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If labor markets tend to equilibrium, why is unemployment always present?

If labor markets tend to equilibrium, why is unemployment always present?. Some unemployment is compatible with equilibrium Equilibrium level of unemployment Natural rate of unemployment Full employment level of unemployment. Labor Market as a Game of Musical Chairs

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If labor markets tend to equilibrium, why is unemployment always present?

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  1. If labor markets tend to equilibrium, why is unemployment always present? Some unemployment is compatible with equilibrium Equilibrium level of unemployment Natural rate of unemployment Full employment level of unemployment

  2. Labor Market as a Game of Musical Chairs At equilibrium unemployment job vacancies = job seekers X X X X X = X

  3. Frictional Unemployment Even when seekers equal vacancies, it takes time for the market to clear “Between Jobs”

  4. Periods of low unemployment

  5. Magnitude of flows in May 1993 • In one month • 5 million leave employment • 5 million enter employment • ~7.8% (10mil/128.1mil) of labor force change employment status every month • 3.5 million leave unemployment • 3.5 million enter unemployment • ~5.5% of labor force change unemployment status every month

  6. Expected unemployment duration • Suppose probability p of leaving unemployment in one month • Random draw on job • Probability you get a job in any month = p • you stay unemployed = (1-p) • Expected duration = (1/p)

  7. FIGURE 15.1 Labor Market Stocks and Flows: May 1993 p = (2/8.9) = .224 Duration = 1/p = 4.5 mo. p = ([2=1.5]/8.9) = .393 Duration = 1/p = 2.5 mo.

  8. Average = 3 months (14 weeks); Peak = 4.7 months (21 weeks) Periods of low unemployment

  9. TABLE 15.2 Sources of Unemployment, United States, Various Years

  10. Seasonal unemployment: unemployment that is fully anticipated because of seasonal fluctuations in demand

  11. Unemployment that is not a problem Frictional Seasonal Voluntary (quits, new entrants, reentrants) Elements of equilibrium unemployment

  12. Problem unemployment Cyclical Unemployment—unemployment associated with national business cycles (recession) Structural unemployment: localized shortfall of demand (geographic (Appalachia); industry (textiles); skill (dropouts, young)

  13. Avg UR=9% Avg UR=4.5% Avg UR=7.1% Avg UR=7.2%

  14. TABLE 15.3 Unemployment Rates in 2000 by Demographic Group

  15. TABLE 2.4 Unemployment and Long-Term Unemployment, Selected European and North American Countries, 2003

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