Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment...
-
date post
21-Dec-2015 -
Category
Documents
-
view
253 -
download
1
Transcript of Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition 1 Topic: Unemployment...
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
1
Topic: Unemployment
Macroeconomy in the Long Run
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
2
Introduction
• Study unemployment:– Identify its causes– Improve public policies that affect the
unemployed
• Rate of unemployment = percentage of the labour force unemployed
• There is always some unemployment– What determines its level?
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
3
Natural Rate of Unemployment
• Natural rate of unemployment = – The average rate of unemployment around
which the economy fluctuates– The steady-state rate of unemployment– Rate towards which the economy gravitates in
the long run
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
4
Job loss, Job finding and the Natural rate of unemployment
• What determines the natural rate of unemployment?
• Notation: L = labour force E = number of employed workers U = number of unemployed workersL = E + URate of unemployment = U/L
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
5
• Assume labour force is fixed• Focus on the transition of individuals between
employment and unemployment
s = rate of job separation: fraction of employed people who lose this job each month
f = rate of job finding: fraction of unemployed people who can find a job each month
• S and f determine the rate of unemployment
Job loss, Job finding and the Natural rate of unemployment
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
6
Job loss, Job finding and the Natural rate of unemployment
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
7
Job loss, Job finding and the natural rate of unemployment
• If unemployment rate is staying the same i.e. not rising or falling = labour market is in steady state = – Number of people finding jobs = number of
people losing jobs
• fU = number of people finding jobs
• sE = number of people losing jobs
• Steady-state condition: fU = sE
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
8
Job loss, Job Finding and the Natural Rate of Unemployment
• Finding the steady-state unemployment rate:– We know: E = L – U
i.e. number employed =
Labour force minus number unemployed– We know: fU = sE– Substitute (L – U) for E:
fU = s(L – U)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
9
Natural rate of unemployment
• To solve for the unemployment rate (U/L) in the steady state divide both sides of the equation by L:fU/L = s(1 – U/L)
• Solve for U/L:U/L = s/s+f
• Steady-state rate of unemployment (U/L) depends on the rates of job separation (s) and job finding (f)
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
10
Natural Rate of Unemployment
• Higher the rate of job separation = higher the unemployment rate
• Higher the rate of job finding = lower the unemployment rate
• To lower the natural rate of unemployment either:– Reduce rate of job separation or– Increase rate of job finding
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
11
Natural Rate of Unemployment
• Why is there unemployment?
• Model above assumes job finding is not instantaneous but why is it not?
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
12
Job Search and Frictional Unemployment
• One reason for unemployment: takes time to match workers and jobs
• Frictional unemployment: – the time it takes workers to search for a job– It’s inevitable in a changing economy– As long as supply and demand of labour
among firms is changing, frictional unemployment will be present
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
13
Public policy and frictional unemployment
• Public policy: seeks to decrease the natural rate of unemployment by reducing frictional unemployment:Examples:– Disseminating info on job vacancies– Retraining programs
• Unemployment Assistance/Benefit
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
14
Real-Wage Rigidity and Wait Unemployment
• Second reason for unemployment: wage rigidity
• Wage rigidity = – The failure of wages to adjust until labour
supply equals labour demand– Wages are not always flexible
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
15
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
16
Real-Wage Rigidity and Wait Unemployment
• Real-wage rigidity – reduces the rate of job finding and – Increases the level of unemployment
• Wait unemployment:– Unemployed not because they are searching
for jobs that suits their skills best but because at the going wage rate, supply of labour > demand for labour
– Waiting for jobs to become available
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
17
Causes of wage rigidity
• Wait unemployment arises because firms fail to reduce wages
• Why?
• Three causes of wage rigidity:1. Minimum-wage laws
2. Monopoly power of unions
3. Efficiency wages
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
18
1. Minimum-wage Laws
• Government prevents wages from falling to equilibrium levels
• In Ireland: National Minimum Wage Act, 2000:– From 1st May 2005, minimum wage = €7.65 per hour– Before May: €7.00 per hour– Applies to an experienced adult employee = an
employee who has any employment whatsoever in any two years over the age of 18
– Wage rate reviewed at regular intervals
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
19
Minimum-Wage Laws
• For most employees it doesn’t apply because employer pays above the minimum wage
• But for some workers, e.g. unskilled or inexperienced workers the minimum wage raises their wage above its equilibrium level and reduces quantity demanded by firms
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
20
Minimum-wage Laws
• Advocates of higher minimum-wage:– A means of raising the income of the working
poor– The cost of having more unemployment is
worth it to raise others out of poverty
• Opponents of higher minimum-wage:– Raises unemployment– Other ways of increasing incomes of the
working poor e.g. tax credits
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
21
2. Unions and Collective Bargaining
• Monopoly power of unions :– Wages of unionised workers determined not by the
equilibrium of supply and demand but by collective bargaining
– Agreement often raises the wage rate above the equilibrium level
• Insiders: workers employed by a firm try to keep wages high
• Outsiders: the unemployed pay the cost of that because at a lower wage they may be hired
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
22
Unions and Collective Bargaining
• In US wage bargaining takes place at the firm level – ‘outsiders’ have no influence
• In Ireland wage bargaining takes place at the national level – Social Partnership – unions, employers,
community and voluntary groups, farmers and government
– Includes ‘outsiders’ and ‘insiders’
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
23
Unions and Collective Bargaining
• Social Partnership in Ireland (cont’d) - Six national agreements to date:– 1988 Programme for National Recovery– 1991 Programme for Economic and Social Progress– 1994 Programme for Competitiveness and Work– 1997 Partnership 2000– 2000 Programme for Prosperity and Fairness– 2003 Sustaining Progress
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
24
3. Efficiency Wages
• Efficiency wage theories:– High wages make workers more productive – Influence of wages on worker efficiency may
explain failure of firms to cut wages despite an excess supply of labour
– Lower wages may reduce costs for firms but it would also lower worker productivity and thus a firm’s profits
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
25
Efficiency Wages
• Theories:– Firms pay wages above equilibrium to
maintain a healthy workforce– Higher wages reduce labour turnover– Average quality of a firm’s workforce depends
on the wage it pays to its employees• Adverse selection
– Higher wages improves worker effort• Moral hazard
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
26
Efficiency wages
• If a firm pays its workers a high wage, the firm operates more efficiently and the firm may find it more profitable to keep wages above the level that balances supply and demand
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
27
Summary
• An economy’s steady-state unemployment rate depends on:– Rate of job separation and rate of job finding
• Two reasons for unemployment i.e. that job finding is not instantaneous:– Process of job search leading to frictional
unemployment– Wage rigidity leading to wait unemployment
• Wage rigidity arises from– Minimum-wage laws, unionisation and efficiency
wages
Source: Mankiw (2000) Macroeconomics, Chapter 6, p. 132-153, Fourth Edition
28
Patterns of unemployment
• Duration of unemployment– Short-term unemployment more likely to be
frictional unemployment– Long-term unemployment more likely to be
wait unemployment
• Variations in unemployment rates across demographic groups e.g. younger vs. older people