Long Run Labor Markets
Long Run Labor Markets
Understanding Unemployment
Understanding Unemployment
Andrew Rose, Global Macroeconomics 4
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Unemployment
• Long run (
Long run (“natural”)
natural ) rate of unemployment: a key rate of unemployment: a key
determinant of the economic well‐being of a society (together with growth)
• Ignore (temporarily) Ignore (temporarily) “business‐cycle”
business cycle deviations deviations
from trend; focus on trend
• Definition and measurement of unemployment (
)
involves search (not benefits!)
Andrew Rose, Global Macroeconomics 4
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Modeling Frictional Unemployment
Modeling Frictional
• Population divided into L(abor
P
l ti di id d i t L( b Force) and F
) d
O(ut of LF), usually on the basis of non‐
economic considerations:
Pop = O + L
• Labor force is employed (E) or unemployed (U)
Labor force is employed (E) or unemployed (U)
L = E + U
Andrew Rose, Global Macroeconomics 4
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Graphically
Pop
L
E
O
U
Andrew Rose, Global Macroeconomics 4
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Notes
• Some O are really U:
S
O
ll U
– “discouraged
discouraged workers
workers” are really part of the are really part of the
unemployed (but have stopped searching)
• Part‐time handled with full‐time equivalents (“FTE”)
Andrew Rose, Global Macroeconomics 4
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Long‐Run
Long
Run Trends
Trends
• Leisure has been rising steadily for decades
has been rising steadily for decades
– Falling Years/Lifetime in lifetime
– Falling Weeks/Year
– Falling Days/Week
g y/
– Falling Hours/Day
• Simultaneous with rising income/wages
l
h
/
• All very good news!
yg
Andrew Rose, Global Macroeconomics 4
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Hall’s Model of Frictional Unemployment
l
• In steady state equilibrium, flows into unemployment (
In steady state equilibrium flows into unemployment (“separations”)
separations ) equal flows from unemployment (“finds”) – use “bathtub theorem”
• Can show in equilibrium, unemployment rate is
• Either/both of a) faster job separation and b) slower job finding, raise unemployment rate
– Often societies with high s also have high f
Andrew Rose, Global Macroeconomics 4
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Graphically
Flow Separations
Fl
S
i
(sE)
Stock of Employed
(E)
Stock of Unemployed (U)
l d( )
Flow of Job Finding
(fU)
Andrew Rose, Global Macroeconomics 4
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Frictional Unemployment
Frictional Unemployment
• Unemployment here the result of differences between Unemployment here the result of differences between
jobs and people which create frictions; people and jobs vary on many dimensions
• Search takes time, hence entails unemployment; but ,
p y
;
search improves match quality, hence valuable
• “Matching” models are of generic interest
“
h ”
d l
f
– Markets for Love and Housing
Andrew Rose, Global Macroeconomics 4
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Policies to Affect Matching
Policies to Affect Matching
• Better
Better information can lower frictional information can lower frictional
unemployment (both public and private)
• Can lower cost of transition (industrial, Can lower cost of transition (industrial,
occupational, geographic …)
• Unemployment insurance benefits
Unemployment insurance benefits lower pain lower pain
of unemployment, hence reduce job finding and speed separations
– Benefits vary dramatically in many dimensions over countries
Andrew Rose, Global Macroeconomics 4
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Problems with Frictional Model
Problems with Frictional Model
• Not many unemployed people search full‐time
y
p y p p
• Many job transitions take place without unemployment
– Separations: voluntary quits, involuntary layoffs l
l
l ff
(with/without cause)
– Many quits are switches from one match straight into yq
g
another, no intervening spell of unemployment
• Most unemployment is concentrated in a small number of unemployed people with long spells of
number of unemployed people with long spells of unemployment
p
p y
y
• Median spell of unemployment very short
Andrew Rose, Global Macroeconomics 4
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The Life Cycle of Matching
The Life Cycle of Matching
• For most people: numerous brief spells of F
t
l
bi f
ll f
unemployment and employment early in life, p y
p y
y
f ,
followed by longer spells of employment in good matches later on
• Most “Churning” done by young
M t “Ch i ” d
b
Andrew Rose, Global Macroeconomics 4
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Structural (“Wait”) Unemployment: An Alternative l
• Wages are too high relative to equilibrium
W
t hi h l ti t
ilib i
• Unemployment is purely involuntary
Unemployment is purely involuntary
• Identical workers treated differently
• An excess supply (of labor) dis‐equilibrium which persists
– But why don't wages fall (faster) to eliminate the gap?
ut why don t wages fall (faster) to eliminate the gap?
Andrew Rose, Global Macroeconomics 4
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Graphically
w
S
w
B
A
D
L
Unemployment
p y
Andrew Rose, Global Macroeconomics 4
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Underlying Reasons for Inappropriate Wages
• Minimum wage laws for young, inexperienced
Mi i
l
f
i
i
d
– Especially in low‐skill services
• Excess labor market regulations
– Severance pay, plant closing laws
• Unions
– "Outsiders" vs. “Insiders”
Andrew Rose, Global Macroeconomics 4
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Efficiency Wages
Efficiency Wages
• Firms find it profitable to pay “above equilibrium” Fi
fi d it
fit bl t
“ b
ilib i ”
wages to achieve objectives:
1. Reduce costly turnover
2. Attract quality labor
3. Penalize shirkingg
4. Discourage unionization/encourage labor flexibility
Andrew Rose, Global Macroeconomics 4
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Key Takeaways
Key Takeaways
• Some
Some unemployment is inevitable because unemployment is inevitable because
matching people to jobs is difficult
• Some unemployment may be because wages Some unemployment may be because wages
are inappropriately high (either because of public policy or private decisions)
public policy or private decisions)
Andrew Rose, Global Macroeconomics 4
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