Unemployment

1
Unemployment

• Chapter 6

2
Natural Rate of Unemployment

• Not constant
• Actual rate fluctuates around natural rate
• Deviations from Natural Rate due to Business
  Cycles

3
U.S. Unemployment, 1952-2005
4
Model of Natural Rate

• L E U
• L Labor Force
• E Employed
• U Unemployed
• Equilibrium separations findings
• fU sE
• fU s(L U)
• dividing both sides by L
• f(U/L) s(1 U/L)

5
Model of Natural Rate

• Unemployment rate is U/L
• U/L s/(sf)
• For f .2, s .01
• U/L .0476 or about 5.0
• Reducing natural rate increase f or reduce s.
• As f approaches 1, U/L approaches zero
• Job search and wage rigidity keep f lt 1

6
Job Search and Frictional Unemployment

• Time required to match workers and jobs
• Workers need to explore opportunities
• Even with flexible wages, search takes time
• Workers are heterogeneous
• Geographic mobility is not instantaneous
• Information is imperfect and costly to obtain

7
Sectoral shifts

• Change in demand among industries and regions
• Time required for workers to shift causes
  frictional unemployment

8
CASE STUDY Structural change over the long run
9
Public Policy for Frictional Unemployment

• Department of Labor provides training and search
  assistance can reduce unemployment
• Unemployment Insurance reduces cost of being
  unemployed
• May increase layoffs
• Job placement increases when benefits expire
• Can improve matches, increasing productivity and
  income

10
Wage Rigidity and Structural Unemployment

• Wage rigidity wages dont adjust to competitive
  equilibrium level
• If wages are rigid, scarce jobs are rationed,
  causing structural unemployment

11
Unemployment from real wage rigidity
If the real wage is stuck above the eqm level,
then there arent enough jobs to go around.
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Causes of Wage Rigidity

• Minimum Wage Laws
• Unions
• Efficiency Wages

13
Minimum Wages

• Below most equilibrium wages
• Cannot explain most of natural rate
• May be relevant for teenagers and other unskilled
  workers
• Teenage employment involves learning

14
The minimum wage in the real world

• In Sept 1996, the minimum wage was raised from
  4.25 to 4.75. Heres what happened

• Other studies A 10 increase in the minimum
  wage increases teenage unemployment by 1-3.

15
Unions

• Use monopoly power to keep wages high for
  insiders
• Outsiders bear costs
• Unions role declining in U.S.

16
Union membership and wage ratios by industry, 2005
wage ratio
U of total
employed (1000s)
industry
105,508
Private sector (total)
20,381
Government (total)
8,053
Construction
600
Mining
15,518
Manufacturing
14,973
Retail trade
4,379
Transportation
6,304
Finance, insurance
10,951
Professional services
3,312
Education
14,045
Health care
wage ratio 100?(union wage)/(nonunion wage)
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Efficiency wages

• Wages set above equilibrium to increase
  productivity
• Reasons high wages increase productivity
• attract higher quality job applicants
• increase worker effort and reduce shirking
• reduce turnover, which is costly
• improve health of workers (in developing
  countries)
• Result of high wages is unemployment
• Henry Fords 5 day

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Evidence about Unemployment

• Spell vs. duration
• Most unemployment due to short spells
• Most time unemployed due to long duration
• Long-term unemployment due to structural and/or
  sectoral factors
• This knowledge can help shape policy

19
The duration of U.S. unemployment, average over
1990-2006
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Unemployment Demographics
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Explaining the Trends in the Natural Rate

• Did natural rate increase due to baby boomers?
• When rate increased in 1970s, males between 25
  54 also experienced increase average
  unemployment, possibly due to frequent
  separations
• As boomers age, separations decrease
• Sectoral shift OPEC and adjustment to energy
  costs low and stable prices in 1990 coincide
  with lower unemployment today adjust better
• Minimum wages and Unions less important

22
Actual natural rates of unemployment in the U.S.
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EXPLAINING THE TRENDThe minimum wage
The trend in the real minimum wage is similar to
that of the natural rate of unemployment.
9
8
7
6
minimum wage in 2006 dollars
5
Dollars per hour
4
3
minimum wage in current dollars
2
1
0
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
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EXPLAINING THE TRENDUnion membership
Since the early 1980s, the natural rate of
unemploy-ment and union membership have both
fallen. But, from 1950s to about 1980, the
natural rate rose while union membership fell.
25
EXPLAINING THE TREND Sectoral shifts
From mid 1980s to early 2000s, oil prices less
volatile, so fewer sectoral shifts.
Price per barrel of oil, in 2006 dollars
26
Labor Market Dynamics

• Entry and exit from labor force some spells of
  unemployment end with exit from labor force
  Discouraged workers
• Many of unemployed are new entrants new and
  returning workers
• Labor force not constant

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European Unemployment Trends
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European Unemployment

• Drop in demand for low-skilled labor due to
  technology, strong demand for skilled workers
• Europe permanent benefits for unemployed
• Generous benefits increase unskilled unemployment
  
• Strong unions protection increases unemployment
• Programs reduce inequality
• U.S. benefits temporary
• Wage gap skill premium widened in past two
  decades
• Low skilled receive lower wages
• Policy choice for Europe more flexible labor
  markets

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Percent of workers covered by collective
bargaining
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Happiness Leisure