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1、S E V E N T H E D I T I O NModified for EC 204 by Bob Murphyabout the natural rate of unemployment:what it meanswhat causes itunderstanding its behavior in the real world3CHAPTER 6 UnemploymentNatural rate of unemploymentNatural rate of unemployment: The average rate of unemployment around which the

2、 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. Actual and natural rates of unemployment in the U.S., 1960-2009Percent of labor forceUnemployment rateNatural rate of unemployment5CHA

3、PTER 6 UnemploymentA first model of the natural rateNotation:L = # of workers in labor forceE = # of employed workersU = # of unemployedU/L = unemployment rate6CHAPTER 6 UnemploymentAssumptions:1. L is exogenously fixed. 2. During any given month, s = rate of job separations, the fraction of employe

4、d workers that become separated from their jobsf = rate of job finding, fraction of unemployed workers that find jobss and f are exogenous7CHAPTER 6 UnemploymentThe transitions between employment and unemploymentEmployedUnemployeds Ef U8CHAPTER 6 UnemploymentThe steady state conditionDefinition: the

5、 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 jobs9CHAPTER 6 UnemploymentFinding the “equilibrium” U rate f U = s E = s (L U )= s

6、 L s U Solve for U/L: (f + s) U = s L so,10CHAPTER 6 UnemploymentExample:Each month, 1% of employed workers lose their jobs (s = 0.01)19% of unemployed workers find jobs (f = 0.19)Find the natural rate of unemployment:11CHAPTER 6 UnemploymentPolicy implicationA policy will reduce the natural rate of

7、 unemployment only if it lowers s or increases f. 12CHAPTER 6 UnemploymentWhy 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 search2. wage rigidity13CHAPTER

8、6 UnemploymentJob search & frictional unemploymentfrictional unemployment: caused by the time it takes workers to search for a joboccurs even when wages are flexible and there are enough jobs to go aroundoccurs becauseworkers have different abilities, preferencesjobs have different skill require

9、mentsgeographic mobility of workers not instantaneousflow of information about vacancies and job candidates is imperfect14CHAPTER 6 UnemploymentSectoral shiftsdef: Changes in the composition of demand among industries or regions.example: Technological change more jobs repairing computers, fewer jobs

10、 repairing typewritersexample: A new international trade agreement labor demand increases in export sectors, decreases in import-competing sectorsThese scenarios result in frictional unemploymentCASE STUDY: Structural change over the long run1960200616CHAPTER 6 UnemploymentMore examples of sectoral

11、shiftsIndustrial revolution (1800s): agriculture declines, manufacturing soarsEnergy crisis (1970s): demand shifts from larger cars to smaller onesHealth care spending as % of GDP:1960: 5.2%2000: 13.8%1980: 9.1%2007: 16.2%In our dynamic economy, smaller sectoral shifts occur frequently, contributing

12、 to frictional unemployment.17CHAPTER 6 UnemploymentPublic policy and job searchGovt programs affecting unemployment include:Govt employment agenciesdisseminate info about job openings to better match workers & jobs. Public job training programshelp workers displaced from declining industries ge

13、t skills needed for jobs in growing industries.18CHAPTER 6 UnemploymentUnemployment insurance (UI)UI pays part of a workers former wages for a limited time after losing his/her job.UI increases search unemployment, because it reducesthe opportunity cost of being unemployedthe urgency of finding work

14、fStudies: The longer a worker is eligible for UI, the longer the duration of the average spell of unemployment.19CHAPTER 6 UnemploymentBy 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. Benefits

15、 of UI20CHAPTER 6 UnemploymentWhy is there unemployment?Two reasons why f 1:1. job search2. wage rigidityDONE Next The natural rate of unemployment:21CHAPTER 6 UnemploymentUnemployment from real wage rigidityLaborReal wageSupplyDemandUnemploymentRigid real wageAmount of labor willing to workAmount o

16、f labor hiredIf real wage is stuck above its eqm level, then there arent enough jobs to go around.22CHAPTER 6 UnemploymentUnemployment from real wage rigidityThen, firms must ration the scarce jobs among workers. Structural unemployment: The unemployment resulting from real wage rigidity and job rat

17、ioning.If real wage is stuck above its eqm level, then there arent enough jobs to go around.23CHAPTER 6 UnemploymentReasons for wage rigidity1.Minimum wage laws2.Labor unions3.Efficiency wages24CHAPTER 6 Unemployment1. The minimum wageThe min. wage may exceed the eqm wage of unskilled workers, espec

18、ially teenagers. Studies: a 10% increase in min. wage reduces teen unemployment 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. 25CHAPTER 6 Unemployment2. Labor unionsUnions exercise monopoly power to secu

19、re higher wages for their members. When the union wage exceeds the eqm wage, unemployment results. Insiders: Employed union workers whose interest is to keep wages high.Outsiders: Unemployed non-union workers who prefer eqm wages, so there would be enough jobs for them.108,073Private sector (total)2

20、1,305Government (total)15,184Health care3,657Education11,967Professional services6,536Finance, insurance4,639Transportation14,987Retail trade15,131Manufacturing776Mining123.2120.5116.0117.197.488.7126.3106.6108.6102.1151.87.6%36.88.013.82.11.321.35.211.46.915.67,652Constructionwage ratioU % of total

21、# employed (1000s)industrywage ratio = 100(union wage)/(nonunion wage)slide 26Union membership and wage ratios by industry, 200827CHAPTER 6 Unemployment3. Efficiency wage theoryTheories in which higher wages increase worker productivity by: attracting higher quality job applicants increasing worker

22、effort, reducing “shirking”reducing turnover, which is costly to firmsimproving health of workers (in developing countries) Firms willingly pay above-equilibrium wages to raise productivity.Result: structural unemployment.NOW YOU TRY: Question for DiscussionUse the material weve just covered to come

23、 up with a policy or policies to try to reduce the natural rate of unemployment. Note whether your policy targets frictional or structural unemployment. The duration of U.S. unemployment, average, Jan 1960 June 2009# of weeks unemployed# of unemployed persons in group (% of allunemployed persons)tim

24、e spent unemployed by this group (% of time spent unemployed by all groups)1-442%8.1%5-1430%21.5%15 or more27%70.4%30CHAPTER 6 UnemploymentThe duration of unemploymentThe data: More spells of unemployment are short-term than medium-term or long-term.Yet, most of the total time spent unemployed is at

25、tributable to the long-term unemployed. This long-term unemployment is probably structural and/or due to sectoral shifts among vastly different industries.Knowing this is important because it can help us craft policies that are more likely to work. TREND: The natural rate rises over 1960-84, then fa

26、lls over 1985-2005Percent of labor forceEXPLAINING THE TREND:The minimum wageDollars per hour$0$1$2$3$4$5$6$7$8$91950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010minimum wage in current dollarsminimum wage in 2009 dollarsThe real minimum wage and natural u-rate have similar trends. EX

27、PLAINING THE TREND:Union membershipSince 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. Union membershipselected yearsyearpercent of labor force193012%194535%195435%197027%198320.1%200812.4%EXPLAI

28、NING THE TREND: Sectoral shifts1970-1986: volatile oil prices create jarring sectoral shifts1986-2005: oil prices less volatile, so fewer sectoral shifts2006-present: oil price volatility increases will the natural u-rate rise again?Price per barrel of oil, in 2009 dollars35CHAPTER 6 UnemploymentEXP

29、LAINING THE TREND:Demographics1970s: The Baby Boomers were young. Young workers change jobs more frequently (high value of s).Late 1980s through today: Baby Boomers aged. Middle-aged workers change jobs less often (low s). Unemployment in Europe, 1960-2008Percent of labor force37CHAPTER 6 Unemployme

30、ntWhy 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 StatesAn increase in the “skill premium” the wage gap between skilled and unskilled workers.Effect in EuropeHigher unemployment, due to generous govt benefits for unemployed workers and strong union presence. Percent of workers covered by collective bargaining, selected countriesUnited States18%United Kingdom47Switzerland5

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