A man who has no office to go to -- I dont care who he is -- is a trial of which you can have no conception. George Bernard Shaw
2 Civilian Labor Force Participation Employment and Unemployment Rates in the United States (in percentages) 3 FIGURE 15.1 Labor Market Stocks and Flows May 1993 4 Sources of Unemployment United States Various Years 5 Steady-state level of unemployment (Martson (1976) Employment Instability and High Unemployment Rates Brookings Papers on Economic Activity 169-203) 6 Unemployed Persons by Duration of Unemployment 1948-2002 Uaverage incidence rateaverage duration rate 7 Unemployment Rates by Education Attainment 1970-2005 8 Frictional Unemployment and the Job Search model The wage offer distribution gives the frequency distribution of potential job offers. A given worker can get a job paying anywhere from 5 to 25 per hour. 9 The Determination of the Asking Wage The marginal revenue curve gives the gain from an additional search. It is downward sloping because the better the offer at hand the less there is to gain from an additional search. The marginal cost curve gives the cost of an additional search. It is upward sloping because the better the job offer at hand the greater the opportunity cost of an additional search. The asking wage equates the marginal revenue and the marginal cost of search. 10 Discount Rates Unemployment Insurance and the Asking Wage 11 The Relationship Between the Probability of Finding a New Job and UI Benefits 12 Funding the UI System Imperfect Experience Rating If the firm has very few layoffs (below threshold l0) the firm is assessed a very low tax rate to fund the UI system. If the firm has had many layoffs in the past (above some threshold l1) the firm is assessed a tax rate but this tax rate is capped at tMAX. 13 Some evidence on the impact of unemployment benefits Ehrenberg and Oaxaca AER 1976 14 Other conceptual frameworks for explaining the existence of unemployment
The intertemporal substitution hypothesis (Lucas and Rapping 1969)
The aggregate demand versus sectoral shifts hypothesis (e.g. Abraham and Katz 1986)
The efficiency wage hypothesis (Shapiro and Shtiglitz 1984) wage curve (Card 1995)
The implicit contract hypothesis (Aziaridis 1975 Rosen 1985 Beaudry and DiNardo 1991)
Below well outline the theoretical framework of the efficiency wage model and well discuss some empirical evidence on each in class
15 The Efficiency Wage Model If shirking is not a problem the market clears at wage w (where supply S equals demand D). If monitoring is expensive the threat of unemployment can keep workers in line. If unemployment is high (point F) firms can attract workers who will not shirk at a very low wage. If unemployment is low (point G) firms must pay a very high wage to ensure that workers do not shirk. The efficiency wage wNS is given by the intersection of the no-shirking supply curve (NS) and the demand curve. 16 The Impact of an Economic Contraction on the Efficiency Wage S A fall in output demand shifts the labor demand curve from D0 to D1. The competitive wage falls from to . If firms pay an efficiency wage the contraction in demand also reduces the efficiency wage but by a smaller amount. 17 The Wage Curve The Relation Between Wage Levels and Unemployment Across Regions Geographic regions (such as B) that offer higher wage rates also tend to have lower unemployment rates. Check Card- the wage curve-JLE 18 The Phillips Curve
A downward-sloping Phillips curve can only exist in the short run.
In the long run there is no trade-off between inflation and unemployment.
19 The Phillips Curve The Phillips curve describes the negative correlation between the inflation rate and the unemployment rate. The curve implies that an economy faces a trade-off between inflation and unemployment. 20 Inflation and Unemployment in the United States 1961-2005 21 The Short-Run and Long-Run Phillips Curves 22 North American-European unemployment compared
Nickell (1997) Unemployment and Labor Market Rigidities Europe versus North America Journal of Economic Perspectives 11 (3) 55-74 is a great reference. Well go through some of the tables and discussions in class.
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