N. Gregory Mankiw
PowerPoint Slides by Ron Cronovich
CHAPTER
6
Modified for EC 204 by Bob Murphy
Unemployment
SEVENTH EDITION
CHAPTER 6
Unemployment
E = # of employed workers
U = # of unemployed
CHAPTER 6
Unemployment
Assumptions:
1. L is exogenously fixed. 2. During any given month, s = rate of job separations, the fraction of employed workers that become separated from their jobs f = rate of job finding, fraction of unemployed workers that find jobs s and f are exogenous
CHAPTER 6
Unemployment
Unemployed
Employed
f U
CHAPTER 6
Unemployment
s E = f U
# of employed people who lose or leave their jobs
CHAPTER 6
Unemployment
CHAPTER 6
Unemployment
Example:
Each month, 1% of employed workers lose their jobs
(s = 0.01)
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Unemployment
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Policy implication
A policy will reduce the natural rate of
unemployment only if it lowers s or increases f.
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Unemployment
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Unemployment
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Job search & frictional unemployment frictional unemployment: caused by the time
it takes workers to search for a job
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 imperfect
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Unemployment
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Sectoral shifts
def: Changes in the composition of demand
among industries or regions.
Unemployment
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In our dynamic economy, smaller sectoral shifts occur frequently, contributing to frictional unemployment.
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Unemployment
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Unemployment
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the urgency of finding work f Studies: The longer a worker is eligible for UI,
the longer the duration of the average spell of unemployment.
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Unemployment
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Benefits of UI
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Unemployment
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Unemployment
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Unemployment
Labor
Amount of labor hired
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Unemployment
Structural unemployment: The unemployment resulting from real wage rigidity and job rationing.
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Unemployment
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Unemployment
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Unemployment
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2. Labor unions
Unions exercise monopoly power to secure higher
wages for their members.
Unemployment
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Government (total)
Construction Mining Manufacturing Retail trade Transportation Finance, insurance Professional services Education
21,305
7,652 776 15,131 14,987 4,639 6,536 11,967 3,657
36.8
15.6 6.9 11.4 5.2 21.3 1.3 2.1 13.8
120.5
151.8 102.1 108.6 106.6 126.3 88.7 97.4 117.1
Health care
15,184
8.0
116.0
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Unemployment
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# of weeks unemployed
time spent unemployed by this group (% of time spent unemployed by all groups) 8.1% 21.5% 70.4%
Unemployment
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The real minimum wage and natural u-rate have similar trends.
$7 $6 $5 $4 $3 $2 $1 $0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Union membership
selected years
Union membership
year 1930 1945 percent of labor force 12% 35%
Since early 1980s, the natural rate and union membership have both fallen. But, from 1950s to about 1980, the natural rate rose while union membership fell.
1954
1970 1983 2008
35%
27% 20.1% 12.4%
EXPLAINING THE TREND: Sectoral shifts 2006-present: oilprices price volatility increases 1986-2005: oil less will the natural u-rate rise again? 1970-1986: volatile oil prices volatile, so fewer sectoral shifts create jarring sectoral shifts
Price per barrel of oil, in 2009 dollars
Demographics
1970s:
The Baby Boomers were young. Young workers change jobs more frequently (high value of s).
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Unemployment
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Unemployment
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Sweden
Germany
83
90
France Austria
92 98
Chapter Summary
1. The natural rate of unemployment
rate of unemployment depends on the rates of job separation and job finding
2. Frictional unemployment
Chapter Summary
3. Structural unemployment
remains above the equilibrium level caused by: minimum wage, unions, efficiency wages
4. Duration of unemployment
Chapter Summary
5. Behavior of the natural rate in the U.S.
trends in real minimum wage, union membership, prevalence of sectoral shifts, and aging of the Baby Boomers
Chapter Summary
6. European unemployment
benefits, strong union presence, and a technology-driven shift in demand away from unskilled workers