ECON 2003 MACROECONOMICS 1 CHAPTER 6 UNEMPLOYMENT Prof. Yeşim Kuştepeli

NATURAL RATE OF UNEMPLOYMENT Natural rate of unemployment: the rate of unemployment around which the economy fluctuates. Steady state rate of unemployment Long run Assoc. Prof. Yeşim Kuştepeli

JOB LOSS, JOB FINDING and NATURAL UNEMPLOYMENT Model of labor force dynamics L = E + U ; Unemployment rate = U/L f: rate of job finding ; s: rate of job separation fU = sE ; fU = s(L-U) f*U/L = s(1-U/L) U/L =s/s+f The higher the rate of job seperation, the higher the U/L. The higher the rate of job finding, the lower the U/L. Assoc. Prof. Yeşim Kuştepeli

JOB LOSS, JOB FINDING and NATURAL UNEMPLOYMENT Any policy aimed at lowering the natural rate of unemployment must either reduce the rate of job seperation or increase job finding. This model of unemployment rate assumes that job finding is not instantaneous, but it fails to explain why this is the case. Two underlying reasons for unemployment: 1) job search 2) wage rigidity. Assoc. Prof. Yeşim Kuştepeli

JOB SEARCH and FRICTIONAL UNEMPLOYMENT It takes time to match workers and jobs. The unemployment caused by the time it takes wokers to search for a job is called frictional unemployment. Sectoral shift Firm fails Job performance is unacceptable Skills are not needed Change careers or places Assoc. Prof. Yeşim Kuştepeli

PUBLIC POLICY and FRICTIONAL UNEMPLOYMENT Government employment agencies disseminate information abouut job vacancies in order to match jobs and workers more efficiently. Unemployment insurance may increase frictional unemployment and natural rate of unemployment as it raises the rate of job seperation and decreases job finding. 100 percent experience rated (requiring a firm that lays off a worker to bear the full cost of that worker’s unnemployment benefits) Partially experience rated Assoc. Prof. Yeşim Kuştepeli

REAL WAGE RIGIDITY and WAIT UNEMPLOYMENT Wage rigidity: failure of wages to adjust until labor supply equals labor demand Wait unemployment: unemployment due to wage rigidity and job rationing. Reasons of wage rigidity: 1) minimum wage laws 2) Monopoly power of labor unions 3) Efficiency wages Assoc. Prof. Yeşim Kuştepeli

unfavorable sorting (adverse selection) worker effort (moral hazard) 1) MINIMUM WAGE LAWS Excess supply of labor Example of price floor 2) UNIONS Insiders-outsiders 3) EFFICIENCY WAGES nutrition labor turnover unfavorable sorting (adverse selection) worker effort (moral hazard) Assoc. Prof. Yeşim Kuştepeli

DURATION OF UNEMPLOYMENT Long term unemployment is more likely to be wait unemployment. If the goal is to lower substantially the natural rate of unemployment, policies must aim at the long term unemployed because these individuals account for a large amount of unemployment. Assoc. Prof. Yeşim Kuştepeli