Intermediate Macroeconomics
lanzichao2015
chapter_7-_mankiw.pptxUnemployment
Tasneem Raihan
Department of Economics
7
Slides courtesy: Ron Cronovich
MACROECONOMICS
© 2015 Worth Publishers, all rights reserved
N. Gregory Mankiw
PowerPoint ® Slides by Ron Cronovich
Fall 2014 update
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CHAPTER 7 Unemployment
This presentation has lots of data. Some of it is in the textbook (or updated versions of what’s in the textbook), plus some additional data, including data that supports some of the textbook’s key points about the causes of the natural rate of unemployment.
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IN THIS CHAPTER, YOU WILL LEARN:
…about the natural rate of unemployment:
what it means
what causes it
understanding its behavior in the real world
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CHAPTER 7 Unemployment
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Natural rate of unemployment
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.
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CHAPTER 7 Unemployment
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The natural rate of unemployment is the “normal” unemployment rate the economy experiences when it is neither in a recession nor a boom.
Actual and natural rates of unemployment, U.S., 1960–2014
Unemployment rate
Natural rate of unemployment
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CHAPTER 7 Unemployment
Similar to Figure 7-1 in the textbook.
The actual unemployment rate fluctuates considerably over the short run. These fluctuations are the focus of Part IV of the book.
For this chapter, though, our goal is to understand the behavior of the natural rate of unemployment, essentially the long-run trend in the unemployment rate.
Source: BLS, obtained from http://research.stlouisfed.org/fred2/
Unemployment data are based on seasonally-adjusted, monthly unemployment rates for the civilian non-institutional population of the U.S.
The actual u-rate for each quarter is an average of the three monthly unemployment rates in that quarter.
The natural u-rate in a given quarter is estimated by averaging all unemployment rates from 10 years earlier to 10 years later; future unemployment rates are set at 5.5%. (Therefore, estimates of the natural rate may become less accurate toward the end of the sample period.)
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Percent of labor force
A first model of the natural rate
Notation:
L = # of workers in labor force
E = # of employed workers
U = # of unemployed
L= E + U
U/L = unemployment rate
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CHAPTER 7 Unemployment
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Assumptions:
1. L is exogenously fixed.
2. During any given month,
s = rate of job separations, fraction of employed workers who quit or lose jobs each month; 0<s<1
f = rate of job finding, fraction of unemployed workers that find jobs each month
s and f are exogenous; 0<s<1.
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CHAPTER 7 Unemployment
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This slide spells out the three variables we assume to be exogenous:
the labor force, the rate of job separations, and the rate of job finding.
The transitions between employment and unemployment
Employed
Unemployed
s ×E
f ×U
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CHAPTER 7 Unemployment
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Figure 7-2, p. 179
(Note: The size of the boxes containing the words “employed” and “unemployed” are not proportional to the number of people in each category.)
The steady state condition
Definition: the labor market is in steady state, or long-run equilibrium, if the unemployment rate is constant.
The steady-state condition is:
s ×E = f ×U
# of employed people who lose or leave their jobs
# of unemployed people who find jobs
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CHAPTER 7 Unemployment
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In order for the unemployment rate to be constant, the number of people who become unemployed in each month must equal the number of formerly unemployed people who find jobs.
Finding the “equilibrium” U rate
f ×U = s ×E
= s ×(L – U ) [Remember L= E + U]
= s ×L – s ×U
Solve for U:
(f × U) + (s × U) = s × L
=> U × (f + s)= s × L => U= (s × L) / (f + s)
so,
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CHAPTER 7 Unemployment
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Example:
Each month,
1% of employed workers lose their jobs (s = 0.01)
19% of unemployed workers find jobs (f = 0.19)
Find the natural/steady state rate of unemployment:
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CHAPTER 7 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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CHAPTER 7 Unemployment
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Why is there unemployment?
If job finding were instantaneous (f = 1), then all spells of unemployment would be brief, and the natural rate would be near zero.
There are two reasons why f < 1:
1. job search
2. wage rigidity
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CHAPTER 7 Unemployment
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Job search & frictional unemployment
frictional unemployment: caused by the time it takes workers to search for a job
occurs even when wages are flexible and there are enough jobs to go around
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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CHAPTER 7 Unemployment
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Sectoral shifts
def: Changes in the composition of demand among industries or regions.
example: Technological change more jobs repairing computers, fewer jobs repairing typewriters
example: A new international trade agreement labor demand increases in export sectors, decreases in import-competing sectors
These scenarios result in frictional unemployment
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CHAPTER 7 Unemployment
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Sometimes the unemployment caused by sectoral shifts is severe.
Due to increasing imports of cheaper foreign-made textiles (particularly since the expiration in 2005 of long-standing quotas on textiles from China), the U.S. textile industry has been in decline for years. Tens of thousands of workers in this industry have lost jobs.
Many of these workers are in their 50s and have worked in this industry for decades. Such workers are unlikely to have the skills necessary to get jobs available in newly booming industries, and they are less likely to invest in the acquisition of the necessary skills for these jobs. Hence, such workers are at greater risk for becoming “discouraged workers.”
More examples of sectoral shifts
Industrial revolution (1800s): agriculture declines, manufacturing soars
Energy crisis (1970s): demand shifts from larger cars to smaller ones
Health care spending as % of GDP: 1960: 5.2 2000: 13.8 1980: 9.1 2010: 17.9
In our dynamic economy, smaller sectoral shifts occur frequently, contributing to frictional unemployment.
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CHAPTER 7 Unemployment
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Most of the examples on this and the previous slides are big changes that have occurred over many years. These examples give students a good idea of what sectoral shifts are. Perhaps more important for the natural rate, though, are the many smaller changes that occur more frequently. Ours is a dynamic economy: the structure of demand is shifting almost continuously, due to changes in preferences, technology, and the location of production. As a result, there is a near-continual flow of newly frictionally unemployed workers.
Sectoral shifts are distinct from recessions (which also cause unemployment). In recessions, there is a general fall in demand across industries, and the unemployment that results is cyclical. Sectoral shifts, though, are changes in the composition of demand across industries, and lead to frictional unemployment as described above.
Source of health expenditure data:
http://www.cms.hhs.gov/NationalHealthExpendData/02_NationalHealthAccountsHistorical.asp#TopOfPage
CASE STUDY: Sectoral shifts over the long run
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CHAPTER 7 Unemployment
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All figures are industry shares in U.S. GDP. “Other industry” includes construction, mining, electricity, water, and gas.
From 1960 to 2009, there are huge changes in all four categories. Manufacturing falls by about half.
Even the “tiny” category of agriculture drops by about three-fourths.
As a result of these huge structural shifts, the types of jobs available now are vastly different than just two generations ago.
Source: World Development Indicators, World Bank.
[2009 is the latest available as of 2012(!)]
Public policy and job search
Govt programs affecting unemployment include:
Govt employment agencies disseminate info about job openings to better match workers & jobs.
Public job training programs help workers displaced from declining industries get skills needed for jobs in growing industries.
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CHAPTER 7 Unemployment
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Unemployment insurance (UI)
UI pays part of a worker’s former wages for a limited time after the worker loses his/her job.
UI increases search unemployment, because it reduces
the opportunity cost of being unemployed
the urgency of finding work
f
Studies: The longer a worker is eligible for UI, the longer the average spell of unemployment.
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CHAPTER 7 Unemployment
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The text includes a nice case study on unemployment insurance (pp.182-3). It discusses evidence that unemployment insurance reduces the job finding rate.
Benefits of UI
By allowing workers more time to search,
UI may lead to better matches between jobs and workers,
which would lead to greater productivity and higher incomes.
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CHAPTER 7 Unemployment
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Why is there unemployment?
Two reasons why f < 1:
1. job search
2. wage rigidity
DONE
Next
The natural rate of unemployment:
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CHAPTER 7 Unemployment
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Unemployment from real wage rigidity
Labor
Real wage
Supply
D1
Unemployment
Rigid real wage
Amount of labor willing to work
Amount of labor hired
If real wage is stuck above its eq’m level, there aren’t enough jobs to go around.
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CHAPTER 7 Unemployment
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Figure 7-3 on p.183.
Abbreviation: “eq’m” = equilibrium
Unemployment from real wage rigidity
Then, firms must ration the scarce jobs among workers.
Structural unemployment: The unemployment resulting from real wage rigidity and job rationing.
If real wage is stuck above its eq’m level, there aren’t enough jobs to go around.
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CHAPTER 7 Unemployment
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Other texts define “structural unemployment” as unemployment that results from a mismatch between the skills or locations of workers and the skill or location requirements of job openings. This would occur, for example, if there were a decrease in demand for domestic steel (and hence steel workers) and a simultaneous increase in demand for financial consulting services (and hence employees of such firms).
However, if wages are perfectly flexible, then the decrease in demand for steel workers would simply cause their wage to fall until all were again employed, and the increase in demand for workers in financial firms would simply increase until equilibrium in that labor market was reestablished. So, the critical ingredient for structural unemployment is wage rigidity. Hence, Mankiw’s definition.
Reasons for wage rigidity
1. Minimum wage laws
2. Labor unions
3. Efficiency wages
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CHAPTER 7 Unemployment
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1. The minimum wage
The min. wage may exceed the eq’m wage of unskilled workers, especially teenagers.
Studies: a 10% increase in min. wage reduces teen employment by 1–3%
But, the min. wage cannot explain the majority of the natural rate of unemployment, as most workers’ wages are well above the min. wage.
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CHAPTER 7 Unemployment
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2. Labor unions
Unions exercise monopoly power to secure higher wages for their members.
When the union wage exceeds the eq’m wage, unemployment results.
Insiders: Employed union workers whose interest is to keep wages high.
Outsiders: Unemployed non-union workers who prefer eq’m wages, so there would be enough jobs for them.
In US, 13% of the workers have their wages set through collective bargaining of labor unions
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CHAPTER 7 Unemployment
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See p.187 for more discussion about insiders and outsiders.
The theory has two implications we can confront with data:
1) Union members’ average earnings should be higher than non-union members’ average earnings.
2) The difference between union and non-union wages should be higher in industries that are more heavily unionized (and hence, in which unions have more market power) than in less heavily unionized industries.
The following slide shows recent data on union membership and wage ratios by industry in the U.S. The data are consistent with the theory.
104,737
Private sector (total)
20,450
Government (total)
15,835
Health care
4,020
Education
12,171
Professional services
6,111
Finance, insurance
4,355
Transportation
14,582
Retail trade
13,599
Manufacturing
780
Mining
122.6
121.1
114.9
112.6
99.1
90.2
123.5
102.4
107.2
96.4
151.7
6.9
37.0
7.5
13.0
2.1
1.1
20.4
4.9
10.5
7.2
14.0
6,244
Construction
wage ratio
U % of total
# employed (1000s)
industry
wage ratio = 100 × (union wage) / (nonunion wage)
Union membership and wage ratios by industry, 2011
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CHAPTER 7 Unemployment
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The wage ratio equals the average weekly earnings of union members divided by that of non-union members. (Here, “union members” does not include non-union members who are represented by unions; however, including them in these calculations does not substantively change the results.)
For example, in Transportation, 20.4% of workers are in unions, and on average they earn 23.5% more per week than non-union members in that industry.
In 2011, 11.8% of all workers in the U.S. were members of unions. The data on this slide show two things:
union workers typically earn more than non-union workers (about 22% more on average).
2) the greater the percentage of union workers in an industry, the higher the wage ratio (the correlation is about 0.5)
Source: BLS.gov
Note: Due to space constraints on the slide, a few industries were omitted.
3. Efficiency wages
Firms willingly pay above-equilibrium wages to raise productivity.
Higher wages increase worker productivity by:
attracting higher quality job applicants
increasing worker effort, reducing “shirking”
reducing turnover, which is costly to firms
improving health of workers (in developing countries)
Result: structural unemployment.
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CHAPTER 7 Unemployment
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NOW YOU TRY Question for Discussion
Use the material we’ve just covered to come up with a policy or policies to try to reduce the natural rate of unemployment.
Note whether your policy targets frictional or structural unemployment.
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CHAPTER 7 Unemployment
Possible answers:
Stop raising the (nominal) minimum wage, so that its real value will gradually erode to zero.
Regulate unions (just like other monopolies are regulated) to reduce unions’ impact on wages.
Reduce the generosity of unemployment insurance benefits.
Implement government employment agencies to increase the accessibility of information about job vacancies and available workers.
Increase public funding to help retrain workers displaced from jobs in declining industries.
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The Median Duration of Unemployment
Weeks
The median duration of unemployment typically rises in recessions—but its rise in 2008–2010 is unprecedented.
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CHAPTER 7 Unemployment
This graph replicates Figure 7-4 on p.191. It’s new to the 8th edition, which also includes some nice discussion of different perspectives on the recent rise in long-term unemployment. There are good quotes from Robert Barro and Paul Krugman.
Two possible reasons for the spike in 2008-2009:
Unemployment coverage expanded from 26 weeks to 99 weeks, so unemployed workers had less incentive to find a job. (Robert Barro pointed this out)
Overall consumer demand was low, so there just were not enough jobs. (This was Paul Krugman’s view)
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TREND: The natural rate rises over 1960–84, then falls over 1985–2005
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CHAPTER 7 Unemployment
The purpose of this slide is to establish the trend behavior of the natural rate in recent decades: rising until the early 80s, then falling from the mid-80s through the early 2000s.
(It is probably too soon to say what happened to the trend in 2008-2010, due to the steep recession and to the fact that the natural rate data used in this graph were estimated as the average of unemployment rates from 10 years before to 10 years after each date, with future unemployment rates set at 5.5 percent.)
The following slides will show that the theories in this chapter are (mostly) consistent with the trend behavior of the natural rate.
The graph on this slide is similar to Figure 7-1 (near the beginning of this PowerPoint presentation), with modifications to the vertical scale and colors to highlight the trend behavior.
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Percent of labor force
EXPLAINING THE TREND: Sectoral shifts
1970–1986: volatile oil prices create jarring sectoral shifts
1986–2005: oil prices less volatile, so fewer sectoral shifts
2006–2012: oil price volatility increases – will the natural u-rate rise again?
Price per barrel of oil, in 2011 dollars
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CHAPTER 7 Unemployment
Earlier in the chapter, we learned that sectoral shifts are a source of job separations and lead to frictional unemployment. One would expect that a decrease in the frequency and magnitude of sectoral shifts would be associated with fewer job separations, less frictional unemployment, and a lower natural rate of unemployment.
Unfortunately, there is no single “index of sectoral shifts.” However, we know that large changes in oil prices are one important source of sectoral shifts. A significant fall in the price of oil causes a decrease in demand for workers at oil fields in Oklahoma and Texas, and an increase in demand for workers at factories that produce SUVs. A significant increase in oil prices would do the opposite.
The graph shows data on the price of oil since 1965.
During 1970-1985, the real price of oil fluctuated between $20 and $100. Also during this time, the natural rate of unemployment was rising.
During 1986-2002, the real price of oil was in the $20-40 range except for a brief spike during the Gulf War. Also during this time, the natural rate of unemployment was falling.
The data are roughly consistent with the notion that sectoral shifts contribute to the natural rate.
Note the recent increase in oil prices: from about $22 to $70 during 2002-2006:1. This represents a sectoral shift and may contribute to an increase in the natural rate of unemployment. Or maybe not, as oil consumption per dollar of GDP is lower today than in the 1970s and 1980s.
source: Dow Jones & Company
obtained from: http://research.stlouisfed.org/fred2/
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Variation across demographic groups
Observations:
Younger workers have much higher U-rates. (High s).
Economists find that an employed white male is 4 times more likely to become unemployed if he is a teenager than if he is middle-aged.
U-rate much higher for blacks. (High s and f are the reasons.)
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CHAPTER 7 Unemployment
Unemployment in Europe, 1960–2012
Percent of labor force
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CHAPTER 7 Unemployment
Figure 7-5 on p.195.
Source: Bureau of Labor Statistics,
http://www.bls.gov/fls/home.htm
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Why unemployment rose in Europe but not the U.S.
Shock Technological progress has shifted labor demand from unskilled to skilled workers in recent decades.
Effect in United States An increase in the “skill premium” – the wage gap between skilled and unskilled workers.
Effect in Europe Higher unemployment, due to generous govt benefits for unemployed workers and strong union presence.
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CHAPTER 7 Unemployment
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Percent of workers covered by collective bargaining, selected countries
| United States | 13% |
| United Kingdom | 35 |
| Switzerland | 48 |
| Spain | 80 |
| Sweden | 92 |
| Germany | 63 |
| France | 95 |
| Greece | 85 |
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CHAPTER 7 Unemployment
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Table 7-1
Source: OECD.
The Rise of European Leisure
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CHAPTER 7 Unemployment
Why this difference?
Europeans face higher taxes, so discouraged to exert more work effort
Also high tax leads to underground economy which can result in such gap
Unions stronger in Europe than in US
Europeans are lazier (from my personal experience while living in UK).
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CHAPTER 7 Unemployment
CHAPTER SUMMARY
1. The natural rate of unemployment
definition: the long-run average or “steady state” rate of unemployment
depends on the rates of job separation and job finding
2. Frictional unemployment
due to the time it takes to match workers with jobs
may be increased by unemployment insurance
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CHAPTER 7 Unemployment
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CHAPTER SUMMARY
3. Structural unemployment
results from wage rigidity: the real wage remains above the equilibrium level
caused by: minimum wage, unions, efficiency wages
4. Duration of unemployment
most spells are short term
but most weeks of unemployment are attributable to a small number of long-term unemployed persons
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CHAPTER 7 Unemployment
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CHAPTER SUMMARY
5. Behavior of the natural rate in the U.S.
rose from 1960 to early 1980s, then fell
possible explanations: trends in real minimum wage, union membership, prevalence of sectoral shifts, and aging of the Baby Boomers
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CHAPTER 1 The Science of Macroeconomics
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CHAPTER SUMMARY
6. European unemployment
has risen sharply since 1970
probably due to generous unemployment benefits, strong union presence, and a technology-driven shift in demand away from unskilled workers
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CHAPTER 1 The Science of Macroeconomics
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U L =
s s + f
001
005, or 5%
001019
Us
Lsf
===
++
.
.
..
1.0%
12.8%
7.2%
79.0%
2009
4.2%
28.0%
9.9%
57.9%
Agriculture
Manufacturing
Other industry
Services
1960
Us
Lsf
=
+
