Post on 30-Dec-2015
Job Loss, Job Finding, and the Natural Rate of Unemployment
Labor Force = # Employed + # UnemployedL = E + U
Unemployment Rate = U/L
Rate of Job Finding = Rate of Job Separation fU = sE
Substitute for E:fU = s(L - U)
Divide by L:f(U/L) = s{1 - (U/L)}
Solve for U/L:(U/L) = s/(f + s)
Suppose 1 percent of employed lose their jobeach month (average job lasts 100 months), s = 0.01And 20 percent of unemployed find a job each month(average spell of unemployment is 5 months), f = 0.2Then, U/L = 0.01/(0.01 + 0.2) = 0.0476
Job Search and Frictional Unemployment
Takes time to search for a job as a person must learn about opportunities, may have to move to a new location, may not want to take the first job that is offered
Shifts in the composition of demand occur among industries or regions may occur and lead to shifts in demand for certain skills
Natural consequence of continually changing demand and supply for labor
Public Policy and Frictional Unemployment
Unemployment Insurance may lead to a higher natural rateof unemployment
Experience Rating may lower the distortionary effect of suchinsurance
Illinois’ experiment with “bonus” for finding work sooner
Real-Wage Rigidity and Structural Unemployment
Labor market doesn’t clear
Real wage is “stuck” above its equilibrium level
Supply of labor exceeds demand for labor
Workers are waiting for jobs to become available
Reasons for Wage Rigidity
1. Minimum-Wage Laws
2. Unions and Collective Bargaining--role of “Insiders and “Outsiders”
3. Efficiency Wages: High Wages make workers more productive
Minimum Wage and Average Hourly Earnings
0
2
4
6
8
10
12
14
16
18
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
Dollars
Minimum Wage
Average Hourly Earnings
How Do Wages Affect Productivity?
A. Nutrition Effect
B. Reduction in Labor Force Turnover
C. Higher Quality of Work Force--Adverse Selection
D. Improves Worker Effort--Monitoring Problem Moral Hazard
Patterns of Unemployment
Average Spell of Unemployment is Short
Most Time Unemployed is Borne by Relatively Few Workers
Variation is Great Across Demographic Groups
Trend Over Time in U.S. Unemployment Rate is Not Completely Understood:
--Demographics--Sectoral Shifts--Productivity
Share of Unemployment by Duration
0
10
20
30
40
50
60
70
80
90
100
1990199119921993199419951996199719981999200020012002200320042005
Percent
27 Weeks and Over
15 to 26 Weeks
5 to 14 Weeks
Less than 5 Weeks
Unemployment and Duration(January 1969 to December 2005)
0
2
4
6
8
10
12
1969 1973 1977 1981 1985 1989 1993 1997 2001 2005
Percent
0
2
4
6
8
10
12
14
Weeks
Unemployment Rate(left axis)
Median Duration(right axis)
Discouraged Workers
Alternative Measures of Unemployment
Transitions into and out of the Labor Force
Alternative Measures of Unemployment2005
U-1 Persons unemployed 15 weeks or longer, as a percent of the civilian labor force 1.8
U-2 Job losers and persons who completed temporary jobs, as a percent of the civilian labor force 2.5
U-3 Total unemployed, as a percent of the civilian labor force (official unemployment rate) 5.1
U-4 Total unemployed plus discouraged workers, as a of the civilian labor force plus discouraged workers 5.4
U-5 Total unemployed, plus discouraged workers, plus all other marginally attached workers, as a percent of the civilian labor force plus all marginally attached workers 6.1
U-6 Total unemployed, plus all marginally attached workers, plus total employed part timefor economic reasons, as a percent of the civilian labor force plus all marginally attached workers 8.9
European Unemployment: Why So Much Higher?
Generous Benefits for Unemployed
Decline in Demand for Unskilled RelativeTo Skilled Workers