu/~murphyro/EC204/PPT/CHAP09.ppt

Per

cen

tag

e ch

ang

e in

rea

l G

DP

Change in unemployment rate

1975

19821991

2001

1984

1951 1966

2003

19872008

1971

∆�

�= 3 − 2 · ∆�

22 31 March 2016-1

-0,5

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

5

-2 -1,5 -1 -0,5 0 0,5 1 1,5 2 2,5 3

∆�

1998

1977

Okun’s law, Spain(1977 1998)

http://www.ine.es

��

23 31 March 2016-1

-0,8

-0,6

-0,4

-0,2

0

0,2

0,4

0,6

0,8

1

1,2

1,4

1,6

1,8

2

-1 -0,8 -0,6 -0,4 -0,2 0 0,2 0,4 0,6 0,8 1 1,2 1,4 1,6 1,8 2

Okun’s law, Spain(1976IV1998IV)

http://www.ine.es

24 31 March 2016

-1,6

-1,4

-1,2

-1,0

-0,8

-0,6

-0,4

-0,2

0,0

0,2

0,4

0,6

0,8

1,0

1,2

1,4

1,6

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

1976TIII

1977TII

1978TI

1978TIV

1979TIII

1980TII

1981TI

1981TIV

1982TIII

1983TII

1984TI

1984TIV

1985TIII

1986TII

1987TI

1987TIV

1988TIII

1989TII

1990TI

1990TIV

1991TIII

1992TII

1993TI

1993TIV

1994TIII

1995TII

1996TI

1996TIV

1997TIII

1998TII

1999TI

1999TIV

2000TIII

2001TII

2002T1

2002T4

2003T3

2004T2

2005T1

2005T4

2006T3

2007T2

2008T1

2008T4

2009T3

2010T2

2011T1

2011T4

2012T3

2013T2

2014T1

2014T4

Spain, unemployment rate, quarterly GDP growth rate, 1976III-2014IVhttp://www.ine.es/jaxi/tabla.do?path=/t22/e308/meto_02/pae/px/l0/&file=01011.px&type=pcaxishttp://www.ine.es/jaxi/tabla.do?path=/t22/e308/meto_05/rde/px/l0/&file=04002.px&type=pcaxis

http://www.ine.es/jaxiT3/Datos.htm?t=4086http://www.ine.es/jaxiT3/Datos.htm?t=2504http://www.ine.es/jaxiT3/Datos.htm?t=9375

UNEMPLOYMENTGDP

25 31 March 2016

-4,5

-4,0

-3,5

-3,0

-2,5

-2,0

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

4,5

5,0

5,5

6,0

6,5

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

1976TIII

1977TII

1978TI

1978TIV

1979TIII

1980TII

1981TI

1981TIV

1982TIII

1983TII

1984TI

1984TIV

1985TIII

1986TII

1987TI

1987TIV

1988TIII

1989TII

1990TI

1990TIV

1991TIII

1992TII

1993TI

1993TIV

1994TIII

1995TII

1996TI

1996TIV

1997TIII

1998TII

1999TI

1999TIV

2000TIII

2001TII

2002T1

2002T4

2003T3

2004T2

2005T1

2005T4

2006T3

2007T2

2008T1

2008T4

2009T3

2010T2

2011T1

2011T4

2012T3

2013T2

2014T1

2014T4

Spain, unemployment rate, annual GDP growth rate, 1976III-2014IVhttp://www.ine.es/jaxi/tabla.do?path=/t22/e308/meto_02/pae/px/l0/&file=01011.px&type=pcaxishttp://www.ine.es/jaxi/tabla.do?path=/t22/e308/meto_05/rde/px/l0/&file=04002.px&type=pcaxis

http://www.ine.es/jaxiT3/Datos.htm?t=4086http://www.ine.es/jaxiT3/Datos.htm?t=2504http://www.ine.es/jaxiT3/Datos.htm?t=9375

UNEMPLOYMENT GDP

26 31 March 2016

-1,8

-1,6

-1,4

-1,2

-1

-0,8

-0,6

-0,4

-0,2

0

0,2

0,4

0,6

0,8

1

1,2

1,4

1,6

1,8

-2,6 -2,4 -2,2 -2 -1,8 -1,6 -1,4 -1,2 -1 -0,8 -0,6 -0,4 -0,2 0 0,2 0,4 0,6 0,8 1 1,2 1,4 1,6 1,8 2 2,2 2,4 2,6 2,8 3 3,2 3,4 3,6

D�

Spain, Okun’s law, 1976III-2014IVhttp://www.ine.es/jaxi/tabla.do?path=/t22/e308/meto_02/pae/px/l

0/&file=01011.px&type=pcaxishttp://www.ine.es/jaxi/tabla.do?path=/t22/e308/meto_05/rde/px/l0

/&file=04002.px&type=pcaxishttp://www.ine.es/jaxiT3/Datos.htm?t=4086http://www.ine.es/jaxiT3/Datos.htm?t=2504http://www.ine.es/jaxiT3/Datos.htm?t=9375

2009I

1984I

2001I

� ̂

27 31 March 2016

-1,8

-1,6

-1,4

-1,2

-1

-0,8

-0,6

-0,4

-0,2

0

0,2

0,4

0,6

0,8

1

1,2

1,4

1,6

1,8

-2,6 -2,4 -2,2 -2 -1,8 -1,6 -1,4 -1,2 -1 -0,8 -0,6 -0,4 -0,2 0 0,2 0,4 0,6 0,8 1 1,2 1,4 1,6 1,8 2 2,2 2,4 2,6 2,8 3 3,2 3,4 3,6

D�

Spain, Okun’s law, 1976III-2014IVhttp://www.ine.es/jaxi/tabla.do?path=/t22/e308/meto_02/pae/px/l

0/&file=01011.px&type=pcaxishttp://www.ine.es/jaxi/tabla.do?path=/t22/e308/meto_05/rde/px/l

0/&file=04002.px&type=pcaxishttp://www.ine.es/jaxiT3/Datos.htm?t=4086http://www.ine.es/jaxiT3/Datos.htm?t=2504http://www.ine.es/jaxiT3/Datos.htm?t=9375

2009I

2001I

1984I

�� = �. ��� − �. ��� · ∆�

� 1.21 � 2.06

��

28 31 March 2016

The Phillips curve

• It is an empirical relationship described in 1960 byPaul Samuelson and Robert Solow based on a 1958paper by the New Zealand economist AlbanWilliam Housego Phillips (19141975).

• The Phillips curve expresses a negative relationshipbetween the unemployment rate � and the inflationrate �: the lower �, the higher �.

• With � and � positive constants, a linear Phillipscurve is represented by an equation of the sort

� = � − � · � .

29 31 March 2016

Trade-off between � and �

• Expressing � and � in percentage terms, that� = � − � · � means that, to reduce one percentagepoint the unemployment rate �, it is necessary toaccept an increase in the inflation rate � of � points.

• Let � = 10 and � = 2. If � = 4%, then � = 10 2·4= 2%. Then, for � to be reduced one point (from4% to 3%), � must be increased in two percentagepoints (from � = 2% to � = 10 2·3 = 4%).

• � is the inflation rate that obtains with zero unem-ployment. It is a measure of underlying inflation.

30 31 March 2016

Unstability of the Phillips curve

• In contrast to Okun’s law, the Phillips curve is ingeneral unstable, since � is a volatile parameter.

• � depends on inflation expectations and the firms’cost structure: an increase in expected inflation orin the production costs rises �. When � rises, thecurve shifts upward, so more inflation must bepaid to reduce the unemployment rate.

• � indicates how sensitive � is to changes in �. Itdepends on institutional factors, like the bargain-ing power of trade unions (more power, higher �).

31 31 March 2016

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Spain, Phillips curve

(1976IV 2014IV)http://www.ine.es/jaxi/menu.do?type=pcaxis&

path=/t22/e308_mnu&file=inebase&N=&L=0http://www.ine.es/jaxi/menu.do?type=pcaxis&

path=%2Ft25%2Fp138&file=inebase&L=0

32 31 March 2016

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Spain, Phillips curve

(1976IV 2015IV)http://www.ine.es/jaxi/menu.do?type=pcaxis&

path=/t22/e308_mnu&file=inebase&N=&L=0http://www.ine.es/jaxi/menu.do?type=pcaxis&

path=%2Ft25%2Fp138&file=inebase&L=0

33 31 March 2016

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Spain, Phillips curve (1976IV 2015IV)

34 31 March 2016

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Spain, Phillips curve (1976IV 1986IV)

35 31 March 2016

-1

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1987 I

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Spain, Phillips curve

(1987I 1994IV, 1996I 2015IV)

36 31 March 2016

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Spain, inflation rate,unemployment rate

(1976III 2014IV)

37 31 March 2016

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Spain, inflation rate,unemployment rate

(1976III 2015IV)

38 31 March 2016

Japan’s Phillips curvelooks like Japan

(1980M1 2005M8)http://www.econ.yale.edu/smith/econ116a/japan.pdf