if labor markets tend to equilibrium, why is unemployment always present?

If labor markets tend to equilibrium, why is unemployment always present?

Some unemployment is compatible with equilibrium

Equilibrium level of unemployment

Natural rate of unemployment

Full employment level of unemployment

Labor Market as a Game of Musical Chairs

At equilibrium unemployment

job vacancies = job seekers

=

Frictional Unemployment

Even when seekers equal vacancies, it takes time for the market to clear

“Between Jobs”

Periods of low unemployment

Magnitude of flows in May 1993

• In one month– 5 million leave employment– 5 million enter employment– ~7.8% (10mil/128.1mil) of labor force change

employment status every month

– 3.5 million leave unemployment– 3.5 million enter unemployment– ~5.5% of labor force change unemployment status

every month

Expected unemployment duration

• Suppose probability p of leaving unemployment in one month

• Random draw on job– Probability you get a job in any month = p– you stay unemployed = (1-p)– Expected duration = (1/p)

FIGURE 15.1 Labor Market Stocks and Flows: May 1993

p = (2/8.9) = .224p = (2/8.9) = .224

Duration = 1/p = 4.5 mo.Duration = 1/p = 4.5 mo.

p = (2/8.9) = .224p = (2/8.9) = .224

Duration = 1/p = 4.5 mo.Duration = 1/p = 4.5 mo.

p = ([2=1.5]/8.9) = .393p = ([2=1.5]/8.9) = .393

Duration = 1/p = 2.5 mo.Duration = 1/p = 2.5 mo.

p = ([2=1.5]/8.9) = .393p = ([2=1.5]/8.9) = .393

Duration = 1/p = 2.5 mo.Duration = 1/p = 2.5 mo.

Periods of low unemployment

Average = 3 months (14 weeks); Average = 3 months (14 weeks);

Peak = 4.7 months (21 weeks)Peak = 4.7 months (21 weeks)

TABLE 15.2 Sources of Unemployment, United States, Various Years

Iowa Unemployment Rate: 1978-2003

0

2

4

6

8

10

12

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Year

%

Seasonally Adjusted

Not Seasonally Adjusted

Seasonal unemployment: unemployment that is fully anticipated because of seasonal fluctuations in demand

Unemployment that is not a problem

Frictional

Seasonal

Voluntary (quits, new entrants, reentrants)

Elements of equilibrium unemployment

Problem unemployment

Cyclical Unemployment—unemployment associated with national business cycles (recession)

Structural unemployment: localized shortfall of demand (geographic (Appalachia); industry (textiles); skill (dropouts, young)

Avg UR=4.5%

Avg UR=9%

Avg UR=7.1% Avg UR=7.2%

Unemployment Rate for Population aged 25 and over, by Education Level: 2000, 2002

Years of Schooling UR: 2000 UR: 2001< 12 6.4 7.312 3.5 4.2

13-15 2.7 3.316+ 1.7 2.3

Average UR for ages 25+ 3 3.7UR for ages 16+ 4 4.8

Source: Current Population Survey

Appendix 2: Unemployment rates by education level, various countries, 2003

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5

Education level

Un

emp

loym

ent

rate

Australia

Austria

Belgium

Canada

France

Germany

Korea

NewZealnd

Spain

Sweden

UK

US

TABLE 15.3 Unemployment Rates in 2000 by Demographic Group

Seasonally Adjusted Unemployment Rates, by occupation

Jan-83 Jul-92 Jul-'02Manager/Professional 3.7 3.2 3.1Technical/Sales/Clerical 6.9 6.1 5.3Crafts 11.3 8.5 6.4Laborer/Operative 18.5 11.3 8.6

Manufacturing 13 8.1 6.3Service 9 7.1 5.9Government 5.5 3.4 2.5

Overall 10.4 7.7 5.9

Unemployment Rate for Population aged 25+, by Education

TABLE 2.4 Unemployment and Long-Term Unemployment, Selected European and North American Countries, 2003