1. Copyright © 2009 Pearson Education, Inc. 14- 1 Topic 5-3. (Ch. 14)  Unemployment

2. Copyright © 2009 Pearson Education, Inc. 14- 2 Table 14.1: Civilian Labor Force Participation, Employment, and Unemployment Rates in the United States (in percentages)

3. Copyright © 2009 Pearson Education, Inc. 14- 3 Figure 14.1: Average Monthly Labor Market Stocks and Flows: 1996-2003

4. Copyright © 2009 Pearson Education, Inc. 14- 4 Table 14.2: Source of Unemployment, United States, Various Years

5. Copyright © 2009 Pearson Education, Inc. 14- 5 Unemployment rate  Unemployment rate (u) = f (P EN P NE P UN P NU P EU P UE ) + - - + + - Where P XY is percentage of X from X to Y. u =

6. Copyright © 2009 Pearson Education, Inc. 14- 6 Figure 14.2: A Market with Full Employment Initially

7. Copyright © 2009 Pearson Education, Inc. 14- 7 Unemployment  Demand deficit: economic fluctuation (x  z of Beveridge curve)  Seasonal: ski instructors  Frictional: result of natural search process  Structural: fundamental mismatch because of skill and residence ( y  z)  Beveridge curve: indicate negative relationship between vacancy rate and unemployment rate

8. Copyright © 2009 Pearson Education, Inc. 14- 8 Beveridge curve Vacancy Unemployed X Z y

9. Copyright © 2009 Pearson Education, Inc. 14- 9 Unemployment flows  L=E+U  At equilibrium nU = sE n: fraction leaving unemployment (outflow from U) s: fraction become unemployed (inflow to U) nU = s(L-U)  nU =sL-sU  (s+n)U=sL  U=L[s/(s+n)]  U/L = s/(s+n) (unemployment rate)

10. Copyright © 2009 Pearson Education, Inc. 14- 10 Unemployment flows (cont’)  If n  then U/L , If s  then U/L   Improvements in the employment service that help match unemployment workers to vacant jobs more effectively (n  ). B curve move inward  High unemployment insurance (n  ) B curve move outward  Greater industrial diversity (s , n  ) B curve move inward

11. Copyright © 2009 Pearson Education, Inc. 14- 11 Unemployment Insurance  Criteria: different across states 1) Reasons for unemployment : involuntary laid off. 2) Labor market experience: weeks-worked tests or minimum earnings tests. New entrants or reentrants are not eligible.  There is maximum duration (eg. 26 week)  He/she should make continual effort.  Evidence: high unemployment insurance  longer duration

12. Copyright © 2009 Pearson Education, Inc. 14- 12 Figure 14.4: Weekly Unemployment Insurance Benefits as a Function of Previous Earnings

13. Copyright © 2009 Pearson Education, Inc. 14- 13 Duration vs. Incidence  Incidence rate: % of workers experiencing any unemployment  Spell: how many times unemployed  u = spells per unemployed worker (S)* average duration per spell (D)* incidence rate (I) /unit of duration in 1 year ex1) everybody experienced unemployment once and duration is 3.2 weeks u = 1 * 3.2/52 * 100% = 6.1% ex2) about 6.1% of people experienced unemployment entire year (52 weeks)

14. Copyright © 2009 Pearson Education, Inc. 14- 14 Completed vs. Incomplete spell  Incomplete spell makes it hard to find the average duration per spell.  Duration of spells in progress is different from duration of all spell. ex) 1 person: 52 weeks & still unemployed in the first week of the year. 52 person: all spells lasted only one week. Average duration of spells of unemployment in progress = (1*52+1*1)/2 = 26.5 week Average duration of completed unemployment = (1*52+52*1)/53 = 2 weeks

15. Copyright © 2009 Pearson Education, Inc. 14- 15 US vs. Europe  Unemployment rate is just a little bit higher in Europe.  But duration is much longer in Europe (on average more than 1 year) and number of spells and incidence rates are higher in US  US responds to business cycles (demand deficient, Europe’s is more structural)

16. Copyright © 2009 Pearson Education, Inc. 14- 16 Figure 14.6: The Wage Curve

17. Copyright © 2009 Pearson Education, Inc. 14- 17 Heterogeneity vs. State-dependence  Hazard rate (H): the probability of leaving unemployment. H drops as duration of unemployment increases. That is, as duration increases, the fraction of workers with high probabilities of finding a job remaining in the sample decreases. Two factors. 1) Heterogeneity: H is different across individual characteristics. 2) State dependence: the longer duration of unemployment is stigma since employers use the duration as screening device.

18. Copyright © 2009 Pearson Education, Inc. 14- 18 Table 14.3: Unemployment Rates in 2005 by Demographic Group

19. Copyright © 2009 Pearson Education, Inc. 14- 19 Structure of unemployment  Women: Now, not much different from men’s. Increased labor force attachment. Affirmative action.  Youth: Very high  “job shopping model” Unemployment does not create a permanent “scarring” (scarring vs. stigma)  Black youth’s unemployment more than doubled.  Duration: old>young, men>women, married men >single, black>white  Incidence: old white

20. Copyright © 2009 Pearson Education, Inc. 14- 20 What is work-sharing? Surplus loss: A. one worker with 40 hours = A+B+C B. two workers with 20 hours = 2C Wage C B A Working Hours