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The unemployment rate over the longer run

3

4

5

6

7

8

9

10

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60 65 70 75 80 85 90 95 00 05 10

Unemployment rate

Shaded regions are NBER recessions

Source: Bureau of Labor Statistics (www.bls.gov) and NBER.

2

Alternative Measures of Unemployment

Source: Bureau of Labor Statistics (www.bls.gov)

Mean duration of unemployment

3Source: 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

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How do labor markets respond to shift in demand?

This is on the fault line of modern macro

66

Labor supply, employment

W/P

MPL

Original equilibrium

(W/P)1E1 = E*1

77

Labor supply, employment

W/P

MPL

Labor demand shift and market clearing

(W/P)1E1 = E*1

E*2

88

Labor supply, employment

W/P

MPL

Because wages sticky, have disequilibrium

(W/P)1E1 = E*1

E2

E*2

99

Labor supply, employment

W/P

MPL

Because wages sticky, have disequilibrium

(W/P)1E1

E2

- The line E2E1 is unemployment.- Upward shift in L demand leads to vacancies.

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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.

How do wages respond to a glut of workers?

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0

1

2

3

4

5

6

90 92 94 96 98 00 02 04 06 08

Annual rate of change of construction wages (%)

Recall a glut of tankers. Price of “Dryships” shipping company:

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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.

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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 :1. Government policies (minimum wages)2. Private contracts (labor union contracts)3. Behavioral factors (morale, custom, efficiency wages)

Predicts that unemployment and vacancies will move in opposite direction.

How much are the unemployed searching

14Alan B. Krueger and Andreas Mueller, “The Lot of the Unemployed: A Time Use Perspective”. “Min” are minutes per day.

Some key empirical regularities of the labor market

Okun’s Law: unemployment moves inversely with Y

Beveridge Curve: Unemployment moves inversely with vacancy rate

Phillips Curve: Inflation moves inversely with unemployment (in short run)

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Okun’s Law over time

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-.08

-.06

-.04

-.02

.00

.02

.04

.06

.08

3

4

5

6

7

8

9

10

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80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

Potential-Actual/ Potential(left scale)

Unemployment rate(right scale)

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Okun’s Law from Keynesian Approach:Change in (unemployment rate – NAIRU)

= α (real GDP growth – potential real GDP growth)or approximately:

Δ U = α x (real GDP growth), where α = -0.3 to -0.5

-3

-2

-1

0

1

2

3

4

-4 -2 0 2 4 6 8

Growth rate real GDP

Chan

ge in

unem

plo

ymen

t ra

te

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

19Source: Robert Shimer, AER, Sept 2007

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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