Lecture 6

Unemployment

Basic fact: varies a lot

More recent information

http://www.google.com/publicdata?ds=usunemployment&met=unemployment_rate&tdim=true&dl=en&hl=en&q=unemployment+rate

Current unemployment rates

08/09 06/10 07/10 08/10

Total, 16 years and over 9.7 9.5 9.5 9.6

Adult men (20 years and over) 10.2 9.9 9.7 9.8

Adult women (20 years and over) 7.7 7.8 7.9 8

Teenagers (16 to 19 years) 25.7 25.7 26.1 26.3

White 8.9 8.6 8.6 8.7

Black or African American 15.2 15.4 15.6 16.3

Asian (not seasonally adjusted) 7.5 7.7 8.2 7.2

Hispanic or Latino ethnicity 13 12.4 12.1 12

 

Total, 25 years and over 8.4 8.2 8.1 8.3

Less than a high school diploma 15.5 14.1 13.8 14

High school graduates, no college 9.8 10.8 10.1 10.3

Some college or associate degree 8.2 8.2 8.3 8.7

Bachelor's degree and higher 4.7 4.4 4.5 4.6

Varies a lot across difference groups

Age groups Races Education Gender Cities Industries and occupations

Questions to be answered

Why unemployment Why fluctuations over time Why variations across different

groups

Two types of unemployment

The frictional unemployment and the structural unemployment

The frictional unemployment: Also equilibrium unemployment. It occurs when the matches between

employees and employers are not very good, or no longer very good because of shocks.

Two types of unemployment

The structural unemployment:

Occurs when firms do not lower their wages to hire more workers, when unemployment workers are willing to work for less.

Nobel Laureates in 2010

Peter Diamond Dale Mortensen Christopher Pissarides MIT Northwestern London School of Economics

Frictional unemployment

L: the labor force E: the number of employed workers U: the number of unemployed.

L = E + U

Frictional unemployment

L is fixed s is rate of job separation f is rate of finding job In equilibrium,

People who find jobs = people who are separated from jobs

fU = sE = s(L-U)

Frictional unemployment

Rearranging this equation, we have:

u is the unemployment rate

sfsfs

LUu

/11

Discussions:

When f and s changes:

Higher f lower unemployment rate Higher s higher unemployment rate

01

0

22

2

sff

sfs

sfsu

sfs

fu

Frictional unemployment

It takes time to match workers and jobs.

Example 1: sectoral shift: We have negative shocks to the auto

industry and positive shocks to the computer industry.

The auto industry needs less workers while the computer industry needs more workers.

Frictional unemployment

Example 1: sectoral shift It takes more time for auto workers to

move to computer industry because they may not have adequate experience.

Overall unemployment would rise.

Frictional unemployment: Example 2– market size

Market size

The Matching Model

vacancies

applicants

A thicker market (more applicants

and more vacancies).

Average distance is closer.

Better match.

Better wage and lower

unemployment rate.

Factors that may affect frictional unemployment

Internet sites such as monster.com etc

The unemployment insurance

George Costanza as the Latex Salesman

http://www.youtube.com/watch?v=_T35QhLx_KI

The Obama stimulus package

The Obama stimulus package extends the length of having unemployment benefit – from five years to 2 to 3 years.

Earned income tax credit – the Obama plan pays each worker with income less than $70,000 an additional credit of $400 if one works.

The Obama stimulus package Several republican governors

rejected the stimulus money.

Rick Perry: rejects the $555 million of Texas’ stimulus funds directed at unemployment insurance on March 2009.

Mark Sanford from South Carolina also did that but later (June 2010) accepted the stimulus money.

Frictional unemployment

The Illinois experiment in 1985: unemployed workers are randomly selected into two groups. The first group would get $500 bonus if

they find jobs within 11 weeks; The second group if not offered this

option.

The first group on average gets jobs in 17 weeks, while the 2nd group gets jobs in 18.3 weeks.

Discussions

Older workers vs young workers?

Older workers has a lower separation rate lower unemployment.

Lower education – easy to leave jobs and the cost of the firms to fire them is also low higher unemployment.

Structural unemployment

Structural unemployment

Labor demand: from lecture 3

MPL = W

Rewrite this equation:

Higher the wage, lower the demand for labor.

WLK 1

/1/1 1 KWL

Labor demand

Labor demand

Wage

Labor

Labor supply

If people’s willingness to work does not depend on wages

Labor supply is vertical.

If people’s willingness to work depends on wages (higher wage willing to work more)

Labor supply is positively sloped.

Labor supply

Wage

Labor

If labor supply does not depend on wage

If labor supply depends on wage

Labor supply

A very important public policy question.

A key difference between republicans and democrats.

The tax debate (09/10)

Obama wanted to abolish the Bush tax cut for those who earn 250,000 or more (currently at either 33% or 35%). Tax rates for those would be raised up to 39%

Republicans wanted to keep it.

Compromise: keep them for two years. Obama was heavily criticized by democrates on this.

Laffer curve

A lower tax rate a higher after-tax wage people are willing to work more a higher level of output a higher tax revenue for the government

This argument critically depends on labor supply function.

Laffer curve

Republicans think current tax rate is at this region

Tax Revenue

Tax Rate0 100t*

Laffer curve – is it true?

For men, the labor supply DOES NOT depend wages – men work regardless.

For women, no concensus.

Equilibrium: no structural unemployment

Labor demand

Wage

Labor

equilibrium wage w*

Equilibrium workers L*

Structural unemployment: wage > w*

Labor demand

Wage

Labor

equilibrium wage w*

Equilibrium workers L*

wage

Labor supply > labor demand

Structural unemployment

Why wage > w*?

The minimum wage Unions and collective bargain Efficiency wage

Minimum wage

Federal minimum wage:

7/24/2008: $6.55 7/24/2009: $7.25

At the heart of debate an increase of minimum wage would lead to a higher unemployment.

Minimum wage

Card and Krueger (1994): New Jersey raised its minimum wage in 1992, from $4.25 to $5.05

Wage and employment data from 400 fast food restaurants in both Pennsylvania and New Jersey before and after the minimum wage increase.

Minimum wage

They find: Wages do increase more in New Jersey

Restaurants do not hire fewer workers in New Jersey. In fact, New Jersey actually added 2.5 workers more per restaurant.

Minimum wage

Two possible reasons:

Restaurants often operate with several vacancies – they could not fill them before – now they can.

The prices of burgers in New Jersey went up.

Minimum wage

Very influential study it directly affects public policies.

Clinton, in his State of Union Address in 1/25/1995, said:

“I believe the weight of the evidence is that a modest increase does not cost jobs, and may even lure people back into the labor market.”

Unions and collective bargaining

Unions typically bargain for wages and firms decide how many workers to hire.

Union workers make more but firms hire less number of workers.

Example: UAW

During the bailout discussion of the auto industry, one prominent issue is the pay of the United Auto Workers (UAW)

GM official: Wage: $39.68, including base pay, cost-of-ling

adjustment, night-shift premiums, overtime, holiday and vacation pay.

Benefits: $33.58, including health-care, pension and other benefits.

Example: UAW

UAW:

$27.81 per hour for a typical UAW-represented assembler at GM.

GM official number includes the benefit costs of retirees who are no longer on the payroll.

Unemployment rate

Efficiency wages

Example: Henry Ford’s $5 workday

In 1914, the prevailing wage was between $2 and $3 per day.

Henry Ford raised salary at $5 per day resulted in a much lower turn over rate, and higher effort.

Efficiency wages

Solow (1979) introduces the idea. Shapiro and Stiglitz’s shirking model

George Akerlof’s fair wage hypothesis

Firms pay higher salary in order to make their workers to have better nutrition a higher level of effort. (Could be true in developing countries).

Summary

Unemployment includes frictional unemployment and structural unemployment.

Frictional unemployment arises because matches between workers and employers take time.

Structural unemployment arises because wages are not flexible enough (rigid), i.e., wages are too high

supply of workers > demand of workers.