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Understanding Unemployment Trends: Insights and Strategies for Addressing Challenges

Explore historical data on US and EU unemployment rates, variations by demographic groups, and factors contributing to frictional, structural, and cyclical unemployment. Gain insights into the natural rate of unemployment, duration patterns, and policy implications for job creation and retention.

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Understanding Unemployment Trends: Insights and Strategies for Addressing Challenges

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  1. Chapter 6:Unemployment

  2. Historical Data (US)

  3. Historical Data (EU)

  4. Variations in Unemployment Demographic Groups, 1997 Age White-M Black-M Black-F White-F 14.3 12.8 36.5 28.7 16-19 3.6 3.7 8.5 8.8 20+

  5. Civilian Labor Force • Individuals between 16 and 64, who are employed for pay or unemployed • Individuals in prisons or mental hospitals, children, and retired are excluded

  6. Unemployment • Members of the labor force who are: • 16 years of age or older • out of work • actively looking for work • Unemployment rate = No. of unemployed workers as a % of the labor force

  7. Discouraged Workers • Members of the labor force who quit looking for jobs (e.g., the homeless) • Unemployment rate is underestimated by 2 to 3% because discouraged workers are excluded

  8. Frictional Unemployment • Unemployment of individuals who are searching for jobs or waiting between jobs • Supply-side effect and transitional

  9. Structural Unemployment • Unemployment due to fundamental economic changes that eliminate some jobs, while creating other jobs for which qualified workers may not be readily available • Normal due to technological advancement and changes in consumer preferences

  10. Cyclical Unemployment • Unemployment caused by contraction in economic activities (i.e., recession) • Needs public policy to increase employment

  11. Natural Rate of Unemployment • An average rate around which the actual unemployment rate fluctuates • The average of last and next 10 years unemployment rate • Future unemployment rate is set at 5.5%

  12. Duration of Unemployment • Short-term if frictional • Long-term if structural or cyclical • Evidence from 1974 is mixed • 60% of the spells of unemployment ended within one month • 69% of the weeks of unemployment occurred in spells that lasted two or more months

  13. Duration of Unemployment • If policy goal is to reduce the natural rate of unemployment, we need long-term investment in job creation (education, training, etc.) • If policy goal is to reduce the unemployment rate, we need short-term investment in job retention and information

  14. Unemployment Rate L = Labor Force E = Employment U = unemployment L = E + U So, E = L – U and U = L – E U/L = Unemployment Rate

  15. Job Loss • s = the rate of job separation: the fraction of “employed” workers who lose jobs each month • sE = the number of “employed” workers who lose jobs each month

  16. Job Gain • f = the rate of job finding: the fraction of “unemployed” workers who find jobs each month • fU = the number of “unemployed” workers who find jobs each month

  17. Employment-Unemployment Transition The rates of job separation and job finding determine the rate of unemployment. Job Separation (s) Unemployed Employed Job Finding (f)

  18. Steady State Unemployment Rate In a steady-state labor market: fU = sE Write: fU = s(L – U) fU = sL – sU sU + fU = sL (s + f)U = sL U/L = s / s+f

  19. Example • s = 0.01: on average, jobs last 100 months • f = 0.20: on average, unemployment lasts 5 months • U/L = 0.01/0.21 = 4.8%

  20. Policy Implications • Public policy to reduce the rate of job separation and/or increase the rate of job finding will lower the natural rate of unemployment • Public policy to lower the natural rate of unemployment must either reduce the rate of job separation or increase the rate of job finding

  21. Policy and Frictional Unemployment • Job Fairs: • provide information on job openings, which lowers f and increases U/L

  22. Policy and Frictional Unemployment • Unemployment Benefits: U/L could increase • Some unemployed workers may refuse job offers and wait for higher ones, lowering f • Some employed workers may not care losing jobs since their incomes are partially compensated, increasing s

  23. Wage Rigidity and Unemployment Real Wage Supply Unemployment W2 A B W1 Demand Labor L2 L1 Amount of labor hired Amount of labor willing to work

  24. Wait Unemployment • Unions setting wages higher than the market wage • Some union members must remain unemployed • Unemployed union members must “wait” for job openings

  25. Minimum Wage law • Workers are paid a wage rate above the market rate • Help those who are employed • Hurt those who are unemployed

  26. Efficiency Wage • Firms pay wages above the market values to • Maintain a stable labor force • Attract qualified workers • Improve productivity and profitability

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