Unemployment

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Unemployment

• Unemployment Rate
• Natural versus Cyclical
• Okuns Law

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Unemployment

• August 2009 Unemployment Rate 9.7
• Everyone is classified in one of three
  categories
• (i) Employed Full /part time job in last
  week.
• (ii) Unemployed Not working and looking for
  work in last month.
• (iii) Not in labor force.
• (i) (ii) Labor Force, (i)(ii)(iii)
  population
• Unemployment Rate (u) (ii)/Labor Force
• LF Participation Rate Labor Froce/Pop
• Employment Ratio Employed/Pop

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Table 3.4 Employment Status of the U.S. Adult
Population, May 2006
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Figure 3.15 Changes in employment status in a
typical month
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• What do the unemployment numbers mean?
• Monthly changes in unemployment rate may not
  reflect creation or loss of jobs.
• Longer term changes in unemployment rate is a
  better indicator of job situation.
• Example July2009 Aug 2009

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• An unemployment spell is the length of time spent
  in unemployment.
• Characteristics about U.S. Unemployment
• (i) Most Unemployment spells are short- term.
• (ii) Most unemployed on a given date are
  long-term unemployed.

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• Example
• - Beginning of each month 2 people become
  unemployed and find job next month
  (short-term).
• - Beginning of year 4 people become
  unemployed for the whole year (long-term).
• 24/28 86 short-term spells
• 4/6 67 long-term unemployed people each
  month.

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U.S. Unemployment Rate, 1890-2005
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(No Transcript)
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• Full Employment does not mean no unemployment.
• Two types of Aggregate Unemployment
• (i) Natural unemployment the amount of
  unemployment when economy is at full employment
  (labor mkt in equilibrium).
• (ii) Cyclical unemployment the difference
  between actual and natural unemployment.

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• Denote
• Natural Unemployment Rate
• Actual Unemployment Rate
• Full Employment occurs when
• (i) There is no cyclical unemployment
• (ii) Actual Unemployment Rate Natural
  Unemployment Rate

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• Natural Unemployment
• Available Jobs Unemployed Workers
• Kinds of Natural Unemployment
• (i) Frictional in-between jobs, workers
  (firms) searching for best available jobs
  (workers).
• (ii) Structural unemployment because of lack
  of skills, qualification, location.
• Current estimated U.S. natural unemployment rate
  around 5-5.5.

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Figure 12.9 Actual and natural unemployment
rates in the United States
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• Too Many Workers? article (Business Week)
• Peg Brubaker, HR VP at 15,000 employee NY
  Presbyterian Hospital
• To hold onto 50k ultrasound/x-ray techs, had to
  hike pay twice
• Added 10k to employee tuition assistance to go
  back to college

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• High productivity co-exists with labor shortages.
  Technical progress outpacing education.
• College educated workers in demand. Lack of
  skilled labor creates natural unemployment.

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Figure 3.9 Unemployment rates in the United
States and Europe
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• Why is European unemployment so high?
• Recessions Structural Unemployment
• Unemployment Insurance Frictional Unemployment
• Government Regulation of Labor Markets

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Unemployment Insurance

• Most industrialized countries have unemployment
  insurance
• (i) Replaces a of lost income
• (ii) Limits for eligibility
• Who people who loose jobs
• Time 6 months (recently extended)
• Feature of FDRs New Deal
• Financed by payroll taxes

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• Government policies to reduce natural
  unemployment
• (i) Investment in education and worker
  re-training.
• (ii) Less government regulation in labor
  markets.
• (iii) Unemployment insurance reform.
• - replacement ratio
• - duration

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• Cyclical Unemployment
• Cyclical unemployment occurs when actual
  unemployment rates are above or below natural.
• Cyclical unemployment rate
• Okuns Law Relationship between GDP and
  unemployment rate
• OR

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Figure 3.16 Okuns law in the United States
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