Unemployment,%20job%20creation%20and%20job%20destruction

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Unemployment, job creation and job destruction

• Chapter 3

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Chapter topics

• Measuring unemployment
• Labor market dynamics
• The natural rate of unemployment
• US and European experience
• Unemployment over the business cycle
• Applying supply and demand to the labor market

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Measuring unemployment

• Labor force is the number of people aged 16 and
  over who are either working or unemployed
• Unemployed those looking for employment during
  the week but who did not work
• Labor force participation rate ratio of labor
  force to population
• Natural rate of unemployment is the rate of
  unemployment when the economy is in equilibrium

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Unemployment in the Long Run

• 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.

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Unemployment in the U.S.
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Dynamics of the labor market

• Economy is characterized by large flows in and
  out of employment. Flows are about equal at three
  million or about 3 every month.
• Population over 16
• In the labor force, employed or unemployed
• Out of the labor force

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The natural rate

• L labor force
• U unemployed
• l job losing rate losses/L
• f job-finding rate finds/U
• u unemployment rate U/L
• In equilibrium, lossesfinds or luf
• That is ul/f, the unemployment rate is the ratio
  of the loss rate to the find rate.

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Flows into unemployment

• Job destruction
• Job loss without distraction
• Personal transitions

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Flows out of unemployment

• Two thirds success in finding a job
• One third leave the labor force
• Finding rate is a crucial factor and is affected
  by
• Efficiency wages
• Union wage premiums
• Minimum wages
• Unemployment insurance

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Minimum Wage

• The minimum wage is well below the eqm wage for
  most workers, so it cannot explain the majority
  of natural rate unemployment.
• However, the minimum wage may exceed the eqm
  wage of unskilled workers, especially teenagers.
  
• If so, then we would expect that increases in the
  minimum wage would increase unemployment among
  these groups.

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Labor Unions

• Unions exercise monopoly power to secure higher
  wages for their members.
• When the union wage exceeds the eqm wage,
  unemployment results.
• Employed union workers are insiders whose
  interest is to keep wages high.
• Unemployed non-union workers are outsiders and
  would prefer wages to be lower (so that labor
  demand would be high enough for them to get jobs).

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Efficiency Wages

• Theories in which high wages increase worker
  productivity
• attract higher quality job applicants
• increase worker effort and reduce shirking
• reduce turnover, which is costly
• The increased productivity justifies the cost of
  paying above-equilibrium wages.
• The result unemployment

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Example

• One percent of the employed lose jobs every month
  while 20 of the unemployed find jobs.
• Then, the unemployment rate is
• U/L .01/(.01.2) .0476.
• Or about 5
• Why is the equilibrium unemployment rate
  positive? Why is f not equal to 1?

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Frictional Unemployment

• Workers are not interchangeable parts. Skills and
  preferences vary as do job requirements. Takes
  time to match the individual and the job.
• Changes in the composition of demand (sectoral
  shift), firm failure, poor job performance,
  desire for career change all contribute to
  frictional unemployment.

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Policy Issues

• Reduce duration of job search through
• provision of information to workers and firms
• job training programs
• Unemployment insurance helps improve the working
  of the labor market by facilitating better job
  search but it does increase the duration of job.

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Structural Unemployment

• Structural unemployment results from wage
  rigidity and job rationing.
• Sources of wage rigidity
• Minimum wage laws
• Unions and collective bargaining
• Efficiency wages
• Market does not clear because wage is above the
  equilibrium level

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Okuns Law

• An empirical relationship between departures of
  GDP from its potential and the unemployment from
  its natural rate.

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S-D and Unemployment
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Fig. 3.4
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Fig. 3.5
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Fig. 3.6