0 CHAPTER 6 Unemployment U P D A T E Chapter 6 Unemployment

1 CHAPTER 6 Unemployment Why do economists study unemployment?  To understand causes & possible solutions  Unemployment affects economic and social outcomes in society

In this chapter, you will learn: …about the natural rate of unemployment:  what it means  what causes it  understanding its behavior in the real world

3 CHAPTER 6 Unemployment Natural rate of unemployment  Natural rate of unemployment: The average rate of unemployment around which the economy fluctuates.  Associated with zero cyclical unemployment

4 CHAPTER 6 Unemployment Figure 6.1 The Unemployment Rate and the Natural Rate of Unemployment in Canada Mankiw and Scarth: Macroeconomics, Canadian Fourth Edition Copyright © 2011 by Worth Publishers

Actual and natural rates of unemployment, U.S., Percent of labor force Unemployment rate Natural rate of unemployment

6 CHAPTER 6 Unemployment 6.1 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

7 CHAPTER 6 Unemployment The transitions between employment and unemployment Employed Unemployed s  E f  U

8 CHAPTER 6 Unemployment The steady state condition  Definition: the labor market is in steady state, or long-run equilibrium, if the unemployment rate is constant.

9 CHAPTER 6 Unemployment Policy implication  A policy will reduce the natural rate of unemployment only if it lowers s or increases f.

10 CHAPTER 6 Unemployment 6.2 Job search & frictional unemployment  frictional unemployment: caused by the time it takes workers to search for a job

11 CHAPTER 6 Unemployment Sectoral shifts  def: Changes in the composition of demand among industries or regions.

12 CHAPTER 6 Unemployment Public policy and job search Govt programs affecting unemployment include:  Govt employment agencies  Public job training programs

13 CHAPTER 6 Unemployment Employment insurance (EI)  EI pays part of a worker’s former wages for a limited time after losing his/her job.

14 CHAPTER 6 Unemployment  Why? Is EI a bad policy?

15 CHAPTER 6 Unemployment 6.3 Unemployment from real wage rigidity  Wage rigidity: the failure of wages to adjust to a level at which the supply of labour equals the demand for labour.

16 CHAPTER 6 Unemployment Structural unemployment  Unemployment due to wage rigidity and job rationing.  Due to a mismatch

17 CHAPTER 6 Unemployment Reasons for wage rigidity 1. Minimum wage laws 2. Labor unions 3. Efficiency wages

18 CHAPTER 6 Unemployment Table 6.1 Percent of Workers Covered by Collective Bargaining Mankiw and Scarth: Macroeconomics, Canadian Fourth Edition Copyright © 2011 by Worth Publishers

19 CHAPTER 6 Unemployment 3. Efficiency wage theory  Efficiency wages theories suggest that paying higher than market wage leads to more productive workers.

20 CHAPTER 6 Unemployment 6.4 Labour Market Experience in Canada  The unemployment rate can be broken into 2 components:  1. incidence  2. duration

21 CHAPTER 6 Unemployment Table 6.2 Unemployment by Age Groups: 2007 Mankiw and Scarth: Macroeconomics, Canadian Fourth Edition Copyright © 2011 by Worth Publishers

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26 CHAPTER 6 Unemployment Why does the natural rate change over time? 1. Demographics 2. Sectoral shifts 3. Productivity 4. Transitions in the labour force

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28 CHAPTER 6 Unemployment 6.5 Labour Market Experience in Europe  In general the u.r. has risen since the 1960s  There is a huge variance among countries

Unemployment in Europe, Percent of labor force

30 CHAPTER 6 Unemployment Explaining the variation in Europe 1. Long term unemployed 2. Labour market policies

31 CHAPTER 6 Unemployment Figure 6.5 Annual Hours Worked per Employed Person Mankiw and Scarth: Macroeconomics, Canadian Fourth Edition Copyright © 2011 by Worth Publishers

32 CHAPTER 6 Unemployment Typical US worker works 20% more hours than typical European.  Why?