ISL244E

Macroeconomics
Problem Session-9
by
Research Assistant
Serkan Deirmenci
D202/09-10.04.2012
 Today
BLANCHARD (2009), Macroeconomics
- Chapter 6: THE LABOR MARKET: (6.3-6.4-6.5) !!!
(btw pages: 135-156)
Quick Check (QC): (1-3) (Page: 153)
Dig Deeper (DD): (4-7) (Page: 153-154)
Explore Further (EF): (8-9) (Page: 154)
NEXT
- Chapter 7: PUTTING ALL MARKETS TOGETHER: THE AS-
AD MODEL (btw pages: 157-183)
Quick Check (QC): (1-4) (Page: 181)
Dig Deeper (DD): (5-11) (Page: 181-183)
Explore Further (EF): (12-13) (Page: 183)
A Tour of the Labor Market-Turkey
TRKYE KENT KIR
2010 2011 2010 2011 2010 2011

Kurumsal olmayan nfus (000) 71 707 72 925 49 342 49 839 22 366 23 087

15 ve daha yukar yataki nfus (000) 52 929 54 122 36 741 37 288 16 189 16 834

gc (000) 25 593 26 254 17 150 17 543 8 444 8 711

stihdam (000) =LF/15+ 22 665 23 678 14 833 15 531 7 832 8 147

siz (000) 2 929 2 576 2 317 2 011 612 564
gcne katlma oran (%) 48,4 48,5 46,7 47,0 52,2 51,7
stihdam oran (%) 42,8 43,8 40,4 41,7 48,4 48,4
sizlik oran (%) =U/LF 11,4 9,8 13,5 11,5 7,2 6,5
Tarm d isizlik oran (%) 14,2 12,0 13,9 11,7 15,8 13,3
Gen nfusta isizlik oran(1)(%) 21,6 18,1 24,2 19,7 15,9 14,8

gcne dahil olmayanlar (000) 27 336 27 868 19 591 19 745 7 745 8 123
(1) 15-24 ya grubundaki nfus
Not: Rakamlar yuvarlamadan dolay toplam vermeyebilir.
 Flows of Workers-Turkey
lgili dnemde igc hareketleri;

Aralk 2011 dneminde 1 milyon 649 bin kii ie yeni

balam veya i deitirmi olup, bunun toplam istihdam
iindeki oran % 7'dir. e yeni balayan veya i
deitirenlerin % 28,7'si 25-34 ya grubundadr.

Bu dnemde ie balayan veya i deitirenlerin % 20,2si

"sanayi", % 38'i "hizmetler", % 22,4' "inaat" sektrnde,
% 19,4' ise "tarm" sektrnde ie balamtr.

Mevcut isizlerin % 17,8ini (458 bin kii) bu dnemde

iten ayrlanlar oluturmaktadr.
 GC DURUMU
(Mevsim Etkilerinden Arndrlm)
Bir Bir Bir
nceki nceki nceki
dneme dneme dneme
gre gre gre gcne
deiim deiim deiim katlma stihdam sizlik
gc oran stihdam oran siz oran oran oran oran
Yllar (000) (%) (000) (%) (000) (%) (%) (%) (%)
2010 Aralk 26 102 0,9 23 260 1,2 2 842 -1,1 49,3 43,9 10,9
2011 Ocak 26 237 0,5 23 467 0,9 2 770 -2,6 49,5 44,2 10,6
ubat 26 539 1,2 23 862 1,7 2 677 -3,3 49,9 44,9 10,1
Mart 26 578 0,1 23 937 0,3 2 641 -1,4 49,9 45,0 9,9
Nisan 26 639 0,2 23 974 0,2 2 664 0,9 49,9 44,9 10,0
Mays 26 640 0,0 23 920 -0,2 2 720 2,1 49,9 44,8 10,2
Haziran 26 811 0,6 24 085 0,7 2 726 0,2 50,1 45,0 10,2
Temmuz 26 765 -0,2 24 094 0,0 2 672 -2,0 49,9 44,9 10,0
Austos 26 797 0,1 24 221 0,5 2 576 -3,6 49,9 45,1 9,6
Eyll 26 800 0,0 24 312 0,4 2 489 -3,4 49,8 45,2 9,3
Ekim 26 842 0,2 24 325 0,1 2 517 1,1 49,8 45,1 9,4
Kasm 26 894 0,2 24 397 0,3 2 497 -0,8 49,8 45,2 9,3
Aralk 26 764 -0,5 24 274 -0,5 2 490 -0,3 49,5 44,8 9,3

2011 yl Aralk dneminde mevsim etkilerinden arndrlm istihdam

edilenlerin saysnda bir nceki dneme gre 123 bin kiilik, isiz
saysnda ise 7 bin kiilik azal sz konusudur. Mevsim etkilerinden
arndrlm igcne katlma oran bir nceki dneme gre 0,3 puanlk
azal ile % 49,5, istihdam oran 0,4 puanlk azal ile % 44,8, isizlik oran
ise herhangi bir deiim gstermeyerek % 9,3 seviyesinde gereklemitir.
Figure 6-2
 Chapter-6-QC-1 (Page: 153)
1. Using the information in this chapter, label each of the following statements true,
false, or uncertain. Explain briefly.
a. Since 1950, the participation rate in the United States has remained
roughly constant at 60%. False. The participation rate has increased over time.
(see page 136) => the participation rate has steadliy increased over time
b. Each month, the flows into and out of employment are very small
compared to the size of the labor force. False. (see Figure 6.2 on page 137)
c. Fewer than 10% of all unemployed workers exit the unemployment pool
each year. False. (see Figure 6.2 on page 137) => (see page 137-138) 45%
d. The unemployment rate tends to be high in recessions and low in
expansions. True. (see page 139 and Figure 6-3)
e. Most workers are typically paid their reservation wage. False. (see page 142
=> wage determination)
f. Workers who do not belong to unions have no bargaining power.
Uncertain/False. The degree of bargaining power depends on the nature of the
job and the employees skills. (see page 142 => wage determination)
g. It may be in the best interest of employers to pay wages higher than
their workers reservation wage. True. (see page 143 => efficiency wages)
h. The natural rate of unemployment is unaffected by policy changes. False. (see page 149)
 Chapter-6-QC-2 (Page: 153)
2. Answer the following questions using the information provided in this
chapter. (see page 137 Figure 6-2)
a. As a percentage of the employed workers, what is the size of the
flows into and out of employment (i.e., hires and separations) each
month? (Monthly hires + monthly separations)/monthly employment =(4.4+4.6)/122=7%
b. As a percentage of the unemployed workers, what is the size of the
flows from unemployment into employment each month? 1.4/6.2=23%
c. As a percentage of the unemployed, what is the size of total flows out
of unemployment each month? What is the average duration of
unemployment? (1.4+1.4)/6.2=45%. Duration is 1/.45 or 2.2 months.
d. As a percentage of the labor force, what is the size of the total flows
into and out of the labor force each month? (3+2.8+1.4+1.4)/128.2= 6%.
e. What percentage of flows into the labor force do new workers
entering the labor force constitute? new workers: 0.4/(3+1.4)=9%.
 Chapter-6-QC-3 (Page: 153)
3. The natural rate of unemployment (see section 6.5)
Suppose that the markup of goods prices over marginal cost is 6%, and
that the wage-setting equation is W=P(1-u), where u is the unemployment
rate.
a. What is the real wage, as determined by the price-setting equation?
b. What is the natural rate of unemployment?
c. Suppose that the markup of prices over costs increases to 12%. What happens to
the natural rate of unemployment? Explain the logic behind your answer.
ANSWER:
a. W/P=1/(1+)=1/1.06= 0.943
b. Wage setting: u=1-W/P= 5.7%
!!! c. W/P=1/1.12= 0.89; u=1-.89= 11%. The increase in the markup lowers the real
ATTENTION: wage. Algebraically, from the wage-setting equation, the unemployment rate must
Difference rise for the real wage to fall. So the natural rate increases. Intuitively, an increase
between
explanation in the markup implies more market power for firms, and therefore less production,
and since firms will use their market power to increase the price of goods by reducing
comment! supply. Less production implies less demand for labor, so the natural rate rises.
 Chapter-6-DD-4 (Page: 153)
4. Reservation wages (see page 143 => efficiency wages)
In the mid-1980s, a famous supermodel once said that she would not get
out of bed for less than $10,000 (presumably per day).
a. What is your own reservation wage?
b. Did your first job pay more than your reservation wage at the time?
c. Relative to your reservation wage at the time you accept each job, which job pays
more: your first one or the one you expect to have in 10 years?
d. Explain your answers to parts (a) through (c) in terms of the efficiency wage
theory.
ANSWERS:
a. Answers will vary.
b-c. Most likely, the difference between your actual wage and your reservation wage
will be higher for the job you will have ten years later.
d. The later job is more likely to require training, which means you will be costly to replace, and
will probably be a much harder job to monitor, which means you may need an incentive to
work hard.
Efficiency wage theory suggests that your employer will be willing to pay a lot more than your
reservation wage for the later job, to make the job valuable to you, so you will stay at it and
work hard.
 Chapter-6-DD-5 (Page: 153)
5. The existence of unemployment (see page 143 => bargaining)
a. Suppose the unemployment rate is very low. How easy is it for firms to find
workers to hire? How easy is it for workers to find jobs? What do your answers
imply about the relative bargaining power of workers and firms when the
unemployment rate is very low? What do your answers imply about what happens
to the wage as the unemployment rate gets very low?
b. Given your answer to part (a), why is there unemployment in the economy?
(What would happen to real wages if the unemployment rate were equal to zero?)
ANSWERS:
a. When the unemployment rate is very low, it is very difficult for firms to find
workers to hire and very easy for workers to find jobs. As a result, the bargaining
power of workers is very high when the unemployment rate is very low. Therefore,
the wage gets very high as the unemployment rate gets very low.
b. Presumably, the real wage would grow without bound as the unemployment rate
approached zero. Since a worker could always find a job, there would be nothing to
constrain aggressive wage bargaining. At any positive rate of unemployment,
however, there is some constraint on worker bargaining power.
 Chapter-6-DD-6 (Page: 153)
6. Bargaining power and wage determination (see page 143 => bargaining)
Even in the absence of collective bargaining, workers do have some
bargaining power that allows them to receive wages higher than their
reservation wage. Each workers bargaining power depends both on the
nature of the job and on the economy-wide labor markets conditions. Lets
consider each factor in turn.
a. Compare the job of a delivery person and a computer network
administrator. In which of these jobs does a worker have more bargaining
power? Why?
b. For any given job, how do labor market conditions affect a workers
bargaining power? Which labor market variable would you look at to
assess labor market conditions?
c. Suppose that for given labor market conditions [the variable you
identified in part (b)], worker bargaining power throughout the economy
increases. What effect would this have on the real wage in the medium
run? in the short run? What determines the real wage in the model
described in this chapter?
 Chapter-6-DD-6 (Page: 153)
ANSWERS:
a. The computer network administrator has more bargaining power. She
is much harder to replace.
b. The rate of unemployment is the most important indicator of labor
market conditions. When the rate of unemployment increases, it
becomes easier for firms to find replacements, and worker bargaining
power falls.
c. In our model, the real wage is always given by the price-setting relation:
W/P=1/(1+).
Since the price-setting relation depends on the actual price level and
not the expected one, this relation holds in the short run and the
medium run of our model.
 Chapter-6-DD-7 (Page: 153)
7. The informal labor market
You learned in Chapter 2 that informal work at home (e.g., preparing meals,
taking care of children) is not counted as part of GDP. Such work also does
not constitute employment in labor market statistics. With these
observations in mind, consider two economies, each with 100 people,
divided into 25 households, each composed of four people. In each
household, one person stays at home and prepares the food, two people
work in the non-food sector, and one person is unemployed. Assume that
the workers outside food preparation produce the same actual and
measured output in both economies.
In the first economy, EatIn, the 25 food-preparation workers (one per
household) cook for their families at home and do not work outside the
house. All meal are prepared and eaten at home. The 25 food preparation
workers in this economy do not seek work in the formal labor market (and
when asked, they say they are not looking for work).
In the second economy, EatOut, the 25 food preparation workers are
employed by restaurants. All meals are purchased in restaurants.
 Chapter-6-DD-7 (Page: 154)
a. Calculate measured employment and unemployment and the measured labor
force for each economy. Calculate the measured unemployment rate and
participation rate for each economy. In which economy is measured GDP higher?
b. Suppose now that EatIns economy changes. A few restaurants open, and the
food-preparation workers in 10 households take jobs restaurants. The members of
these 10 households now eat all of their meals in restaurants. The food-preparation
workers in the remaining 15 households continue to work at home and do not seek
jobs in the formal sector. The members of these 15 households continues to eat all
of their meals at home. Without calculating the numbers, what will happen to
measured employment and unemployment and to the measured labor force,
unemployment rate, and participation rate in EatIn? What will happen to measured
GDP in EatIn?
c. Suppose that you want to include work at home in GDP and the employment
statistics. How would you measure the value of work at home in GDP? How would
you alter the definitions of employment, unemployment and out of the labor force?
d. Given your new definitions in part (c), would the labor market statistics differ for
EatIn and EatOut? Assuming that the food produced by these economies has the
same value, would measured GDP in these economies differ? Under your new
definitions, would the experiment in part (b) have any effect on the labor market or
GDP statistics for EatIn?
 Chapter-6-DD-7 (Page: 154)
ANSWERS:
a. EatIn EatOut
Population 100 Population 100
Labor Force 75 Labor Force 100
Employment 50 Employment 75
Unemployment 25 Unemployment 25
Unemployment Rate 33% Unemployment Rate 25%
Participation Rate 75% Participation Rate 100%
* Measured GDP is higher in EatOut.
b. The measured labor force and participation rate rise. Measured employment rises.
Measured unemployment does not change, but the measured unemployment rate
falls. Measured GDP will rises.
c. To adjust the labor market statistics, you would have to estimate the number of
workers informally employed at home and add them to the measured employed. To
the extent that workers employed informally at home were measured as
unemployed, you would have to reduce measured unemployment accordingly. To the
extent that workers employed informally at home were considered out of the labor
force, counting these workers as employed would increase the size of the labor force.
 Chapter-6-DD-7 (Page: 154)
ANSWERS:
c. To adjust the GDP statistics, you would have to estimate the value-added of final
goods produced at home. You could make comparisons to similar goods produced
outside the home, or make comparisons to workers involved in similar industries
outside the home, estimate the relevant wage and hours worked, and calculate value-
added as the cost of labor, as is done for government services. In either case, you
need to calculate value-added, since intermediate goodsgroceries, cleaning
supplies, child care supplies, and so oninvolved in the production of at-home goods
are already counted in GDP as final goods in the formal sector.
d. If food preparation at home is counted in GDP and workers involved in food
preparation at home are counted as employed, then the labor market statistics and
measured GDP would be the same in the two economies and the experiment in part
(b) would have no effect.
 Chapter-6-EF-8 (Page: 154)
8. Unemployment spells and long-run unemployment
According to the data presented in this chapter, about 45% of unemployed workers
leave unemployment each month.
a. What is the probability that an unemployed worker will still be unemployed
after one month? two months? six months?
Now consider the composition of the unemployment pool. We will use a simple
experiment to determine the proportion of the unemployment who have been
unemployed six months or more. Suppose the number of unemployed workers is
constant and equal to x (where x is some constant). Each month, 45% of the
unemployed find jobs, and an equivalent number of previously employed workers
become unemployed.
b. Consider the group of x workers who are unemployed this month. After a
month, what percentage of this group will still be unemployed? (Hint: If 45% of
unemployed workers find jobs every month, what percentage of the original x
unemployed workers did not find jobs in the first month?)
c. After a second month, what percentage of the original x unemployed workers
has been unemployed for at least two months? (Hint: Given your answer to part (b),
what percentage of those unemployed for at least one month do not find jobs in
the second month?) After the sixth month, what percentage of the original x
unemployed workers has been unemployed for at least six months?
 Chapter-6-EF-8 (Page: 154)
This percentage applies to the economy at any time (remember that we started with
an arbitrary month). Under our assumptions, the percentage of the unemployed
who have been unemployed six months or more is constant.
d. Using Table B-44 of the Economic Report of the President
(www.access.gpo.gov/eop/), compute the proportion of unemployed who have
been unemployed six months or more (27 weeks or more) for each year between
1996 and 2003. How do these numbers compare with the answer you obtained in
part (c)? Can you guess what may account for the difference between the actual
numbers and the answer you obtained in this problem? (Hint: Suppose that the
probability of exiting unemployment goes down the longer you are unemployed.)
 Chapter-6-EF-8 (Page: 154)
ANSWERS:
a. 55%; (0.55)2= 30%; (0.55)6 = 2%
b. 55%
c. second month: (0.55)2=30%; sixth month: (0.55)6 = 2%
d. Average proportion 27 weeks or more over 1990-1999= 16.1%
1996: 17% 2000: 11%
1997: 16% 2001: 12%
1998: 14% 2002: 18%
1999: 12% 2003: 22%
The long-term unemployed exit unemployment less frequently than the average
unemployed worker.
 Chapter-6-EF-9 (Page: 154)
9. Go to the Web site maintained by the Turkish Statistical Institute
(www.turkstat.gov.tr). Find the Labor Force Statistics. Look under the link Data.
a. What are the latest monthly data on the size of the Turkish civilian labor force, on
the number of the unemployed, and on the unemployment rate?
b. How many people are employed?
c. Compute the change in the number of unemployed from the first number in the
table to the most recent month in the table. Do the same for the number of
employed workers. Is the decline in unemployment equal to the increase in
employment? Explain in words.
ANSWERS:
a-b. Answers will depend on when the page is accessed.
c. The decline in unemployment does not equal the increase in employment,
because the labor force is not constant.
to be continued