7. Unemployment. IN THIS CHAPTER, YOU WILL LEARN:. …about the natural rate of unemployment: what it means what causes it understanding its behavior in the real world. 1. Natural rate of unemployment.
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…about the natural rate of unemployment:
Natural rate of unemploymentActual and natural rates of unemployment, U.S., 1960–2012
L = # of workers in labor force
E = # of employed workers
U = # of unemployed
U/L = unemployment rate
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 fare exogenous
f UThe transitions between employment and unemployment
f U =sE
=s(L –U )
Solve for U/L:
(f + s)U = sL
1. job search
2. wage rigidity
In our dynamic economy, smaller sectoral shifts occur frequently, contributing to frictional unemployment.
Govt programs affecting unemployment include:
UI may lead to better matches between jobs and workers,
which would lead to greater productivity and higher incomes.
The natural rate of unemployment:
If real wage is stuck above its eq’m level, there aren’t enough jobs to go around.
Then, firms must ration the scarce jobs among workers.
Structural unemployment: The unemployment resulting from real wage rigidity and job rationing.
1. Minimum wage laws
2. Labor unions
3. Efficiency wages
114.9Union membership and wage ratios by industry, 2011
# employed (1000s)
U % of total
Private sector (total)
wage ratio = 100 (union wage) / (nonunion wage)
The duration of unemployment typically rises in recessions—but its rise in 2008–2010 is unprecedented.
The real minimum wage and natural u-rate have similar trends.
minimum wage in 2012 dollars
minimum wage in current dollars
Since early 1980s, the natural rate and union membership have both fallen.
But, from 1950s to about 1980, the natural rate rose while union membership fell.
2006–2011: oil price volatility increases – will the natural u-rate rise again?
1986–2005: oil prices less volatile, so fewer sectoral shifts
1970–1986: volatile oil prices create jarring sectoral shifts
Price per barrel of oil, in 2011 dollars
Percent of labor force
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.
1. The natural rate of unemployment
2. Frictional unemployment
3. Structural unemployment
4. Duration of unemployment
5. Behavior of the natural rate in the U.S.
6. European unemployment