Chapter 6 Unemployment
6
CHAPTER 6 Unemployment 0

Why do economists study unemployment?

To understand causes & possible solutions

Unemployment affects economic and social outcomes in society
CHAPTER 6 Unemployment 1

…about the natural rate of unemployment:
 what it means
 what causes it
 understanding its behavior in the real world

Natural rate of unemployment

Natural rate of unemployment :
The average rate of unemployment around which the economy fluctuates.

Associated with zero cyclical unemployment
CHAPTER 6 Unemployment 3

Figure 6.1 The Unemployment Rate and the Natural Rate of
Unemployment in Canada
Mankiw and Scarth: Macroeconomics, Canadian Fourth
Unemployment
Copyright © 2011 by Worth Publishers
4

Actual and natural rates of unemployment, U.S.,
1960-2010
12
Unemployment rate
10
8
6
4
2
Natural rate of unemployment
0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

6.1 A first model of the natural rate
Notation:
L = # of workers in labor force
E = # of employed workers
U = # of unemployed
U/L = unemployment rate
CHAPTER 6 Unemployment 6

The transitions between employment and unemployment s  E
Employed Unemployed
CHAPTER 6 Unemployment f  U
7

The steady state condition

Definition: the labor market is in steady state , or long-run equilibrium, if the unemployment rate is constant.
CHAPTER 6 Unemployment 8

Policy implication

A policy will reduce the natural rate of unemployment only if it lowers s or increases f .
CHAPTER 6 Unemployment 9

6.2 Job search & frictional unemployment
 frictional unemployment : caused by the time it takes workers to search for a job
CHAPTER 6 Unemployment 10

Sectoral shifts
 def: Changes in the composition of demand among industries or regions.
CHAPTER 6 Unemployment 11

Public policy and job search
Govt programs affecting unemployment include:

Govt employment agencies

Public job training programs
CHAPTER 6 Unemployment 12

Employment insurance (EI)
 EI pays part of a worker’s former wages for a limited time after losing his/her job.
CHAPTER 6 Unemployment 13

Is EI a bad policy?

Why?
CHAPTER 6 Unemployment 14

6.3 Unemployment from real wage rigidity

Wage rigidity: the failure of wages to adjust to a level at which the supply of labour equals the demand for labour.
CHAPTER 6 Unemployment 15

Structural unemployment

Unemployment due to wage rigidity and job rationing.

Due to a mismatch
CHAPTER 6 Unemployment 16

Reasons for wage rigidity
1 .
Minimum wage laws
2 .
Labor unions
3 .
Efficiency wages
CHAPTER 6 Unemployment 17

Table 6.1 Percent of Workers Covered by Collective Bargaining
Mankiw and Scarth: Macroeconomics, Canadian Fourth Edition
Unemployment 18

3. Efficiency wage theory

Efficiency wages theories suggest that paying higher than market wage leads to more productive workers.
CHAPTER 6 Unemployment 19

6.4 Labour Market Experience in
Canada

The unemployment rate can be broken into 2 components:

1. incidence

2. duration
CHAPTER 6 Unemployment 20

Table 6.2 Unemployment by Age Groups: 2007
Mankiw and Scarth: Macroeconomics, Canadian Fourth Edition
Copyright © 2011 by Worth Publishers
CHAPTER 6 Unemployment 21

CHAPTER 6 Unemployment 22

CHAPTER 6 Unemployment 23

CHAPTER 6 Unemployment 24

CHAPTER 6 Unemployment 25

Why does the natural rate change over time?
1.
Demographics
2.
Sectoral shifts
3.
Productivity
4.
Transitions in the labour force
CHAPTER 6 Unemployment 26

CHAPTER 6 Unemployment 27

6.5 Labour Market Experience in
Europe

In general the u.r. has risen since the 1960s

There is a huge variance among countries
CHAPTER 6 Unemployment 28

Unemployment in Europe, 1960-2009
12
10
8
6
4
France
Germany
2
Italy
United Kingdom
0
1970 1975 1980 1985 1990 1995 2000 2005 2010

Explaining the variation in Europe
1.
Long term unemployed
2.
Labour market policies
CHAPTER 6 Unemployment
30

Figure 6.5 Annual Hours Worked per Employed Person
Mankiw and Scarth: Macroeconomics, Canadian Fourth Edition
Copyright © 2011 by Worth Publishers
CHAPTER 6 Unemployment
31

Typical US worker works 20% more hours than typical European.

Why?
CHAPTER 6 Unemployment
32