unemployment unemployment rate –the current population survey is a joint project of the bls and...

Unemployment

Unemployment rate– The Current Population Survey is a joint project of the BLS and the Bureau of the Census

– Every month, 1,600 CPS interviewers survey 60,000 households to establish job market status of each member of the household.

– Working-age population (WAP) = all people aged 16 years and over not jailed, hospitalized, institutionalized nor in the U.S. Armed Forces. (WAP = L + those not in L )

– Labor force (L) is the number of people employed plus the number unemployed (L = E + U ).

– The CPS counts as employed (E ) all those in the WAP who, during the prior week, either

1. Worked at least 1 hour in a paid job or 15 hours unpaid in family business.

2. Were not working but who had jobs from which they were temporarily absent.

– The CPS counts as unemployed (U ) all those in the WAP who, during the prior week,

1. Weren’t working but were available for work,

2. Looked for work during the previous 4 weeks OR were waiting to be recalled to a job from which they had been laid off.

– The unemployment rate:u = x 100% U .

L

Year Labor Force Employed Unemployed u

2001 143,768,917 136,939,333 6,829,583 4.75

2002 144,856,083 136,480,917 8,375,167 5.78

2003 146,499,500 137,729,250 8,770,250 5.99

2004 147,379,583 139,239,750 8,139,833 5.52

2005 149,291,750 141,713,500 7,578,250 5.08

2006 151,412,500 144,420,083 6,992,417 4.62

2007 153,126,333 146,049,500 7,076,833 4.62

2008 154,329,250 145,368,417 8,960,833 5.81

=

Types of unemployment Frictional (uf ): workers temporarily between jobs because of a move/career change.

Structural (us ): workers displaced by automation.

Cyclical (uc ): workers who loose their jobs due to recession.

u = uf + us + uc

Natural rate of unemployment (un ≈ 5%): It’s the rate at which inflation remains constant.

uf + us = 5%

uc = 0.81%

Unemployment

Unemployment 1900 to 2010

2011 researchstlouisfedorgUNRATE

0

5

10

15

20

25

30

1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Year

Un

emp

loym

ent

Rat

e

Alternate measures of unemployment

Unemployed workers who have actively looked for work for 4 weeks

Discouraged workers are unemployed and have stopped looking for workbecause they think no work is available for them

Other marginally attached workers are unemployed, would like, and ableto work but have not looked for work recently

Underemployed are PT workers who want to work FT but cannot due to economic reasons

u1 = % of LF unemployed 15 weeks or longer

u2 = % of LF who lost jobs or completed temporary work

u3 = official unemployment rate

u4 = u3 + discouraged workers

u5 = u4 + Other marginally attached workers

u6 = u5 + underemployed

u6

u5

u3

UNRATE, U4RATE, U5RATE, U6RATE

Alternate measures of unemployment1994-2010

u4

Unemployment Rates by Race/Ethnicity 1973-2010

Black

Hispanic

White

Asian

LNS14000006, LNS14000003LNU04032183, LNS14000009

Unemployment Rates by Gender 1960-2010

Male

Female

2011 researchstlouisfedorgUSALFFEMADSMEI, USAEMPFEMADSMEI,

USALFMALEADSMEI, USAEMPMALADSMEI

Unemployment Rates by Education 1992-2010

HS dropout

HS no college

Some college orAssoc Degree

Bachelor’s Degreeor higher

LNS14027662, LNS14027689LNS14027660, LNS14027659

Unemployment Rates by Age1970-2010

Teenagers

20-24 year olds

Adults

USAURANAA, USAUR24NAA, USAURTNAA

Unemployment rate and average duration1948 to 2010

Avg Duration of unemployment

Unemployment

UNRATEUEMPMEAN

Unemployment Rates by Industry

Source: www.bls.gov

2001-2011

Unemployed Persons by Reason for Unemployment, 1967-2005

0

10

20

30

40

50

60

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Year

Per

cen

t

Job losers

Job leavers

Reentrants

New entrants

Unemployed Persons by Duration of Unemployment, 1948-2002

• Although most spells of unemployment do not last very long, most weeks of unemployment can be attributed to workers who are in very long spells

0

10

20

30

40

50

60

70

1940 1950 1960 1970 1980 1990 2000 2010

Year

Per

cent

Less than 5 weeks

5-14 weeks

More than 26 weeks

15-26 weeks

Flows Between Employment and Unemployment

Employed(E workers) Unemployed

(U Workers)

Job Losers ( p E )

Job Finders ( q U )

Suppose a person is either working or unemployed. At any point in time, some workers lose their jobs and unemployed workers find jobs.

If the probability of losing a job equals p, there are p E job losers.

If the probability of finding a job equals q, there are q U job finders.

Dynamic Flows in the US Labor Market, May 1993

Employed:119.2 million

Unemployed:8.9 million

Out of Labor Force:65.2 million

1.8 million

2.0 million

1.5 million

1.7 million

3.2 million

3.0 million

Job Search

• The asking wage makes the worker indifferent between continuing his search activities and accepting the job offer at hand

• An increase in the benefits from search raises the asking wage and lengthens the duration of the unemployment spell

• An increase in search costs reduces the asking wage and shortens the duration of the unemployment spell

The Wage Offer Distribution

$5 $8 $22 $25

Frequency

Wage

The wage offer distribution gives the frequency distribution of potential job offers A given worker can get a job paying anywhere from $5 to $25 per hour What is the probability that the worker receives a wage offer between 5 and $8?

The Asking Wage

Wage Offer at Hand

Dollars

MC

MR

$100

The marginal revenue curve gives the gain from an additional search. It is downward sloping because the better the offer at hand, the less there is to gain from an additional search .

The marginal cost curve gives the cost of an additional search. It is upward sloping because the better the job offer at hand, the greater the opportunity cost of an additional search.

The asking wage equates the marginal revenue and the marginal cost of search

$20$15

MC$10

MC$20

MC$15 = MR$15

MR$10

MR$20

Wage

Dollars

1015

MC

MR0

MR1

Wage

MC0

MC1

MR

People with higher discount rates are more worried about the present than their futuresSo they have little to gain from additional searches

UI benefits reduce the cost of searching for the right jobSo there is much to gain from additional searches

10 15

The Asking Wage

10Wage

MC0

MC1

MR

• The internet can greatly reduce the costs associated with job search.

• Kuhn and Skuterud (2004):

• D-in-D estimates: people using the Internet found work 0.3 months faster (perhaps because the Internet helps secure a high w offer quicker)

• This result vanishes in a regression that controls educational attainment, gender, and age.

Why? The Internet is ineffective, used to meet UI job search requirements, or used by people who do not put in the time and effort to find work (selection bias).

15

The Asking Wage

Dollars

The Relationship Between the Probability of Finding a New Job and UI Benefits

• Before the 2008 recession, UI ended at 26 weeks.• The probability of finding a new job spikes when UI benefits are exhausted • The probability of finding a new job spikes again at 15 weeks after benefits are exhausted

US increased UI benefits from 26 to 99 weeks

1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96 101(Weeks of UI benefits)

.08

.06

.04

.02

.00

• Hence, UI benefits should lengthen the duration of unemployment spells

Funding the UI System: Imperfect Experience Rating

Tax rate

0

0.1%

5.4%

UI is funded by payroll tax on employers—the more lay offs the higher the tax

The state determines up to what level to tax payrolls

In California, the first $7000 paid to employees is taxed at a rate of between 0.1% to 5.4%

Firm layoff Rate in the Pastl0 l1


Tax rate

0

0.1%

5.4%

If the firm has a layoff rate less than l0, for each employee, the firm pays a tax to the Federal UI fund equal to the lesser of

(0.1%)(wh)

(0.1%)($7000)

l

or



Tax rate

0

0.1%

5.4%

If the firm has a layoff rate between l0 and l1, for each employee, the firm pays a tax to the Federal UI fund equal to the lesser of

(t)(wh)

(t)($7000)

l

t

or



Tax rate

0

0.1%

5.4%

lFirm layoff Rate in the Past

l0 l1

If the firm has a layoff rate greater than l1, for each employee, the firm pays a tax to the Federal UI fund equal to the lesser of

(5.4%)(wh)

(5.4%)($7000)or

Hence, firms with high layoff rates are subject to perfect experience rating, meaning firms with low layoff rates subsidize firms with high layoff rates

Efficiency Wages and Unemployment

The shirking model• If workers are equally productive in a perfectly competitive labor market, they get

paid w* whether they

– work productively (which is costly)

– goof off or make long distance phone calls at work (shirk)

• Workers may shirk after they are hired because

– their incentives are not perfectly aligned with the owner’s (principal-agent)

– information about their performance is limited (asymmetric information)

– getting fired after being caught doesn’t prevent them from working for someone else making w* (moral hazard)

• Solutions:

– Increased monitoring (costly and not perfect)

– Bonding (e.g., employee don’t get student loans paid off if they quit early)

– Piece rate pay (brownnosers lobby supervisors for the ‘best’ working conditions)

– Paying wage wNS that exceeds w* (efficiency wage), which makes being fired costly (w = wNS – w*)

w*

If shirking is not a problem, the market clears at wage w*. Shirking may occur because fired workers can find work somewhere else making w*.At high unemployment (N – E0), workers toe the line at a slightly higher wage w0 because high unemployment attracts workers who will not shirk at w0.

S

w0

E0

The Determination of the Efficiency Wage

U

Employment

Dollars

D

N

SNS

At low unemployment (N – E1) firms have to pay much more to inhibit shirking

Hence the no-shirking supply curve is upward sloping, and asymptotically approaches S.

w1

E1


Dollars

Employment

D

N

w*

S

w0

E0

U


The efficient wage model suggests that some unemployment is necessary to keep employees in line (structural unemployment)

Efficiency wage wNS is given by the intersection of the no-shirking supply curve and demand curve

wNS

ENS

SNSDollars

Employment

D

N

S

w*

The Determination of the Efficiency Wageand Economic Contraction

SNS

D0

w*

w*0

wNS0

wNS

D1

A fall in output demand reduces labor demand, reducing the competitive wage.

If firms pay an efficiency wage, the contraction also reduces the efficiency wage

Efficiency wage theory suggests that wages are sticky because the decline in wNS

is much smaller than the fall in w*.

E0 EmploymentN

S

E1

Dollars

1

1

w*

D

An increase in UI benefits decreases no-shirking labor supply•the wage needed to inhibit shirking (wNS)•Unemployment (N – E) •The cost of getting caught shirking (wNS – w*)

wNS

E EmploymentN

S

Dollars

SNS

The Determination of the Efficiency Wageand UI Benefits

and increases

The Wage Curve: The Relation Between Wage Levels and Unemployment Across Regions

Unemployment Rate

Wage

Efficiency wages may play an important role in unemployment

Geographic regions that offer higher wage rates also tend to have lower unemployment rates

Hence, the greater is the surplus of workers (u), the lower the wage???

Yes if shirking is problematic

wNS1

u1 u0

wNS0

AS

Recessionary Gap

AD

PL

A recessionary gap occurs when GDP is less than potential GDP.

Resources, capital, and workers are not being fully utilized, and so u is high.

As a result, there is downward pressure on wages…

….prices fall

GDP YFE

PL

Note: Unemployment insurance replaces a

portion of a newly unemployed worker’s income. Designed to prevent the “next” Great Depression.

The Phillips Curve

AS

Inflationary Gap

AD

PL

GDPYFE

An inflationary gap occurs when GDP exceeds potential GDP.

Workers are working overtime and firms are competing for their labor, resulting in low u

As a result, there is upward pressure on wages…

….prices fall

PL

The Phillips Curve

The business cycle

The figure shows recent cycles in real GDP.

Recessions began in mid-1990 and in first quarter of 2001.

The longest expansion in U.S. history ran from the March 1991 to March 2001.

When GDP decreases

The unemployment rate increases

And a little later, the inflation rate decreases

As real GDP increases toward potential GDP, unemployment falls toward its natural rate, which leads to an eventual rise in inflation.

The Phillips Curve

(1948-1969)

-4

-2

0

2

4

6

8

10

2 3 4 5 6 7Unemployment Rate

Infl

atio

n R

ate

Source: http://wwwblsgov/

The Phillips Curve

The Phillips curve describes the negative correlation between the inflation rate and the unemployment rate The curve implies that an economy faces a trade-off between inflation and unemployment

(1961-2005)

0

2

4

6

8

10

12

14

3 4 5 6 7 8 9 10

Unemployment Rate

Ra

te o

f In

fla

tio

n

6162

6365

64

66

67

68

69

70

71

72

73

74

75

7677

78

79

80

81

82

83

84

86

858887

89 91

90

929394

9596979899

00 01

03

02

05

The Phillips Curve

What happened?

Inflation expectations were changing

Expected Inflation

• The yields on two different kinds of Treasury securities are used to calculate a measure of inflation expectations:– nominal treasury notes– treasury inflation-protected securities (TIPS)– Their difference is called the TIPS spread

• Because the market's expectations for inflation are priced TIPS, the measure that is derived from the yields is a good estimate of the market's estimate of future inflation

• The calculation involves correcting for some biases:– inflation-risk premium– liquidity premium

The Phillips Curve

• The liquidity premium (LP): difference between the yields on 10-year on-the-run and off-the-run treasury notes

• Spread (or bias) is equal to the difference between inflation expectations from the Survey of Professional Forecasters (SPF) and the TIPS-derived expected inflation (TIPS)

• Regressing spread (or bias) on LP and LP2 gives predicted bias:

bias = + 1∙LP + 2∙LP2

• Subtracting this from TIPS-derived expected inflation yields an unbiased estimate of expected inflation:

e = TIPS – bias (LP)

picks up the bias due to inflation risk

picks up the bias due to liquidity

Expected Inflation

The Phillips Curve

5

Short Run

Long Run

Rate of Inflation

Unemployment Rate

The economy is initially at the point where there is no inflationand a 5 percent unemployment rate

The Phillips Curve

0

3

7

Short Run

Long Run

Rate of Inflation

Unemployment Rate

If monetary policy increases the inflation rate to 7 percent, job searchers will suddenly find many jobs that meet their reservation wage and the unemployment rate falls in the short run

5

The Phillips Curve

0

Over time, workers realize that the inflation rate is higher and will adjusttheir reservation wage upward, returning the economy to having u = 5% and = 7

3

7

Short Run

Long Run

Rate of Inflation

Unemployment Rate

0

5

In the long run, therefore, there is no trade-off between inflation and unemployment

In the long run, the unemployment rate is still 5 percent, but there is nowa higher rate of inflation

The Phillips Curve

-4

-3

-2

-1

0

1

2

3

4

4 5 6 7 8 9 10

Unemployment Rate

In

flat

ion

Rat

e

t tu x

1t t tu x

Source: http://wwwblsgov/

et t tu x

Increasing UI benefitsMore stringent antitrust legislation

decreases market power

NAIRU or Natural Rate of unemployment

NAIRU

increases

NAIRU

decreases

The Augmented Phillips Curve(1975-2005)

x is all other variables affecting wage setting is the markup of firm’s unit price over unit cost

is positive (but if = 0, Phillips curve)

Unemployment and Interest Rates

The unemployment rate lags the The unemployment rate lags the federal funds rate byfederal funds rate bya couple of yearsa couple of years

?

1954-2011

Unemployment and Interest Rates1987-2011

u


Fed Funds Rate

u


Fed Funds Rate (lagged one year)

u


Fed Funds Rate (lagged two years)

u

Unemployment in Europe

Table 12-3. Percentage of Unemployed Workersin Spells Lasting At Least 12 Months

Country 1990 2006

Belgium 68.7 56.6

Denmark 29.9 20.4

Germany 46.8 57.2

France 38.0 44.0

Ireland 66.0 34.3

Italy 69.8 52.9

Netherlands 49.3 45.2

Spain 54.0 29.5

United Kingdom 34.4 22.1

United States 5.5 10.0

Source: OECD Employment Outlook, Statistical Annex, Paris: OECD, 2007, Table G.

0

3

6

9

12

15

1960 1970 1980 1990 2000 2010

Year

Un

em

plo

ym

en

t R

ate

US

France

Germany

Italy

UK

• Unemployment in Western Europe is a combination of…

– high unemployment insurance benefits

– employment protection restrictions

– wage rigidity

Unemployment in Europe

US increased UI benefits from 26 to 99 weeks

unemployment unemployment rate –the current population survey is a joint project of the bls and...

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