CHAPTER
6
Unemployment
MACROECONOMICS
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
CHAPTER 6
Unemployment
slide 1
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.
CHAPTER 6
Unemployment
slide 2
Actual and natural rates of
unemployment in the U.S., 1960-2007
Percent of labor force
12
Unemployment rate
10
8
6
4
2
Natural rate of
unemployment
0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
CHAPTER 6 Unemployment
slide 3
A first model of the natural rate
REMEMBER?
L = # of workers in labor force
E = # of employed workers
U = # of unemployed
U/L = unemployment rate
CHAPTER 6
Unemployment
slide 4
Assumptions:
1. L is exogenously fixed.
2. During any given month,
s = fraction of employed workers
that become separated from their jobs
s is called the rate of job separations
f = fraction of unemployed workers
that find jobs
f is called the rate of job finding
s and f are exogenous
CHAPTER 6
Unemployment
slide 5
The transitions between
employment and unemployment
s E
Employed
Unemployed
f U
CHAPTER 6
Unemployment
slide 6
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
CHAPTER 6
Unemployment
# of unemployed
people who find
jobs
slide 7
Finding the “equilibrium” U rate
f U
= sE
= s  (L – U )
= s  L – s U
Solve for U/L:
(f + s) U = s  L
so,
U
L
CHAPTER 6
Unemployment

s
s f
slide 8
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:
U
L
CHAPTER 6

s
s f

0 .0 1
0 .0 1  0 .1 9
Unemployment
 0 . 0 5, o r 5 %
slide 9
Policy implication
 A policy will reduce the natural rate of
unemployment only if it lowers s or increases f.
CHAPTER 6
Unemployment
slide 10
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
CHAPTER 6
Unemployment
slide 11
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
CHAPTER 6
Unemployment
slide 12
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
 Result: frictional unemployment
CHAPTER 6
Unemployment
slide 13
CASE STUDY:
Structural change over the long run
Agriculture
Manufacturing
Other industry
Services
1960
2000
73.5%
57.9%
4.2%
1.6%
9.9%
28.0%
CHAPTER 6
Unemployment
7.7%
17.2%
slide 14
Unemployment insurance (UI)
 UI pays part of a worker’s 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
 f (job finding rate)
 Studies: The longer a worker is eligible for UI,
the longer the duration of the average spell of
unemployment.
CHAPTER 6
Unemployment
slide 15
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.
CHAPTER 6
Unemployment
slide 16
Why is there unemployment?
The natural rate of unemployment:
U
L

s
s f
 Two reasons why f < 1:
DONE 1. job search
Next  2. wage rigidity
CHAPTER 6
Unemployment
slide 17
Unemployment from real wage
rigidity
If real wage is
stuck above
its eq’m level,
then there
aren’t enough
jobs to go
around.
Real
wage
Supply
Unemployment
Rigid
real
wage
Demand
Labor
Amount of
labor hired
CHAPTER 6
Unemployment
Amount of labor
willing to work
slide 18
Unemployment from real wage
rigidity
If real wage is
stuck above
its eq’m level,
then there
aren’t enough
jobs to go
around.
CHAPTER 6
Then, firms must ration the
scarce jobs among workers.
Structural unemployment:
The unemployment resulting
from real wage rigidity and
job rationing.
Unemployment
slide 19
Reasons for wage rigidity
1.
Minimum wage laws
2.
Labor unions
3.
Efficiency wages
CHAPTER 6
Unemployment
slide 20
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 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.
CHAPTER 6
Unemployment
slide 21
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.
CHAPTER 6
Unemployment
slide 22
Union membership and wage ratios by industry, 2005
industry
Private sector (total)
# employed
(1000s)
U % of
total
wage
ratio
105,508
8.5%
122.3
20,381
40.5
121.7
8,053
13.8
156.9
600
9.5
113.7
Manufacturing
15,518
13.7
107.8
Retail trade
14,973
5.8
114.0
Transportation
4,379
24.4
129.2
Finance, insurance
6,304
2.1
90.7
10,951
3.1
90.6
3,312
15.4
112.7
14,045
8
115.1
Government (total)
Construction
Mining
Professional services
Education
Health care
wage ratio = 100(union wage)/(nonunion wage)
slide 23
3. Efficiency wage theory
 Theories in which 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)
 Firms willingly pay above-equilibrium wages to
raise productivity.
 Result: structural unemployment.
CHAPTER 6
Unemployment
slide 24
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.
CHAPTER 6
Unemployment
slide 25
The duration of U.S. unemployment,
average over 1/1990-6/2007
# 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
1-4
38%
6.1%
5-14
31%
18.8%
15 or more
31%
75.1%
CHAPTER 6
Unemployment
slide 26
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.
CHAPTER 6
Unemployment
slide 27
TREND: The natural rate rises during
1960-1984, then falls during 1985-2007
9
8
7
6
5
4
3
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
CHAPTER 6
Unemployment
slide 28
EXPLAINING THE TREND:
The minimum wage
9
The trend in the
real minimum wage
is similar to that of
the natural rate of
unemployment.
Dollars per hour
8
7
6
5
minimum wage
in 2006 dollars
4
3
minimum wage in
current dollars
2
1
0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
CHAPTER 6
Unemployment
slide 29
EXPLAINING THE TREND:
Union membership
Union membership
selected years
year
percent of labor force
1930
12%
1945
35%
1954
35%
1970
27%
1983
20.1%
2006
12.0%
CHAPTER 6
Unemployment
Since the early
1980s, the natural
rate of unemployment and union
membership have
both fallen.
But, from 1950s
to about 1980,
the natural rate
rose while union
membership fell.
slide 30
EXPLAINING THE TREND:
Sectoral shifts
From mid 1980s to early 2000s,
oil prices less volatile,
so fewer sectoral shifts.
$100
$80
$60
Price per
barrel of oil,
in 2007
dollars
$40
$20
$0
1970
1975
CHAPTER 6
1980
1985
Unemployment
1990
1995
2000
2005
slide 31
EXPLAINING THE TREND:
Demographics
 1970s:
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).
CHAPTER 6
Unemployment
slide 32
Unemployment in Europe, 1960-2006
France
Percent of labor force
12
9
6
Italy
3
U.K.
Germany
0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
slide 33
The rise in European unemployment
 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.
CHAPTER 6
Unemployment
slide 34
Percent of workers covered by
collective bargaining
CHAPTER 6
United States
18%
United Kingdom
47
Switzerland
53
Spain
68
Sweden
83
Germany
90
France
92
Austria
98
Unemployment
slide 35
Chapter Summary
1. The natural rate of unemployment
 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
CHAPTER 6
Unemployment
slide 36
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
CHAPTER 6
Unemployment
slide 37
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
CHAPTER 6
Unemployment
slide 38
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
CHAPTER 6
Unemployment
slide 39
CHAPTER
7
Economic Growth I:
Capital Accumulation and
Population Growth
MACROECONOMICS
In this chapter, you will learn…
 the closed economy Solow model
 how a country’s standard of living depends on its
saving and population growth rates
 how to use the “Golden Rule” to find the optimal
saving rate and capital stock
CHAPTER 6
Unemployment
slide 41
Why growth matters
 Data on infant mortality rates:
 20% in the poorest 1/5 of all countries
 0.4% in the richest 1/5
 In Pakistan, 85% of people live on less than $2/day.
 One-fourth of the poorest countries have had
famines during the past 3 decades.
 Poverty is associated with oppression of women
and minorities.
Economic growth raises living standards and
reduces poverty….
CHAPTER 6
Unemployment
slide 42
Income and poverty in the world
selected countries, 2000
100
Madagascar
% of population
living on $2 per day or less
90
India
Nepal
Bangladesh
80
70
60
Botswana
Kenya
50
China
40
Peru
30
Mexico
Thailand
20
Brazil
10
0
$0
CHAPTER 6
Chile
Russian
Federation
$5,000
$10,000
S. Korea
$15,000
Income per capita in dollars
Unemployment
$20,000
slide 43
Why growth matters
 Anything that effects the long-run rate of economic
growth – even by a tiny amount – will have huge
effects on living standards in the long run.
annual
growth rate of
income per
capita
…25 years
…50 years
…100 years
2.0%
64.0%
169.2%
624.5%
2.5%
85.4%
243.7%
1,081.4%
CHAPTER 6
percentage increase in
standard of living after…
Unemployment
slide 44
Why growth matters
 If the annual growth rate of U.S. real GDP per
capita had been just one-tenth of one percent
higher during the 1990s, the U.S. would have
generated an additional $496 billion of income
during that decade.
CHAPTER 6
Unemployment
slide 45
The Solow model
 due to Robert Solow,
won Nobel Prize for contributions to
the study of economic growth
 a major paradigm:
 widely used in policy making
 benchmark against which most
recent growth theories are compared
 looks at the determinants of economic growth
and the standard of living in the long run
CHAPTER 6
Unemployment
slide 46
How Solow model is different
from Chapter 3’s model
1. K is no longer fixed:
investment causes it to grow,
depreciation causes it to shrink
2. L is no longer fixed:
population growth causes it to grow
3. the consumption function is simpler
CHAPTER 6
Unemployment
slide 47
How Solow model is different
from Chapter 3’s model
4. no G or T
(only to simplify presentation;
we can still do fiscal policy experiments)
5. cosmetic differences
CHAPTER 6
Unemployment
slide 48
The production function
 In aggregate terms: Y = F (K, L)
 Define: y = Y/L = output per worker
k = K/L = capital per worker
 Assume constant returns to scale:
zY = F (zK, zL ) for any z > 0
 Pick z = 1/L. Then
Y/L = F (K/L, 1)
y = F (k, 1)
y = f(k)
where f(k) = F(k, 1)
(think of this as a per worker production function)
CHAPTER 6
Unemployment
slide 49
The production function
Output per
worker, y
f(k)
MPK = f(k +1) – f(k)
1
Note: this production function
exhibits diminishing MPK.
Capital per
worker, k
CHAPTER 6
Unemployment
slide 50
The national income identity
 Y=C+I
(remember, no G )
 In “per worker” terms:
y=c+i
where c = C/L and i = I /L
CHAPTER 6
Unemployment
slide 51
The consumption function
 s = the saving rate,
the fraction of income that is saved
(s is an exogenous parameter)
Note: s is the only lowercase variable
that is not equal to
its uppercase version divided by L
 Consumption function: c = (1–s)y
(per worker)
CHAPTER 6
Unemployment
slide 52
Saving and investment
 saving (per worker)
= y – c
= y – (1–s)y
=
sy
 National income identity is y = c + i
Rearrange to get: i = y – c = sy
(investment = saving, like in chap. 3!)
 Using the results above,
i = sy = sf(k)
CHAPTER 6
Unemployment
slide 53
Output, consumption, and investment
Output per
worker, y
f(k)
c1
sf(k)
y1
i1
k1
CHAPTER 6
Unemployment
Capital per
worker, k
slide 54
Depreciation
Depreciation
per worker, k
 = the rate of depreciation
= the fraction of the capital stock
that wears out each period
k

1
Capital per
worker, k
CHAPTER 6
Unemployment
slide 55
Capital accumulation
The basic idea: Investment increases the capital
stock, depreciation reduces it.
Change in capital stock
k
= investment – depreciation
=
i
–
k
Since i = sf(k) , this becomes:
k = s f(k) – k
CHAPTER 6
Unemployment
slide 56
The equation of motion for k
k = s f(k) – k
 The Solow model’s central equation
 Determines behavior of capital over time…
 …which, in turn, determines behavior of
all of the other endogenous variables
because they all depend on k. E.g.,
income per person: y = f(k)
consumption per person: c = (1–s) f(k)
CHAPTER 6
Unemployment
slide 57
The steady state
k = s f(k) – k
If investment is just enough to cover depreciation
[sf(k) = k ],
then capital per worker will remain constant:
k = 0.
This occurs at one value of k, denoted k*,
called the steady state capital stock.
CHAPTER 6
Unemployment
slide 58
The steady state
Investment
and
depreciation
k
sf(k)
k*
CHAPTER 6
Unemployment
Capital per
worker, k
slide 59
Moving toward the steady state
k = sf(k)  k
Investment
and
depreciation
k
sf(k)
k
investment
depreciation
k1
CHAPTER 6
Unemployment
k*
Capital per
worker, k
slide 60
Moving toward the steady state
Investment
and
depreciation
k = sf(k)  k
k
sf(k)
k
k1 k2
CHAPTER 6
Unemployment
k*
Capital per
worker, k
slide 62
Moving toward the steady state
k = sf(k)  k
Investment
and
depreciation
k
sf(k)
k
investment
depreciation
k2
CHAPTER 6
Unemployment
k*
Capital per
worker, k
slide 63
Moving toward the steady state
Investment
and
depreciation
k = sf(k)  k
k
sf(k)
k
k2 k3 k*
CHAPTER 6
Unemployment
Capital per
worker, k
slide 65
Moving toward the steady state
Investment
and
depreciation
k = sf(k)  k
k
sf(k)
Summary:
As long as k < k*,
investment will exceed
depreciation,
and k will continue to
grow toward k*.
k3 k*
CHAPTER 6
Unemployment
Capital per
worker, k
slide 66
A numerical example
Production function (aggregate):
Y  F (K , L ) 
K L  K
1/2
L
1/2
To derive the per-worker production function,
divide through by L:
Y
L

K
1/2
L
1/2
L
K 
 

 L 
1/2
Then substitute y = Y/L and k = K/L to get
y  f (k )  k
CHAPTER 6
Unemployment
1/2
slide 67
A numerical example, cont.
Assume:
 s = 0.3
  = 0.1
 initial value of k = 4.0
CHAPTER 6
Unemployment
slide 68
Approaching the steady state:
A numerical example
Year
k
y
c
i
k
1
4.000
2.000
1.400
0.600
0.400
0.200
2
4.200
2.049
1.435
0.615
0.420
0.195
3
4.395
2.096
1.467
0.629
0.440
0.189
1.499
0.642
0.458
0.184
1.657
0.710
0.560
0.150
1.894
0.812
0.732
0.080
2.096
0.898
0.896
0.002
2.100
0.900
0.900
0.000slide 69
4
4.584
2.141
…
10
5.602
2.367
…
25
7.351
2.706
…
100
8.962
2.994
…
 CHAPTER9.000
3.000
6 Unemployment
k
Exercise: Solve for the steady state
Continue to assume
s = 0.3,  = 0.1, and y = k 1/2
Use the equation of motion
k = s f(k)  k
to solve for the steady-state values of k, y, and c.
CHAPTER 6
Unemployment
slide 70
Solution to exercise:
k  0
d e f. o f s te a d y s ta te
s f (k * )   k *
0 .3 k *  0 .1 k *
3 
k *
k *

S o lv e to g e t:
F in a lly,
CHAPTER 6
e q 'n o f m o tio n w ith  k  0
u s in g a s s u m e d v a lu e s
k *
k*  9
and
y* 
k *  3
c *  (1  s ) y *  0 .7  3  2 .1
Unemployment
slide 71
An increase in the saving rate
An increase in the saving rate raises investment…
…causing k to grow toward a new steady state:
Investment
and
depreciation
k
s2 f(k)
s1 f(k)
*
CHAPTER 6
Unemployment
k1
*
k2
k
slide 72
Prediction:
 Higher s  higher k*.
 And since y = f(k) ,
higher k*  higher y* .
 Thus, the Solow model predicts that countries
with higher rates of saving and investment
will have higher levels of capital and income per
worker in the long run.
CHAPTER 6
Unemployment
slide 73
International evidence on investment
rates and income per person
Income per 100,000
person in
2000
(log scale)
10,000
1,000
100
0
5
10
15
20
25
30
35
Investment as percentage of output
(average 1960-2000)
CHAPTER 6
Unemployment
slide 74
The Golden Rule: Introduction
 Different values of s lead to different steady states.
How do we know which is the “best” steady state?
 The “best” steady state has the highest possible
consumption per person: c* = (1–s) f(k*).
 An increase in s
 leads to higher k* and y*, which raises c*
 reduces consumption’s share of income (1–s),
which lowers c*.
 So, how do we find the s and k* that maximize c*?
CHAPTER 6
Unemployment
slide 75
The Golden Rule capital stock
*
k g o ld  the Golden Rule level of capital,
the steady state value of k
that maximizes consumption.
To find it, first express c* in terms of k*:
c*
CHAPTER 6
=
y*
 i*
= f (k*)
 i*
= f (k*)
 k*
Unemployment
In the steady state:
i* = k*
because k = 0.
slide 76
The Golden Rule capital stock
steady state
output and
depreciation
k*
Then, graph
f(k*) and k*,
look for the
point where
the gap between
them is biggest.
*
*
y g o ld  f ( k g o ld )
CHAPTER 6
Unemployment
f(k*)
*
c g o ld
*
*
i g o ld   k g o ld
*
k g o ld
steady-state
capital per
worker, k*
slide 77
The Golden Rule capital stock
c* = f(k*)  k*
is biggest where the
slope of the
production function
equals
the slope of the
depreciation line:
k*
f(k*)
*
c g o ld
MPK = 
*
k g o ld
CHAPTER 6
Unemployment
steady-state
capital per
worker, k*
slide 78
The transition to the
Golden Rule steady state
 The economy does NOT have a tendency to
move toward the Golden Rule steady state.
 Achieving the Golden Rule requires that
policymakers adjust s.
 This adjustment leads to a new steady state with
higher consumption.
 But what happens to consumption
during the transition to the Golden Rule?
CHAPTER 6
Unemployment
slide 79
Starting with too much capital
If k
*
*
 k g o ld
then increasing c*
requires a fall in s.
In the transition to
the Golden Rule,
consumption is
higher at all points
in time.
y
c
i
t0
CHAPTER 6
Unemployment
time
slide 80
Starting with too little capital
If k
*
*
 k g o ld
then increasing c*
requires an
increase in s.
y
Future generations
enjoy higher
consumption,
but the current
one experiences
an initial drop
in consumption.
i
CHAPTER 6
c
Unemployment
t0
time
slide 81
Population growth
 Assume that the population (and labor force)
grow at rate n.
(n is exogenous.)
L
 n
L
 EX: Suppose L = 1,000 in year 1 and the
population is growing at 2% per year (n = 0.02).
 Then L = n L = 0.02  1,000 = 20,
so L = 1,020 in year 2.
CHAPTER 6
Unemployment
slide 82
Break-even investment
 ( + n)k = break-even investment,
the amount of investment necessary
to keep k constant.
 Break-even investment includes:
  k to replace capital as it wears out
 n k to equip new workers with capital
(Otherwise, k would fall as the existing capital stock
would be spread more thinly over a larger
population of workers.)
CHAPTER 6
Unemployment
slide 83
The equation of motion for k
 With population growth,
the equation of motion for k is
k = s f(k)  ( + n) k
actual
investment
CHAPTER 6
Unemployment
break-even
investment
slide 84
The Solow model diagram
Investment,
break-even
investment
k = s f(k)  ( +n)k
( + n ) k
sf(k)
k*
CHAPTER 6
Unemployment
Capital per
worker, k
slide 85
The impact of population growth
Investment,
break-even
investment
( +n2) k
( +n1) k
An increase in n
causes an
increase in breakeven investment,
leading to a lower
steady-state level
of k.
sf(k)
k 2*
CHAPTER 6
Unemployment
k1* Capital per
worker, k
slide 86
Prediction:
 Higher n  lower k*.
 And since y = f(k) ,
lower k*  lower y*.
 Thus, the Solow model predicts that countries
with higher population growth rates will have
lower levels of capital and income per worker in
the long run.
CHAPTER 6
Unemployment
slide 87
International evidence on population
growth and income per person
Income 100,000
per Person
in 2000
(log scale)
10,000
1,000
100
0
1
2
3
4
5
Population Growth
(percent per year; average 1960-2000)
CHAPTER 6
Unemployment
slide 88
The Golden Rule with population
growth
To find the Golden Rule capital stock,
express c* in terms of k*:
c* =
y*
= f (k* )

i*
 ( + n) k*
c* is maximized when
MPK =  + n
or equivalently,
MPK   = n
CHAPTER 6
Unemployment
In the Golden
Rule steady state,
the marginal product
of capital net of
depreciation equals
the population
growth rate.
slide 89
Alternative perspectives on
population growth
The Malthusian Model (1798)
 Predicts population growth will outstrip the Earth’s
ability to produce food, leading to the
impoverishment of humanity.
 Since Malthus, world population has increased
sixfold, yet living standards are higher than ever.
 Malthus omitted the effects of technological
progress.
CHAPTER 6
Unemployment
slide 90
Alternative perspectives on
population growth
The Kremerian Model (1993)
 Posits that population growth contributes to
economic growth.
 More people = more geniuses, scientists &
engineers, so faster technological progress.
 Evidence, from very long historical periods:
 As world pop. growth rate increased, so did rate
of growth in living standards
 Historically, regions with larger populations have
enjoyed faster growth.
CHAPTER 6
Unemployment
slide 91
Chapter Summary
1. The Solow growth model shows that, in the long
run, a country’s standard of living depends
 positively on its saving rate
 negatively on its population growth rate
2. An increase in the saving rate leads to
 higher output in the long run
 faster growth temporarily
 but not faster steady state growth.
CHAPTER 6
7
Unemployment
Economic
Growth I
slide 92
Chapter Summary
3. If the economy has more capital than the
Golden Rule level, then reducing saving will
increase consumption at all points in time,
making all generations better off.
If the economy has less capital than the Golden
Rule level, then increasing saving will increase
consumption for future generations, but reduce
consumption for the present generation.
CHAPTER 7
6
Unemployment
Economic
Growth I
slide 93