Ch6: Unemployment Mankiw: Macro Ch 6 Mankiw: Econ Ch 28 Abel & Bernake: Ch 3

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Text of Ch6: Unemployment Mankiw: Macro Ch 6 Mankiw: Econ Ch 28 Abel & Bernake: Ch 3

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  • Ch6: Unemployment Mankiw: Macro Ch 6 Mankiw: Econ Ch 28 Abel & Bernake: Ch 3
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  • Table Taiwan: the Labor-Market Experiences of Various Demographic Groups Copyright2004 South-Western GDP -2006 20-24 1978- 2007 58.6672.6544.666.783.842.612.886.54 1978- 90 59.3076.0242.468.362.901.952.575.02 1991- 00 58.5471.6945.396.353.282.172.485.78 2001- 07 57.6567.7747.684.096.384.454.0310.48
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  • Types of unemployment : Economic Watch http://www.economywatch.com/unemployment/types/ 1. Frictional Unemployment 2. Structural Unemployment 3. Real Wage or Classical Unemployment 4. Cyclical Unemployment 5. Seasonal Unemployment
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  • 1. Frictional Unemployment It takes time for workers to search for the jobs that are best suit their tastes and skills. Frictional Unemployment : the unemployment that results from the time to match qualified workers (U) with appropriate jobs (V). U: ( ) V Vacancy U=V -- It is not caused by a wage rate higher than equilibrium.
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  • Frictional Unemployment Imperfect information may aggravate the problem of frictional unemployment. The problem of frictional unemployment is minimized with the development of efficient labor markets and of efficient communication technology. The time period of shifting from one job to another will be reduced.
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  • 2. Structural Unemployment Changes in the composition of demand among industries or regions are called sectoral shifts. For some sectors, U i > V i and for the others, V j > U j but U i have no skills for the jobs in sector j.
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  • CASE STUDY: Structural change over the long run
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  • Taiwan Structural change over the long run
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  • 3. Real Wage or Classical Unemployment Mankiw : Real-Wage Rigidity Unemployment This type of unemployment problem arises when the wages rise above the equilibrium full employment level. Wages are not flexible downwards which will imply that unemployment would persist for long. The sticky wage is set by minimun wage law or by negotiations in the union.
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  • 4. Cyclical Unemployment Ch5 It is fluctuations in unemployment around its natural rate, associated with short-term ups and downs of the business cycle. According to the Keynesian economists this type of unemployment occurs due to demand deficiency. The demand for labor increases with the economy in the boom phase. Again, when the economy passes though recession, demand for labor contracts and the surplus is released as the unemployed labor force.
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  • 5. Seasonal Unemployment There are certain kinds of unemployment that tend to concentrate in a particular time of the year and are known as seasonal unemployment. Seasonal unemployment is most common in industries like tourism, hotel, catering and fruit picking.
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  • LR and SR Unemployment 1. L ong-run: natural rate of unemployment ( ) the amount of unemployment that the economy normally experiences. 2. Short-run: cyclical rate of unemployment ( ) certain cyclical factors that can cause deviation of the economy from the natural rate of unemployment. Govt may adopt expansionary macro policy in order to reduce the cyclical part of unemployment.
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  • Natural Rate of Unemployment : Milton Friedman and Edmund Phelps:1960s. It is basically the lowest unemployment rate that is consistent with the long run aggregate production. It can also be defined as that low level of unemployment at which the economy faces a stable inflation rate. (Ch13: Phillips Curve) Therefore, it cannot be lowered with the help of macro policies. LR natural rate of unemployment = Frictional unemployment Structural Unemployment ( ) + (Mankiw ) Real-Wage Rigidity Unemployment
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  • Actual and natural rates of unemployment in the U.S., 1960-2006 Percent of labor force 0 2 4 6 8 10 12 1960196519701975198019851990199520002005 Unemployment rate Natural rate of unemployment
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  • Taiwan: unemployment rate
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  • SR: U and GDP Deviations from Trends
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  • The duration of U.S. unemployment, average over 1/1990-5/2006 # of weeks unemployed # of unemployed persons as % of total # of unemployed amount of time these workers spent unemployed as % of total time all workers spent unemployed 1-438%7.2% 5-1431%22.3% 15 or more31%70.5%
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  • Taiwan: Duration of Unemployment / 1999200020012002200320042005 2.922.994.575.174.994.444.13 ( ) 23.024.725.729.331.130.529.4 (53+ ) 3.03.95.89.410.5 8.7 (%) 10.914.314.118.821.020.819.1
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  • The duration of unemployment The data: More spells of unemployment are short-term than medium-term or long-term. Yet, most of the total time spent unemployed is attributable 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.
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  • Theory: Job Loss, Job Finding, and the Natural Rate of Unemployment 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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  • Assumptions: 1.L is exogenously fixed. 2.During any given month, rate of job separations s: fraction of employed workers that become separated from their jobs. rate of job finding f : fraction of unemployed workers that find jobs Assume both s and f are exogenous
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  • The transitions between employment and unemployment Employed Unemployed s E f U
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  • The steady state condition 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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  • Determination of LR equilibrium unemployment rate (Natural rate of Unemployment) f U = s E = s (L U ) = s L s U Solve for U/L: (f + s) U = s L so,
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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 rate of 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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  • Public Policy related to Job Search 3 programs: ( ) (1) Government-run employment agencies give out information about job vacancies in order to match workers and jobs more quickly. --- (2) Public job-training programs aim to ease the transition of workers from declining to growing industries and to help disadvantaged groups escape poverty. ---
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  • Public Policy related to Job Search (3) Unemployment insurance UI pays part of a workers former wages for a limited time after losing his/her job. UI increases search unemployment, because it reduces the opportunity cost of being unemployed the urgency of finding work job-finding rate (f) 1999 2003 http://www.cla.gov.tw/cgi-in/SM_theme?page=416f8419
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  • Public Policy related to Job Search The impacts of Unemployment insurance: It reduces the search efforts of the unemployed and increases the amount of search unemployment. It may improve the chances of workers being matched with the right jobs. (4) 2005 7
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  • Mankiw Real-Wage Rigidity Unemployment Ls > Ld when w > w* the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one. occurs when the quantity of labor supplied exceeds the quantity demanded. caused by a wage rate higher than equilibrium.
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  • Fig Unemployment from a Wage Above the Equilibrium Level Copyright2003 Southwestern/Thomson Learning Quantity of Labor 0 Surplus of labor = Unemployment Labor supply Labor demand Wage Minimum wage LDLD LSLS WEWE LELE
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  • 1. Minimum-Wage Laws 3 reasons for structural unem: 1. Minimum-wage laws 2. Unions 3. Efficiency wages Minimum-Wage Laws When the minimum wage is set above W*, it creates unemployment. --- (Nominal) Wage Rigidity ( )
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  • EXPLAINING THE TREND: The minimum wage 0 1 2 3 4 5 6 7 8 9 195019551960196519701975198019851990199520002005 Dollars per hour minimum wage in current dollars minimum wage in 2006 dollars The trend in the real minimum wage is similar to that of the natural rate of unemployment.
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  • 2. Unions and Collective Bargaining A union ( ) is a worker association that bargains with employers over wages and working conditions. Unions exercise monopoly power to secure higher wages for their members. When the union wage exceeds the equilibrium wage, unemployment results. A union is a type of cartel attempting to exert its market power. collective bargaining the process by which unions and firms agree on the terms of employment.
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  • Unions and Collective Bargaini