Unemployment

Categories of the population• employed

working at a paid job

• unemployed not employed but looking for a job

• labor force the amount of labor available for producing goods and services; all employed plus unemployed persons

• not in the labor forcenot employed, not looking for work

Categories of the population

• How do we know? 2 sources:

• 1)Every month BLS does a detailed survey asking a sample of people about what they have been doing with regard to work over the previous month. From their answers, they are categorized as E, U or Not in the Labor Force, and this is used to estimate how many are in these categories in the population as a whole.

• 2) The BLS obtains a second measure of employment by surveying businesses, called the Establishment Survey, asking how many workers are on their payrolls.

Categories of the population

• Neither measure is perfect, and they occasionally diverge due to:

– treatment of self-employed persons

– new firms not counted in establishment survey

– technical issues involving population inferences from sample data

Important labor force concepts

• unemployment rate percentage of the labor force that is unemployed

• labor force participation rate the fraction of the adult population that “participates” in the labor force, i.e. is working or looking for work

• employment-to-population ratio The fraction of the adult population that is employed

NOW YOU TRY

Computing labor statistics

6

U.S. adult population by group, Dec 2014

Number employed = 147.4 million

Number unemployed = 8.7 million

Adult population = 243.0 million

Use the above data to calculate

the labor force

the number of people not in the labor force

the labor force participation rate

the unemployment rate

the employment-to-population ratio

Different Kinds of Unemployment

• The natural rate of unemployment

– Rate that would prevail if the economy were in neither a boom nor a bust

• Cyclical unemployment

– The difference between the actual rate and the natural rate

– Associated with short-run fluctuations in output

Anatomy of Unemployment

• Large variations across groups (age, race, education, experience)

• High turnover

• Most people who are unemployed are unemployed for a short time.

• Much of total unemployment consists of people who will be unemployed for a long time.

Average Monthly Flows between Employment,

Unemployment, and Nonparticipation in the

United States, 1994 to 2011 (millions)(from Blanchard and Johnson 2013)

Movements in UnemploymentMovements in the U.S. Unemployment Rate, 1948–2010

Movements in UnemploymentThe Unemployment Rate and the Proportion of Unemployed Finding Jobs, 1994–2010

Movements in UnemploymentThe Unemployment Rate and the Monthly Separation Rate from Employment, 1994–2010

Natural rate of unemployment

• Natural rate of unemployment: The average rate of unemployment around which the economy fluctuates.

• In a recession, the actual unemployment rate rises above the natural rate.

• In a boom, the actual unemployment rate falls below the natural rate.

0

2

4

6

8

10

12

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Pe

rce

nt

of

lab

or

forc

e

Actual and natural rates of unemployment, U.S., 1960–2012

Unemployment rate

Natural rate of

unemployment

A first model of the natural rate

Notation:

L = # of workers in labor force

E = # of employed workers

U = # of unemployed

U/L = unemployment rate

Assumptions:1. L is exogenously fixed.

2. During any given month,

s = rate of job separations, fraction of employed workers that become separated from their jobs

f = rate of job finding, fraction of unemployed workers that find jobs

s and f are exogenous

The transitions between employment and unemployment

Employed Unemployed

s E

f U

The steady state condition

• Definition: the labor market is in steady state, or long-run equilibrium, if the unemployment rate is constant.

• The steady-state condition is:s E = f U

# of employed

people who

lose or leave

their jobs

# of unemployed

people who find

jobs

Finding the “equilibrium” U rate

f U = sE

= s(L –U )

= sL – sU

Solve for U/L:

(f + s)U = sL

so,

U s

L s f

Example:

• Each month,

– 1% of employed workers lose their jobs (s = 0.01)

– 19% of unemployed workers find jobs (f = 0.19)

• Find the natural rate of unemployment:

0 010 05, or 5%

0 01 0 19

U s

L s f

..

. .

Policy implication

• A policy will reduce the natural rate of unemployment only if it lowers s or increases f.

Why is there unemployment?

• If job finding were instantaneous (f = 1), then all spells of unemployment would be brief, and the natural rate would be near zero.

• There are two reasons why f < 1:

1. job search

2. wage rigidity

Job search & frictional unemployment

• frictional unemployment: caused by the time it takes workers to search for a job

• occurs even when wages are flexible and there are enough jobs to go around

• occurs because

– workers have different abilities, preferences

– jobs have different skill requirements

– geographic mobility of workers not instantaneous

– flow of information about vacancies and job candidates is imperfect

Sectoral shifts• def: Changes in the composition of demand

among industries or regions.

• example: Technological change more jobs repairing computers, fewer jobs repairing typewriters

• example: A new international trade agreement labor demand increases in export sectors, decreases in import-competing sectors

• These scenarios result in frictional unemployment

CASE STUDY:

Structural change over the long run

4.2%

28.0%9.9%

57.9%

Agriculture

Manufacturing

Other industry

Services

1960

1.0%

12.8%

7.2%

79.0%

2009

More examples of sectoral shifts• Industrial revolution (1800s):

agriculture declines, manufacturing soars

• Energy crisis (1970s): demand shifts from larger cars to smaller ones

• Health care spending as % of GDP:1960: 5.2 2000: 13.81980: 9.1 2010: 17.9

In our dynamic economy,

smaller sectoral shifts occur frequently,

contributing to frictional unemployment.

Public policy and job search

Govt programs affecting unemployment include:

– Govt employment agencies

disseminate info about job openings to better

match workers & jobs.

– Public job training programs

help workers displaced from declining industries

get skills needed for jobs in growing industries.

Unemployment insurance (UI)• UI pays part of a worker’s former wages for a limited

time after the worker loses his/her job.

• UI increases search unemployment, because it reduces

– the opportunity cost of being unemployed

– the urgency of finding work

– f

• Studies: The longer a worker is eligible for UI, the longer the average spell of unemployment.

Benefits of UI

• By allowing workers more time to search,

UI may lead to better matches between jobs and workers,

which would lead to greater productivity and higher incomes.

Why is there unemployment?

• Two reasons why f < 1:

1. job search

2. wage rigidity

U s

L s f

DONE

Next

The natural rate of unemployment:

Unemployment from real wage rigidity

Labor

Real

wage

Supply

Demand

Unemployment

Rigid

real

wage

Amount of labor

willing to work

Amount of

labor hired

If real wage

is stuck

above its

eq’m level,

there aren’t

enough

jobs to go

around.

Unemployment from real wage rigidity

Then, firms must ration the

scarce jobs among workers.

Structural unemployment:

The unemployment resulting

from real wage rigidity and

job rationing.

If real wage

is stuck

above its

eq’m level,

there aren’t

enough

jobs to go

around.

Reasons for wage rigidity

1. Minimum wage laws

2. Labor unions

3. Efficiency wages

1. The minimum wage

• The min. wage may exceed the eq’m wage of unskilled workers, especially teenagers.

• Studies: a 10% increase in min. wage reduces teen employment by 1–3%

• But, the min. wage cannot explain the majority of the natural rate of unemployment, as most workers’ wages are well above the min. wage.

2. Labor unions

• Unions exercise monopoly power to secure higher wages for their members.

• When the union wage exceeds the eq’m wage, unemployment results.

• Insiders: Employed union workers whose interest is to keep wages high.

• Outsiders: Unemployed non-union workers who prefer eq’m wages, so there would be enough jobs for them.

104,737Private sector (total)

20,450Government (total)

15,835Health care

4,020Education

12,171Professional services

6,111Finance, insurance

4,355Transportation

14,582Retail trade

13,599Manufacturing

780Mining

122.6

121.1

114.9

112.6

99.1

90.2

123.5

102.4

107.2

96.4

151.7

6.9

37.0

7.5

13.0

2.1

1.1

20.4

4.9

10.5

7.2

14.06,244Construction

wage ratioU % of total# employed

(1000s)industry

wage ratio = 100 (union wage) / (nonunion wage)

Union membership and wage ratios by industry, 2011

3. Efficiency wages

• Theories in which higher wages increase worker productivity by: – attracting higher quality job applicants

– increasing worker effort, reducing “shirking”

– reducing turnover, which is costly to firms

– improving health of workers (in developing countries)

• Firms willingly pay above-equilibrium wages to raise productivity.

• Result: structural unemployment.

Focus: Henry Ford and Efficiency Wages

Table 1 Annual Turnover and Layoff Rates (%) at Ford, 1913–1915

The Median Duration of UnemploymentW

eeks

0

5

10

15

20

250

1/1

96

5

01

/19

68

01

/19

71

01

/19

74

01

/19

77

01

/19

80

01

/19

83

01

/19

86

01

/19

89

01

/19

92

01

/19

95

01

/19

98

01

/20

01

01

/20

04

01

/20

07

The duration of unemployment

typically rises in recessions—but its

rise in 2008–2010 is unprecedented.

Unemployment in Europe, 1960–2011P

erc

ent

of

labor

forc

e

0

2

4

6

8

10

12

1970 1975 1980 1985 1990 1995 2000 2005 2010

France

Germany

Italy

United Kingdom

Why unemployment rose in Europe but not the U.S.

Shock Technological progress has shifted labor demand from unskilled to skilled workers in recent decades.

Effect in United StatesAn increase in the “skill premium” – the wage gap between skilled and unskilled workers.

Effect in EuropeHigher unemployment, due to generous govt benefits for unemployed workers and strong union presence.

Percent of workers covered by collective bargaining, selected countries

United States 13%

United Kingdom 35

Switzerland 48

Spain 80

Sweden 92

Germany 63

France 95

Greece 85

Beveridge Curve

Beveridge Curve since 1950

• Counter-cyclical movements are typical

NAIRU

• Another way to think about the natural rate of unemployment.

• The natural rate is the rate that is consistent with a steady rate of inflation – Non-Accelerating Inflation Rate of Unemployment.

• That is, the lowest unemployment can go before we see changes in the rate of inflation.

Relationship between unemployment rate and wage growth.

NAIRU Estimates for 2000

Nairu

Estimates

for 2000

1994 5.4%

1995 5.7%

1996 5.8%

1999 5.6%

2000 5.2%

2007 5.0%

2008 4.8%

Unemployment and Various Measures of Inflation 1995-2001

Unempl

oyment

C.P.I Core

C.P.I.

G.D.P.

Price

Index

P.C.E.

Less

Food/E

nergy

1995 5.6% 2.5% 3.0% 2.1% 2.3%

1996 5.4% 3.3% 2.6% 1.9% 1.9%

1997 4.9% 1.7% 2.2% 1.8% 1.9%

1998 4.5% 1.6% 2.4% 1.1% 1.5%

1999 4.2% 2.7% 1.9% 1.5% 1.5%

2000 4.0% 3.4% 2.6% 2.2% 1.7%

2001 4.7% 1.6% 2.7% 2.3% 1.8%