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If labor markets tend to equilibrium, why is unemployment always present? Some unemployment is compatible with equilibrium Equilibrium level of unemployment.

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Presentation on theme: "If labor markets tend to equilibrium, why is unemployment always present? Some unemployment is compatible with equilibrium Equilibrium level of unemployment."— Presentation transcript:

1 If labor markets tend to equilibrium, why is unemployment always present? Some unemployment is compatible with equilibrium Equilibrium level of unemployment Natural rate of unemployment Full employment level of unemployment

2 Labor Market as a Game of Musical Chairs At equilibrium unemployment job vacancies = job seekers =

3 Frictional Unemployment Even when seekers equal vacancies, it takes time for the market to clear “Between Jobs”

4 Periods of low unemployment

5 Magnitude of flows in May 1993 In one month –5 million leave employment –5 million enter employment –~7.8% (10mil/128.1mil) of labor force change employment status every month –3.5 million leave unemployment –3.5 million enter unemployment –~5.5% of labor force change unemployment status every month

6 Expected unemployment duration Suppose probability p of leaving unemployment in one month Random draw on job –Probability you get a job in any month = p – you stay unemployed = (1-p) –Expected duration = (1/p)

7 FIGURE 15.1 Labor Market Stocks and Flows: May 1993 p = (2/8.9) =.224 Duration = 1/p = 4.5 mo. p = (2/8.9) =.224 Duration = 1/p = 4.5 mo. p = ([2=1.5]/8.9) =.393 Duration = 1/p = 2.5 mo. p = ([2=1.5]/8.9) =.393 Duration = 1/p = 2.5 mo.

8 Periods of low unemployment Average = 3 months (14 weeks); Peak = 4.7 months (21 weeks)

9 TABLE 15.2 Sources of Unemployment, United States, Various Years

10 Seasonal unemployment: unemployment that is fully anticipated because of seasonal fluctuations in demand

11 Unemployment that is not a problem Frictional Seasonal Voluntary (quits, new entrants, reentrants) Elements of equilibrium unemployment

12 Problem unemployment Cyclical Unemployment—unemployment associated with national business cycles (recession) Structural unemployment: localized shortfall of demand (geographic (Appalachia); industry (textiles); skill (dropouts, young)

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16 Avg UR=4.5% Avg UR=9% Avg UR=7.1%Avg UR=7.2%

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20 TABLE 15.3 Unemployment Rates in 2000 by Demographic Group

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22 TABLE 2.4 Unemployment and Long-Term Unemployment, Selected European and North American Countries, 2003


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