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Unemployment, job creation and job destruction

Unemployment, job creation and job destruction. Chapter 3. Chapter topics. Measuring unemployment Labor market dynamics The natural rate of unemployment US and European experience Unemployment over the business cycle Applying supply and demand to the labor market. Measuring unemployment.

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Unemployment, job creation and job destruction

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  1. Unemployment, job creation and job destruction Chapter 3

  2. Chapter topics • Measuring unemployment • Labor market dynamics • The natural rate of unemployment • US and European experience • Unemployment over the business cycle • Applying supply and demand to the labor market

  3. Measuring unemployment • Labor force is the number of people aged 16 and over who are either working or unemployed • Unemployed: those looking for employment during the week but who did not work • Labor force participation rate: ratio of labor force to population • Natural rate of unemployment is the rate of unemployment when the economy is in equilibrium

  4. Unemployment in the Long Run • Natural rate of unemployment: the average rate of unemployment around which the economy fluctuates. • In a recession, the actual unemployment rate rises above the natural rate. • In a boom, the actual unemployment rate falls below the natural rate.

  5. Unemployment in the U.S.

  6. Dynamics of the labor market • Economy is characterized by large flows in and out of employment. Flows are about equal at three million or about 3% every month. • Population over 16: • In the labor force, employed or unemployed • Out of the labor force

  7. The natural rate • L = labor force • U = unemployed • l = job losing rate = losses/L • f =job-finding rate = finds/U • u =unemployment rate = U/L • In equilibrium, losses=finds or l=uf • That is u=l/f, the unemployment rate is the ratio of the loss rate to the find rate.

  8. Flows into unemployment • Job destruction • Job loss without distraction • Personal transitions

  9. Flows out of unemployment • Two thirds success in finding a job • One third leave the labor force • Finding rate is a crucial factor and is affected by • Efficiency wages • Union wage premiums • Minimum wages • Unemployment insurance

  10. Minimum Wage • The minimum wage is well below the eq’m wage for most workers, so it cannot explain the majority of natural rate unemployment. • However, the minimum wage may exceed the eq’m wage of unskilled workers, especially teenagers. • If so, then we would expect that increases in the minimum wage would increase unemployment among these groups.

  11. Labor Unions • Unions exercise monopoly power to secure higher wages for their members. • When the union wage exceeds the eq’m wage, unemployment results. • Employed union workers are insiders whose interest is to keep wages high. • Unemployed non-union workers are outsiders and would prefer wages to be lower (so that labor demand would be high enough for them to get jobs).

  12. Efficiency Wages • Theories in which high wages increase worker productivity: • attract higher quality job applicants • increase worker effort and reduce “shirking” • reduce turnover, which is costly • The increased productivity justifies the cost of paying above-equilibrium wages. • The result: unemployment

  13. Example • One percent of the employed lose jobs every month while 20% of the unemployed find jobs. • Then, the unemployment rate is • U/L = .01/(.01+.2) = .0476. • Or about 5% • Why is the equilibrium unemployment rate positive? Why is f not equal to 1?

  14. Frictional Unemployment • Workers are not interchangeable parts. Skills and preferences vary as do job requirements. Takes time to match the individual and the job. • Changes in the composition of demand (sectoral shift), firm failure, poor job performance, desire for career change all contribute to frictional unemployment.

  15. Policy Issues • Reduce duration of job search through • provision of information to workers and firms • job training programs • Unemployment insurance helps improve the working of the labor market by facilitating better job search but it does increase the duration of job.

  16. Structural Unemployment • Structural unemployment results from wage rigidity and job rationing. • Sources of wage rigidity: • Minimum wage laws • Unions and collective bargaining • Efficiency wages • Market does not clear because wage is above the equilibrium level

  17. Okun’s Law • An empirical relationship between departures of GDP from its potential and the unemployment from its natural rate.

  18. S-D and Unemployment

  19. Fig. 3.4

  20. Fig. 3.5

  21. Fig. 3.6

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