1. MACROECONOMICS Chapter 6 Unemployment

2. 2 Steady State The labor market is in equilibrium. The labor market is in equilibrium. No unemployment = long-run rate of unemployment. No unemployment = long-run rate of unemployment. Call it “natural rate of unemployment” or NAIRU – non-accelerating inflation rate of unemployment. Call it “natural rate of unemployment” or NAIRU – non-accelerating inflation rate of unemployment. Number of unemployed finding a job is the same as number of employed losing a job. Number of unemployed finding a job is the same as number of employed losing a job.

3. 3 Natural Rate Definitions The natural rate of unemployment (the rate when the labor market is in long run equilibrium) can be calculated by s/(f+s): rate of jobs lost over rate of jobs lost plus rate of jobs found. Suppose during steady state 2% of the employed lose jobs per month and 30% of the unemployed find a job..02/.32 = 1/16 = 6.7%

4. 4 How To Reduce Natural Rate Either lower s, rate of job separation, or raise f, rate of job finding. Either lower s, rate of job separation, or raise f, rate of job finding. Can the government make job losses smaller? Can the government make job losses smaller? There are measures government can do to increase f. There are measures government can do to increase f.

5. 5 Frictional Unemployment Unemployment during search for a job. Unemployment during search for a job. It is the result of It is the result of Sectoral shifts Sectoral shifts Bankrupt firms Bankrupt firms Firing Firing Skills are obsolete Skills are obsolete Changing careers Changing careers Moving to another location Moving to another location

6. 6 Policies to Reduce U N Retraining to shift workers from declining industries to growing industries. Retraining to shift workers from declining industries to growing industries. Disseminate information about job vacancies. Disseminate information about job vacancies. Make companies pay the full unemployment insurance for laid-off workers. Make companies pay the full unemployment insurance for laid-off workers.

7. 7 Policies That Raise U N Unemployment insurance Unemployment insurance The urgency of finding a job – any job – is diminished. The urgency of finding a job – any job – is diminished. For those who need the support to survive, it is a lifeline. For those who need the support to survive, it is a lifeline. It also allows longer search to match skills and jobs. It also allows longer search to match skills and jobs. For those who do not care to have a job, it may delay their job finding. For those who do not care to have a job, it may delay their job finding.

8. 8 Even five years after losing his job, a sacked Norwegian worker can expect to take home almost three-quarters of what he did while employed, according to the OECD. The corresponding fraction is nearly two-thirds in Belgium, but is much lower in most other OECD countries. Benefits in America are not only less generous to begin with, but also expire after one year. Sweden and France both pay an unemployed person around two-thirds of his previous income in the first year of joblessness. But although a French worker can expect benefits to provide nearly a third of what he earned in his last job even five years after he lost it, a Swede can expect only 8% of his previous income to be replaced. http://www.economist.com/markets/indicators/displaystory.cfm?story_id=14513958

9. 9 Structural Unemployment Define it as unemployment resulting from wage rigidity: real wage above the equilibrium real wage. Define it as unemployment resulting from wage rigidity: real wage above the equilibrium real wage. Minimum wage laws Minimum wage laws Unions Unions Efficiency wages Efficiency wages

10. 10 Minimum Wage Laws In general, a 10% increase in the minimum wage reduces teenage employment by 1- 3%. In general, a 10% increase in the minimum wage reduces teenage employment by 1- 3%. Earned income tax credit helps the working poor more. Earned income tax credit helps the working poor more.

11. 11 Characteristics of Minimum Wage Workers http://www.bls.gov/cps/minwage2008.htm http://www.bls.gov/cps/minwage2008.htm http://www.bls.gov/cps/minwage2008.htm They are a small percentage of the labor force. They are young, female, less educated, part-time, working for restaurants and bars. They are a small percentage of the labor force. They are young, female, less educated, part-time, working for restaurants and bars.

12. 12 Unions Most countries in the EU cover 2/3 or more of their workers through collective bargaining. Most countries in the EU cover 2/3 or more of their workers through collective bargaining. US is at 18%, UK at 47%. US is at 18%, UK at 47%. How come Sweden with 83% covered with collective bargaining did not have high unemployment? How come Sweden with 83% covered with collective bargaining did not have high unemployment? Government including the outsiders in the process. Government including the outsiders in the process.

13. Unions 13 http://www.bls.gov/news.release/union2.nr0.htm

14. 14 Efficiency Wages Higher wages influence nutrition in poorer countries. Higher wages influence nutrition in poorer countries. Higher wages lower turnover rates and retraining costs. Higher wages lower turnover rates and retraining costs. Higher wages reduce adverse selection. Higher wages reduce adverse selection. Better workers do not seek higher paying jobs leaving the firm with worse workers. Better workers do not seek higher paying jobs leaving the firm with worse workers. Higher wages reduce moral hazard. Higher wages reduce moral hazard. Less shirking, more worker effort. Less shirking, more worker effort.

15. 15 The US Experience During 1990 to 2006 During 1990 to 2006 38% of unemployed found jobs within a month 38% of unemployed found jobs within a month 31% were unemployed for more than 15 weeks. 31% were unemployed for more than 15 weeks. 71% of unemployment time was represented by the second group while only 7% was from the first group. 71% of unemployment time was represented by the second group while only 7% was from the first group.

16. 16 The US Experience Example: Example: Suppose there are 10 people who are unemployed some time. Suppose there are 10 people who are unemployed some time. 7 of the 10 are unemployed for one month. 7 of the 10 are unemployed for one month. 3 are unemployed for 11 months. 3 are unemployed for 11 months. Total time of unemployment: 7+33=40 months. Total time of unemployment: 7+33=40 months. Most time of unemployment is from the long- term: 33/40. Most time of unemployment is from the long- term: 33/40. Most unemployed (7/10) have short spells. Most unemployed (7/10) have short spells.

17. 17 Unemployment Rates in 2008 MenWomen Total6.15.4 White5.54.9 Black11.48.9 Typically, the unemployment rates between groups have been very consistent: 2W=B, 2B=Wta, 2Wta=Bta.

18. 18 Productivity, Sluggish Real Wages and Unemployment W/P L L S MPL S S’ MPL’

19. 19 Alternative Measures http://www.bls.gov/news.rel ease/empsit.t12.htm

20. Weeks Unemployed 20

21. Intensity of Unemployment 21

22. 22 European Experience Western European unemployment has been higher. Western European unemployment has been higher. Generous benefits for unemployed. Generous benefits for unemployed. Technological impact on the demand for unskilled labor. Technological impact on the demand for unskilled labor. Public spending on active labor market policies reduces unemployment. Public spending on active labor market policies reduces unemployment. Job training Job training Job search assistance Job search assistance Subsidized employment Subsidized employment

23. 23 Misery Index Starting 1970s a misery index has been used to indicate the hardship of the population: UR+π. Starting 1970s a misery index has been used to indicate the hardship of the population: UR+π. Studies indicate the true misery index should be UR+0.5π or 2UR+ π (if you support the opposition! Same measure, higher number) Studies indicate the true misery index should be UR+0.5π or 2UR+ π (if you support the opposition! Same measure, higher number)

24. 24 Why Europeans Work Less? High taxes in Europe make people decide to give up work. High taxes in Europe make people decide to give up work. Assumes very large labor elasticity Assumes very large labor elasticity US hours per year haven’t changed yet tax rates dropped a lot since 1960s. US hours per year haven’t changed yet tax rates dropped a lot since 1960s. Underground economy in Europe may be higher indicating people work off books. Underground economy in Europe may be higher indicating people work off books. Unions have pushed for more holidays and vacations. Unions have pushed for more holidays and vacations. Europeans prefer more leisure to more income, maybe. Europeans prefer more leisure to more income, maybe.