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JOB LOSS, JOB FINDING, AND THE NATURAL RATE OF UNEMPLOYMENT (7-1)
- L = labor force
- Every worker is either employed or unemployed
- Labor force: Sum of the employed and unemployed
- E = number of employed workers
- U = number of unemployed workers
- Rate of unemployment: U/L
To see what factors determine the unemployment rate...
Steady-state Condition
- Model of the n
atural rate of unemployment has an important implication for public
policy
- Policy to ➡ lower natural rate of unemployment → either ➡ reduce the rate of
job separation or increase the rate of job finding
- Any policy that affects the rate of job separation or job finding also changes the
natural rate of unemployment
- Policy implication
- A policy will reduce the natural rate of unemployment only if it lowers s or
increases f
1. A way to raise the income of the working 1. Causes unemployment for some workers
poor 2. Minimum wage is poorly targeted
- Only a meager standard of living - Targets teenagers rather than heads
- Raises others out of poverty of households
- Earned income tax credit: Amount that poor working families are allowed to subtract
from the taxes they owe
- Many believe that this is a better way to increase the income of the working
poor
- Pro: Does not reduce the quantity of labor that firms demand
- Con: Reduces the government’s tax revenue
- Note: C
urrent Population Survey can be used to see who earns the minimum wage
- More likely women than men
- Tend to be young, less educated, working part time, etc.
2. Unions and Collective Bargaining
- Monopoly power of unions
- Exercise monopoly power to secure higher wages for their
members
- Bargaining power of labor on issues
- Wages of unionized workers are determined not by the equilibrium of
supply and demand, but by bargaining between union leaders and firm
management
- When the union wage exceeds the equilibrium wage, unemployment
results
- Final agreement usually raises the wage above the equilibrium level =
allows the firm to decide how many workers to employ = ➡ number of
workers hired = ➡ rate of job finding = structural unemployment
- Most firms dislike unions
- Conflict between different groups of workers:
- Insiders: workers employed in the firm who want to keep their
wages high
- Outsiders: unemployed who bear part of the cost of higher
wages because at a lower wage they might be hired
- Unemployed non-union workers who prefer equilibrium
wages so there would be enough jobs for them
- Sweden: Wage bargaining takes place at a national level
- Centralization of bargaining and the role of government in the
process give more influence to outsiders = no high
unemployment rate since wage is closer to equilibrium
3. Efficiency Wages
- High wages make workers more productive
- Increase worker productivity
- Even though a wage reduction would lower a firm’s wage bill, it will also
lower worker productivity and the firm’s profits
a. Wages influence nutrition in poorer countries
- Better-paid workers can afford a more nutritious diet = healthier
= productive
- Improving health of workers
b. High wages reduce labor turnover in developed countries
- wage = incentive to stay with the firm = ➡ time and money
spent hiring and training new workers
- Turnover is costly to firms
c. Average quality of a firm’s workforce depends on the wage it pays
its employees
- Risk of worker taking another job and leaving the firm with
inferior employees
- Adverse selection: Tendency of people with more information
(workers who know their outside opportunities) to self-select in a
way that disadvantages people with less information (firm)
- Pay wage above equilibrium = ➡ adverse selection = quality
and productivity of workers
- Attracting higher quality job applicants
d. High wage improves worker effort
- Moral hazard: Tendency of people to behave inappropriately
when their behavior is imperfectly monitored
- Reduced by paying wage = cost of getting fired =
induces employees not to shirk = productivity
- Increases effort and reduces “shirking”
- Conclusion: Firm operates more efficiently if it pays its workers a high
wage (profitable to keep wage above equilibrium) = unemployment
LABOR-MARKET EXPERIENCE: THE UNITED STATES (7-4)
- Steady-state unemployment rate: D epends on the rates of job separation and j ob
finding
- 2 reasons why job finding is not instantaneous
- Process of job search (leads to f rictional unemployment)
- Wage rigidity (leads to s tructural unemployment)
- Arises from m inimum-wage laws, unionization, and efficiency
wages
I. THE DURATION OF UNEMPLOYMENT
- Most unemployment can be
a. Short-term unemployment = frictional
b. Long-term unemployment - structural
- Goal to ➡ natural rate of unemployment = make policies that
aim at the long-term unemployed
II. VARIATION IN THE UNEMPLOYMENT RATE ACROSS DEMOGRAPHIC GROUPS
- Rate of unemployment varies across different groups
- Examples of unemployment per group:
- Younger workers > older workers because they are uncertain about their
plans
- Blacks > whites
- 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
III. TRANSITIONS INTO AND OUT OF THE LABOR FORCE
- Discouraged workers: I ndividuals who want jobs, but gave up looking after
unsuccessful searches
-Cause?
- Long-standing policy: Generous benefits for unemployed workers
- Recent shock: Technologically driven fall in the demand for unskilled
workers relative to skilled workers
II. UNEMPLOYMENT VARIATION WITHIN EUROPE
- Europe: Not a single labor market, but a collection of national labor markets
- Unemployment rates vary from country to country
- Variation is attributable to the long-term unemployed
- Higher in nations with more generous unemployment insurance as
measured by the r eplacement rate (% of previous wages that is
replaced when a worker loses a job) + longer period of benefits
- Spending on “ active” labor-market policies decrease unemployment
- Job training, assistance with job search, subsidized employment
- Unions vary
- Why unemployment rose in Europe but not in the US
a. Shock
- Technological progress has shifted labor demand from unskilled
to skilled workers in the recent decades
b. Effect in United States
- An increase in the “skill premium” - the wage gap between skilled
and unskilled workers
c. Effect in Europe
- Higher unemployment, due to generous government benefits for
unemployed workers and strong union presence
III. RISE OF EUROPEAN LEISURE
CONCLUSION (7-6)
- Unemployment represents wasted resources (potential to contribute to national
income)
- Zero unemployment is not a plausible goal for free-market economies