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The unemployment rate over the longer run

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Title: Economics 154b February 24 and March 1, 1999 Wages, Prices and Unemployment Lectures 7-B and 8-A Author: bill n Created Date: 3/1/2003 2:58:36 PM – PowerPoint PPT presentation

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Title: The unemployment rate over the longer run


1
The unemployment rate over the longer run
Source Bureau of Labor Statistics (www.bls.gov)
and NBER.
2
Alternative Measures of Unemployment
Source Bureau of Labor Statistics (www.bls.gov)
3
Mean duration of unemployment
Source Data from Bureau of Labor Statistics
graph from FRED (St Louis Fed)
4
The Current Population Survey (CPS)
  • Source of data for monthly unemployment,
    employment, labor force data.
  • Overview of the survey
  • 50,000 households
  • scientifically selected to represent the
    civilian non-institutional population
  • provides estimates of employment, unemployment,
    earnings, hours of work, and other indicators
  • Definitions
  • Employed worked for pay or absent from job for
    cause
  • Unemployed not working plus actively looking
    for work
  • Labor force E U
  • For further information, see http//www.bls.census
    .gov/cps/cpsbasic.htm

5
How do labor markets respond to shift in
demand? This is on the fault line of modern macro
6
Original equilibrium
W/P
E1 E1
(W/P)1
MPL
Labor supply, employment
6
7
Labor demand shift and market clearing
W/P
E1 E1
(W/P)1
E2
MPL
Labor supply, employment
7
8
Because wages sticky, have disequilibrium
W/P
E1 E1
(W/P)1
E2
E2
MPL
Labor supply, employment
8
9
Because wages sticky, have disequilibrium
W/P
- The line E2E1 is unemployment. - Upward shift
in L demand leads to vacancies.
E1
(W/P)1
E2
MPL
Labor supply, employment
9
10
Theories of Unemployment
  • Market-clearing (Walrasian)
  • Wages move to clear supply and demand
  • Workers would be on supply curves unemployment
    would be voluntary
  • Non-market-clearing (non-Walrasian) Wages are
    not determined in auction markets
  • In one version, there are flexible-wage,
    decentralized markets
  • In another version, real or nominal wages are
    sticky
  • - If firms determine employment (are on their
    demand schedules), then workers may be off curves
    and jobs rationed.

11
How do wages respond to a glut of workers?
Recall a glut of tankers. Price of Dryships
shipping company
12
Classical-Type Theories of Unemployment
  • New classical models Unemployment from
    confusion about relative prices and wages
  • Search models Unemployment arises from search
    and labor market frictions (Mortensen-Pissarides
    model is standard)
  • Firms and workers are like molecules, bouncing
    around looking for jobs or workers.
  • This leads to equilibrium frictional
    unemployment depending on various parameters.
  • Example Oil price shock forces workers to move
    from energy-intensive to other industries.
  • However, does not generally give sticky wages or
    correct cyclical predictions.
  • Some (not all) classical models
  • predict that vacancies and
  • unemployment rise together.

13
Keynesian Theories of Unemployment
  • Involuntary and cyclical unemployment arise
    because of wage stickiness
  • Wage stickiness means that wages do not fully
    react to shock to supply and demand.
  • Reasons for wage stickiness
  • Government policies (minimum wages)
  • Private contracts (labor union contracts)
  • Behavioral factors (morale, custom, efficiency
    wages)
  • Predicts that unemployment and vacancies will
    move in opposite direction.

14
How much are the unemployed searching
Alan B. Krueger and Andreas Mueller, The Lot of
the Unemployed A Time Use Perspective. Min
are minutes per day.
15
Some key empirical regularities of the labor
market
  • Okuns Law unemployment moves inversely with Y
  • Beveridge Curve Unemployment moves inversely
    with vacancy rate
  • Phillips Curve Inflation moves inversely with
    unemployment (in short run)

16
Okuns Law over time
17
Okuns Law from Keynesian Approach Change in
(unemployment rate NAIRU) a (real GDP
growth potential real GDP growth) or
approximately ? U a x (real GDP growth),
where a -0.3 to -0.5
18
Data suggests most movements are as predicted by
sticky-wage model. But periods of turmoil
(1980s) have shift in curve. Source FRBSF
Economic Letter, 2006-08 April 21, 2006, Job
Matching Evidence from the Beveridge Curve
19
Source Robert Shimer, AER, Sept 2007
20
Final Thoughts on Unemployment
  • High unemployment is one of the most traumatic of
    economic outcomes.
  • Modern macro has not yet succeeded in developing
    a complete microeconomic theory to explain the
    phenomena of sticky wages and unemployment.
  • Stay tuned!
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