Class Slides for EC 204 Spring 2006 To Accompany Chapter 6

Job Loss, Job Finding, and the Natural Rate of Unemployment Labor Force = # Employed + # Unemployed L = 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 job each month (average job lasts 100 months), s = 0.01 And 20 percent of unemployed find a job each month (average spell of unemployment is 5 months), f = 0.2 Then, U/L = 0.01/( ) =

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 rate of unemployment Experience Rating may lower the distortionary effect of such insurance 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

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

Discouraged Workers Alternative Measures of Unemployment Transitions into and out of the Labor Force

Alternative Measures of Unemployment 2005 U-1 Persons unemployed 15 weeks or longer, as a percent of the civilian labor force1.8 U-2 Job losers and persons who completed temporary jobs, as a percent of the civilian labor force2.5 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 workers5.4 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 workers6.1 U-6 Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers8.9

European Unemployment: Why So Much Higher? Generous Benefits for Unemployed Decline in Demand for Unskilled Relative To Skilled Workers

Unemployment Rate for the European Community