Mankiw Macroeconomics Chapter 15 28

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Mankiw Macroeconomics Chapter 15 (28)

• Unemployment and its Natural Rate

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A Roadmap for Chapter 15

• Background
• Long Run vs. Short Run Unemployment
• Unemployment - Generally Speaking
• Determinants of Long-Run Unemployment

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How to think about long-run vs. short-run
macroeconomics

• In Ch.10-11 we study how to measure the key
  variables in the macroeconomy GDP, CPI, Price
  Level
• In chapters 12-18 we study the REAL economy in
  the LONG-RUN growth the slope of the RGDP
  trend!
• In chapters 19-21 we study economic fluctuations
  in the SHORT-RUN why do we deviate from the
  trend?

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UnemploymentLong Run or Short Run?

• def The Natural Rate of Unemployment
• the normal rate of unemployment around which the
  unemployment rate fluctuates
• the long-run rate of unemployment
• the rate of unemployment when the economy is at
  full employment
• According to your book, about 5.5 (see next
  slide)

• def Cyclical Unemployment
• The deviation of unemployment from its natural
  rate
• If unemployment gt 5.5
• Cyclical unemployment is positive
• The output of the economy must be less than full
  employment
• If unemployment lt 5.5
• Cyclical unemployment is negative
• The output of the economy must be greater than
  full employment

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Figure 2 Unemployment Rate Since 1960
Percent of
Labor Force
10
8
6
4
2
0
1970
1975
1960
1965
1980
1985
1990
2005
1995
2000
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What is Unemployment?

• Compiled by a random monthly BLS survey of 60,000
  households
• To be counted as part of the labor force, you
  must either
• have a job
• not have a job AND be actively searching
• The labor force is the sum of the employed, and
  the unemployed

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Figure 1 US Population and Unemployment, 2001
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Labor Force Participation Rate
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Who is Unemployed?
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Problems With Our Measure of Unemployment?

• def Discouraged workers
• people who would like to work but have given up
  looking for jobs after an unsuccessful search,
  dont show up in unemployment statistics.
• Other people may claim to be unemployed in order
  to receive financial assistance, even though they
  arent looking for work.
• Some people work (homemakers) but arent paid in
  a formal labor market, and so arent counted as
  being part of the labor force

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Is 0 Unemployment ever possible?

• def Frictional unemployment
• refers to the unemployment that results from the
  time that it takes to match workers with jobs. In
  other words, it takes time for workers to search
  for the jobs that are best suit their tastes and
  skills.

• def Structural unemployment
• is the unemployment that results because the
  number of jobs available in some labor markets is
  insufficient to provide a job for everyone who
  wants one.

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Why do above market wages cause unemployment?

• If the wage is kept above the equilibrium (w),
  then the quantity of labor supplied (LS) will
  exceed the quantity of labor demanded (LD) and
  some workers will be unable to find work
• This is structural unemployment, and can be
  caused by
• Minimum wages
• Unions
• Efficiency wages

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What determines the natural rate of unemployment?

• Minimum wages
• Minimum wages cause some unemployment
• As minimum wage rises above equilibrium, the
  natural rate rises
• Labor Unions
• As unions seek to raise wages above equilibrium,
  theyll produce a similar effect on the natural
  rate as minimum wages

• Efficiency Wages
• When employers pay above market wages to reduce
  turnover and increase worker productivity, they
  increase the natural rate
• Job Search
• In general, its not possible to move from one
  job to another without some lost time workers
  are therefore temporarily unemployed during the
  interim