1. Chapter 18 Big Issue No. 2: Unemployment
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

2. Objectives Analyse the anatomy of unemployment
Investigate variations in unemployment rates across groups
Discuss the costs of unemployment
Examine the theory of the natural rate of unemployment
Evaluate approaches to recent unemployment policies
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

3. Chapter Organisation
18.1 Definition, Measurement and Some Stylised Facts
18.2 The Anatomy of Unemployment
18.3 The Costs of Unemployment
18.4 Full Employment
18.5 Unemployment Policy
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

4. 18.1 Definition, Measurement and Some Stylised Facts
Unemployment rates vary widely across groups, gender, between skill levels, regions, and countries.
'The labour forces' is the collective term for people working or actively seeking work.
Those of working age but not actively seeking work are classified as not in the labour force.
A person is officially defined as unemployed if they are out of work and have actively been seeking work during the previous four weeks.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

5. Definition, Measurement and Some Stylised Facts
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

6. Definition, Measurement and Some Stylised Facts
Research on the Australian labour market has revealed the following characteristics of unemployment:
Unemployment has increased dramatically since the 1970s and has remained high.
However, the unemployment rate in 2004 was the lowest since 1976.
There are significant variations in unemployment rates across groups.
There is a high turnover in the labour market.
There is a significant cyclical component in turnover rates.
A large proportion of those unemployed are classified as long-term unemployed.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

7. Chapter Organisation
18.1 Definition, Measurement and Some Stylised Facts
18.2 The Anatomy of Unemployment
18.3 The Costs of Unemployment
18.4 Full Employment
18.5 Unemployment Policy
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

8. 18.2 The Anatomy of Unemployment
Frictional, Structural and Cyclical Unemployment
Frictional unemployment is
Unemployment due to the job-searching process.
Structural unemployment is
Unemployment due to problems associated with matching the available job opportunities with the skills and abilities available among the unemployed.
Cyclical unemployment is
Unemployment that occurs when output is below the full-employment level.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

9. Frictional, Structural and Cyclical Unemployment
A distinction can be made between voluntary cyclical unemployment and involuntary unemployment.
Voluntary unemployment arises when individuals choose not to work when wages are temporarily low.
Involuntary unemployment arises when individuals would like to work at the going wage rate but are unable to find a job.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

10. Variations in Unemployment Across Groups
Aggregate data on unemployment conceals wide variations between groups.
Teenagers and indigenous Australians have higher levels of unemployment rates.
Female unemployment was higher then males until the early 1990s.
The variation in unemployment across groups can be examined using the relationship between the overall unemployment and unemployment rate of various groups.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

11. Variations in Unemployment Across Groups
The overall rate of unemployment is a weighted average of the unemployment rates of the groups.
u = w1u1 + w2u wnun (18.1)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

12. The Unemployment Pool
At any point in time, there is a given number of unemployed people.
Over time there are flows into and out of this unemployment pool.
Reasons a person may be unemployed:
A new entrant into the labour force.
A person quits their job to look for other employment.
A person is fired or the firm closes down.
A person may be laid off.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

13. The Unemployment Pool
Reasons a person may leave the unemployment pool:
A person may be hired into a new job.
Someone laid off may be reinstated.
An unemployed person may stop looking for a job and leave the labour force.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

14. Labour Market Flows
Over time new jobs are created and others become obsolete.
Employment flows occur as jobs are reallocated between firms and across sectors of the economy.
At the same time there are flows of workers between the labour market states of employment and unemployment.
Labour market flows can be illustrated with reference to the flows in and out of employment.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

15. Labour Market Flows Change in unemployment (U)
U = EU + NU – UE – UN (18.2)
Where N is ‘not in labour force’, E is ‘employed’ and U is ‘unemployed’. This defines the flows.
EU is ‘employed to unemployed’, NU is ‘not in labour force’ to unemployed’ and so on.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

16. Labour Market Flow
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

17. Duration of Unemployment
Duration of unemployment is:
The average length of time a person remains unemployed.
The duration of unemployment in Australia has increased dramatically since 1980.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

18. Chapter Organisation
18.1 Definition, Measurement and Some Stylised Facts
18.2 The Anatomy of Unemployment
18.3 The Costs of Unemployment
18.4 Full Employment
18.5 Unemployment Policy
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

19. 18.3 The Costs of Unemployment
The costs of cyclical unemployment:
Output lost because the economy is not at full employment
According to Okun’s law, the Australian economy loses about 1.5% of output for each 1% that the unemployment rate exceeds NRU.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

20. The Costs of Unemployment
Distributional impact of unemployment
Unemployment generally hits poor people harder than it hits the rich
Unemployment benefits partially spread the burden of unemployment.
Other costs
Society bears the additional cost of lost tax revenue on top of the worker’s lost wages
Increased criminal activity
Health status
Decreased ‘happiness’.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

21. Chapter Organisation
18.1 Definition, Measurement and Some Stylised Facts
18.2 The Anatomy of Unemployment
18.3 The Costs of Unemployment
18.4 Full Employment
18.5 Unemployment Policy
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

22. 18.4 Full Employment
Determinants of the natural rate of unemployment (NRU)
The duration of unemployment and frequency of unemployment affects the NRU.
Factors affecting the duration of unemployment
Organisation of the labour market, including employment agencies
Demographic make-up of the labour force
Availability of unemployment benefits.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

23. Frequency of Unemployment
Frequency of unemployment is:
Average number of times, per period, that workers become unemployed.
Determinants affecting frequency of unemployment:
Variability of demand for labour across different firms in the economy
The greater the variability, the greater the unemployment rate
The rate at which new entrants enter the labour force (LF)
The faster the LF growth, the greater the NRU.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

24. The NAIRU The NAIRU is an alternative concept of the NRU.
It measures the unemployment rate at which inflation is neither accelerating or decelerating.
It derives from the Phillips curve where:
The rate of unemployment is that level where the actual and expected inflation rates are equal and constant.
Estimates of the NAIRU are imprecise.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

25. Estimates of the NRU
Estimates of the NRU in Australia have changed over time from 2% in the 1960s:
To 6% in the early 1980s
To 18.5% in the early 1990s.
The variation in Australia in the NRU:
Is similar to that in Europe
Is much larger than for the United States.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

26. Estimates of the NRU Equation (18.3) for the natural rate:
u* = w1u*1 + w2u* wnu*n (18.3)
The NRU is shown as the weighted average of the natural rates of unemployment of the subgroups in the labour force.
Two factors affect the NRU:
Changes in the composition of the labour force (i.e. the w weights)
Changes in the natural rates for the different subgroups (i.e. the u* for each group).
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

27. Hysteresis and the Rising NRU
Hysteresis claims that extended periods of high employment raise the NRU.
How does hysteresis raise the NRU?
The unemployed might be accustomed to not working.
Discouraged unemployed do not try so hard to find a job.
Long-term unemployed might signal to firms the possibility that they are undesirable.
Therefore, firms may not employ them.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

28. Reducing the NRU
Unemployment benefits increase the rate of unemployment because:
It allows longer for job searching, increasing the duration of unemployment
It raises the reservation wage, which is the wage at which a person receiving unemployment benefits is willing to take a new job.
The replacement ratio is the ratio of after tax income while unemployed to after tax income while employed.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

29. Reducing the NRU
A high replacement ratio impacts on the reservation wage (the lowest wage the individual is prepared to accept).
Evidence suggests that the more generous the level of welfare benefits the longer the duration of unemployment.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

30. Chapter Organisation
18.1 Definition, Measurement and Some Stylised Facts
18.2 The Anatomy of Unemployment
18.3 The Costs of Unemployment
18.4 Full Employment
18.5 Unemployment Policy
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

31. 18.5 Unemployment Policy
Unemployment policies in Australia since the 1990s have included:
Restoring Full Employment ( Green paper 1993)
Emphasis was placed on stimulating economic growth and expansion.
Working Nation ( White paper1994)
Emphasis was placed on labour market programs for the long-term unemployed.
Job Network (1996)
Emphasis placed on labour market deregulation and the introduction of private employment agencies.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

32. Unemployment Policy
International comparison indicate that both Ireland and the Netherlands have achieved strong labour market performances in recent years.
This performance was associated with widespread reforms to wage and workplace policies.
Two features of reform were:
Wage restraint which incorporated offsetting tax cuts to reduce the impact on net workplace remuneration
Changes agreed on a consensus basis with agreement between business, unions and government.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.

33. Unemployment Policy
International experience suggests that policies designed to reduce unemployment need to be wide ranging and not specifically directed at the labour market.
Such an approach should include:
Wage reform
Tax reform
Reform of the benefits system
A systematic approach to labour market programs
Improvements in education and training.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Dr Monica Keneley.