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Chapter 6 Unemployment

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Why do economists study unemployment?

To understand causes & possible solutions

Unemployment affects economic and social outcomes in society

In this chapter, you will learn:

…about the natural rate of unemployment:

what it means

what causes it

understanding its behavior in the real world

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Natural rate of unemployment

Natural rate of unemployment: The average rate of unemployment around which the economy fluctuates.

Associated with zero cyclical unemployment

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Figure 6.1 The Unemployment Rate and the Natural Rate of Unemployment in CanadaMankiw and Scarth: Macroeconomics, Canadian Fourth EditionCopyright © 2011 by Worth Publishers

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100

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Actual and natural rates of unemployment, U.S., 1960-2010

Per

cent

of l

abor

forc

e Unemployment rate

Natural rate of unemployment

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6.1 A first model of the natural rate

Notation:

L = # of workers in labor force

E = # of employed workers

U = # of unemployed

U/L = unemployment rate

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The transitions between employment and unemployment

Employed Unemployed

s E

f U

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The steady state condition

Definition: the labor market is in steady state, or long-run equilibrium, if the unemployment rate is constant.

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Policy implication

A policy will reduce the natural rate of unemployment only if it lowers s or increases f.

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6.2 Job search & frictional unemployment

frictional unemployment: caused by the time it takes workers to search for a job

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Sectoral shifts

def: Changes in the composition of demand among industries or regions.

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Public policy and job search

Govt programs affecting unemployment include: Govt employment agencies

Public job training programs

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Employment insurance (EI)

EI pays part of a worker’s former wages for a limited time after losing his/her job.

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Why?

Is EI a bad policy?

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6.3 Unemployment from real wage rigidity

Wage rigidity: the failure of wages to adjust to a level at which the supply of labour equals the demand for labour.

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Structural unemployment

Unemployment due to wage rigidity and job rationing.

Due to a mismatch

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Reasons for wage rigidity

1. Minimum wage laws

2. Labor unions

3. Efficiency wages

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Table 6.1 Percent of Workers Covered by Collective BargainingMankiw and Scarth: Macroeconomics, Canadian Fourth EditionCopyright © 2011 by Worth Publishers

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3. Efficiency wage theory

Efficiency wages theories suggest that paying higher than market wage leads to more productive workers.

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6.4 Labour Market Experience in Canada

The unemployment rate can be broken into 2 components: 1. incidence 2. duration

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Table 6.2 Unemployment by Age Groups: 2007Mankiw and Scarth: Macroeconomics, Canadian Fourth EditionCopyright © 2011 by Worth Publishers

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Why does the natural rate change over time?1. Demographics

2. Sectoral shifts

3. Productivity

4. Transitions in the labour force

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6.5 Labour Market Experience in Europe

In general the u.r. has risen since the 1960s

There is a huge variance among countries

Unemployment in Europe, 1960-2009P

erce

nt o

f lab

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1970 1975 1980 1985 1990 1995 2000 2005 20100

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FranceGermanyItalyUnited Kingdom

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Explaining the variation in Europe

1. Long term unemployed

2. Labour market policies

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Figure 6.5 Annual Hours Worked per Employed PersonMankiw and Scarth: Macroeconomics, Canadian Fourth EditionCopyright © 2011 by Worth Publishers

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Typical US worker works 20% more hours than typical European. Why?