1. ECON 2003 MACROECONOMICS 1 CHAPTER 6 UNEMPLOYMENT
Prof. Yeşim Kuştepeli

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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