acroeconomics sixth edition n g m - business school
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MMACROECONOMICSACROECONOMICS
C H A P T E R
© 2007 Worth Publishers, all rights reserved
SIXTH EDITIONSIXTH EDITION
PowerPointPowerPoint®® Slides by Ron Cronovich Slides by Ron Cronovich
NN. . GGREGORY REGORY MMANKIWANKIW
Unemployment
6
CHAPTER 6 Unemployment slide 1
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
CHAPTER 6 Unemployment slide 2
Natural rate of unemployment
Natural rate of unemployment:The average rate of unemployment around whichthe economy fluctuates.
In a recession, the actual unemployment rate risesabove the natural rate.
In a boom, the actual unemployment rate falls belowthe natural rate.
CHAPTER 6 Unemployment slide 3
Actual and natural rates ofunemployment in the U.S., 1960-2006
Per
cent
of l
abor
forc
e
0
2
4
6
8
10
12
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Unemployment rate
Natural rate ofunemployment
CHAPTER 6 Unemployment slide 4
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
CHAPTER 6 Unemployment slide 5
Assumptions:
1. L is exogenously fixed.
2. During any given month,s = fraction of employed workersthat become separated from their jobs
s is called the rate of job separationsf = fraction of unemployed workersthat find jobs
f is called the rate of job findings and f are exogenous
2
CHAPTER 6 Unemployment slide 6
The transitions betweenemployment and unemployment
Employed Unemployed
s ×E
f ×U
CHAPTER 6 Unemployment slide 7
The steady state condition
Definition: the labor market is insteady state, or long-run equilibrium,if the unemployment rate is constant.
The steady-state condition is:
s ×E = f ×U
# of employedpeople wholose or leavetheir jobs
# of unemployedpeople who findjobs
CHAPTER 6 Unemployment slide 8
Finding the “equilibrium” U rate
f ×U = s × E
= s × (L – U )
= s × L – s × U
Solve for U/L:
(f + s) × U = s × L
so,=
+
U s
L s f
CHAPTER 6 Unemployment slide 9
Example:
Each month, 1% of employed workers lose their jobs
(s = 0.01) 19% of unemployed workers find jobs
(f = 0.19)
Find the natural rate of unemployment:
0 010 05, or 5%
0 01 0 19
U s
L s f= = =
+ +
..
. .
CHAPTER 6 Unemployment slide 10
Policy implication
A policy will reduce the natural rate ofunemployment only if it lowers s or increases f.
CHAPTER 6 Unemployment slide 11
Why is there unemployment?
If job finding were instantaneous (f = 1),then all spells of unemployment would be brief,and the natural rate would be near zero.
There are two reasons why f < 1:1. job search2. wage rigidity
3
CHAPTER 6 Unemployment slide 12
Job search & frictional unemployment
frictional unemployment: caused by the timeit takes workers to search for a job
occurs even when wages are flexible and thereare enough jobs to go around
occurs because workers have different abilities, preferences jobs have different skill requirements geographic mobility of workers not instantaneous flow of information about vacancies and job
candidates is imperfectCHAPTER 6 Unemployment slide 13
Sectoral shifts
def: Changes in the composition of demandamong industries or regions.
example: Technological changemore jobs repairing computers,fewer jobs repairing typewriters
example: A new international trade agreementlabor demand increases in export sectors,decreases in import-competing sectors
Result: frictional unemployment
CHAPTER 6 Unemployment slide 14
CASE STUDY:Structural change over the long run
4.2%
28.0%
9.9%
57.9%
Agriculture
Manufacturing
Other industry
Services
1960
1.6%
17.2%7.7%
73.5%
2000
CHAPTER 6 Unemployment slide 15
More examples of sectoral shifts
Late 1800s: decline of agriculture,increase in manufacturing
Late 1900s: relative decline of manufacturing,increase in service sector
1970s: energy crisis caused a shift in demandaway from gas guzzlers toward smaller cars.
In our dynamic economy,smaller sectoral shifts occur frequently,contributing to frictional unemployment.
CHAPTER 6 Unemployment slide 17
Unemployment insurance (UI)
UI pays part of a worker’s former wages for alimited time after losing his/her job.
UI increases search unemployment,because it reduces the opportunity cost of being unemployed the urgency of finding work f
Studies: The longer a worker is eligible for UI,the longer the duration of the average spell ofunemployment.
CHAPTER 6 Unemployment slide 18
By allowing workers more time to search,UI may lead to better matches betweenjobs and workers,which would lead to greater productivity andhigher incomes.
Benefits of UI
4
CHAPTER 6 Unemployment slide 19
Why is there unemployment?
Two reasons why f < 1:1. job search2. wage rigidity
U s
L s f=
+
DONE Next
The natural rate of unemployment:
CHAPTER 6 Unemployment slide 20
Unemployment from real wagerigidity
Labor
Realwage
Supply
Demand
Unemployment
Rigidrealwage
Amount of laborwilling to work
Amount oflabor hired
If real wageis stuckabove itsequilibriumlevel, thenthere aren’tenough jobsto go around.
CHAPTER 6 Unemployment slide 21
Unemployment from real wagerigidity
Then, firms must ration thescarce jobs among workers.
Structural unemployment:The unemployment resultingfrom real wage rigidity andjob rationing.
If real wageis stuckabove itsequilibriumlevel, thenthere aren’tenough jobsto go around.
CHAPTER 6 Unemployment slide 22
Reasons for wage rigidity
1. Minimum wage laws
2. Labor unions
3. Efficiency wages
CHAPTER 6 Unemployment slide 23
1. The minimum wage
The min. wage may exceed the equilibriumwage of unskilled workers, especially teenagers.
But, the min. wage cannot explain themajority of the natural rate of unemployment,as most workers’ wages are well abovethe min. wage.
CHAPTER 6 Unemployment slide 24
2. Labor unions
Unions exercise monopoly power to secure higherwages for their members.
When the union wage exceeds the equilibriumwage, unemployment results.
Insiders: Employed union workers whose interestis to keep wages high.
Outsiders: Unemployed non-union workers whoprefer equilibrium wages, so there would beenough jobs for them.
5
105,508Private sector (total)20,381Government (total)
14,045Health care3,312Education
10,951Professional services6,304Finance, insurance4,379Transportation
14,973Retail trade15,518Manufacturing
600Mining
122.3121.7
115.1112.7
90.690.7
129.2114.0107.8113.7156.9
8.5%40.5
815.4
3.12.1
24.45.8
13.79.5
13.88,053Construction
wageratio
U % oftotal
# employed(1000s)industry
wage ratio = 100×(union wage)/(nonunion wage) slide 25
Union membership and wage ratios by industry, 2005
CHAPTER 6 Unemployment slide 26
3. Efficiency wage theory
Theories in which higher wages increase workerproductivity by: attracting higher quality job applicants increasing worker effort, reducing “shirking” reducing turnover, which is costly to firms improving health of workers
(in developing countries)
Firms willingly pay above-equilibrium wages toraise productivity.
Result: structural unemployment.
CHAPTER 6 Unemployment slide 27
The duration of U.S. unemployment,average over 1/1990-5/2006
70.5%31%15 or more
22.3%31%5-14
7.2%38%1-4
amount of timethese workers spent
unemployedas % of total time all
workers spentunemployed
# of unemployedpersons
as % of total# of unemployed
# of weeksunemployed
CHAPTER 6 Unemployment slide 28
The duration of unemployment
The data: More spells of unemployment are short-term
than medium-term or long-term. Yet, most of the total time spent unemployed
is attributable to the long-term unemployed.
This long-term unemployment is probablystructural and/or due to sectoral shifts amongvastly different industries.
Knowing this is important because it can helpus craft policies that are more likely to work.
CHAPTER 6 Unemployment slide 29
TREND: The natural rate rises during1960-1984, then falls during 1985-2006
3
4
5
6
7
8
9
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
CHAPTER 6 Unemployment slide 30
EXPLAINING THE TREND:
The minimum wage
0
1
2
3
4
5
6
7
8
9
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Dol
lars
per
hou
r
minimum wage incurrent dollars
minimum wagein 2006 dollars
The trend in thereal minimum wageis similar to that ofthe natural rate ofunemployment.
6
CHAPTER 6 Unemployment slide 31
EXPLAINING THE TREND:Union membership
Since the early1980s, the naturalrate of unemploy-ment and unionmembership haveboth fallen.
But, from 1950sto about 1980,the natural raterose while unionmembership fell.
27%1970
percent of labor forceyear
12%1930
35%1945
35%1954
20.1%1983
12.5%2005
Union membershipselected years
CHAPTER 6 Unemployment slide 32
EXPLAINING THE TREND:
Sectoral shifts
$0
$20
$40
$60
$80
$100
1970 1975 1980 1985 1990 1995 2000 2005
Price perbarrel of oil,
in 2006dollars
From mid 1980s to early 2000s,oil prices less volatile,so fewer sectoral shifts.
CHAPTER 6 Unemployment slide 33
EXPLAINING THE TREND:Demographics
1970s:The Baby Boomers were young.Young workers change jobs more frequently(high value of s).
Late 1980s through today:Baby Boomers aged. Middle-aged workerschange jobs less often (low s).
Chapter SummaryChapter Summary
1. The natural rate of unemployment the long-run average or “steady state” rate of
unemployment depends on the rates of job separation and job
finding
2. Frictional unemployment due to the time it takes to match workers with jobs may be increased by unemployment insurance
CHAPTER 6 Unemployment slide 37
Chapter SummaryChapter Summary
3. Structural unemployment results from wage rigidity: the real wage remains
above the equilibrium level caused by: minimum wage, unions, efficiency
wages
4. Duration of unemployment most spells are short term but most weeks of unemployment are attributable
to a small number of long-term unemployedpersons
CHAPTER 6 Unemployment slide 38
Chapter SummaryChapter Summary
5. Behavior of the natural rate in the U.S. rose from 1960 to early 1980s, then fell possible explanations:
trends in real minimum wage,union membership, prevalence of sectoral shifts,and aging of the Baby Boomers
CHAPTER 6 Unemployment slide 39
7
CHAPTER 6 Unemployment slide 41
Question for discussion:
• Use the material we’ve just covered tocome up with a policy or policiesto try to reduce the natural rate ofunemployment.
• Note whether your policy targetsfrictional or structural unemployment.
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