CHAPTER SIX Unemployment

1. Except for the material on economic growth (Chapters 7 and 8), this chapter completes our study of the economy�s behavior in the long run, when prices generally are flexible and markets clear. Except for the material on economic growth (Chapters 7 and 8), this chapter completes our study of the economy�s behavior in the long run, when prices generally are flexible and markets clear.

2. slide 1 Chapter objectives The natural rate of unemployment: what it means what causes it understanding its behavior in the real world Unemployment is a critical issue in macroeconomics. The PowerPoint presentation of chapter 1 included some data showing that unemployment is statistically associated with many other social problems. Unemployment especially hurts those who are unemployed, but it affects the rest of us, as well. When unemployment is high, those of us who remain employed are likely to experience slower wage increases, a greater sense of economic uncertainty, and a greater likelihood of falling victim to crime (crime rates are correlated with unemployment). Also, the new case study on pp.173-174 shows a significant statistical correlation between a country�s unemployment rate and the happiness of its citizens - including those that are employed. Unemployment represents wasted resources: the higher the unemployment rate, the less labor is involved in the production of goods and services, implying a lower level of output and income in the economy. If you want to solve a problem, you need to first understand its causes. The causes of unemployment can be broken down into long-run and short-run. This chapter focuses on the long-run, particularly the causes of the so-called �natural rate of unemployment.� Unemployment is a critical issue in macroeconomics. The PowerPoint presentation of chapter 1 included some data showing that unemployment is statistically associated with many other social problems. Unemployment especially hurts those who are unemployed, but it affects the rest of us, as well. When unemployment is high, those of us who remain employed are likely to experience slower wage increases, a greater sense of economic uncertainty, and a greater likelihood of falling victim to crime (crime rates are correlated with unemployment). Also, the new case study on pp.173-174 shows a significant statistical correlation between a country�s unemployment rate and the happiness of its citizens - including those that are employed. Unemployment represents wasted resources: the higher the unemployment rate, the less labor is involved in the production of goods and services, implying a lower level of output and income in the economy. If you want to solve a problem, you need to first understand its causes. The causes of unemployment can be broken down into long-run and short-run. This chapter focuses on the long-run, particularly the causes of the so-called �natural rate of unemployment.�

3. 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. The natural rate of unemployment is the �normal� unemployment rate the economy experiences when it is neither in a recession nor a boom. The natural rate of unemployment is the �normal� unemployment rate the economy experiences when it is neither in a recession nor a boom.

4. slide 3 U.S. Unemployment, 1960-2004 Figure 6-1 on p.156. Source of data: U.S. Department of Labor, Bureau of Labor Statistics (via FRED, the Economic and Financial Database of the St. Louis Federal Reserve Bank.) Point out to students that the actual unemployment rate fluctuates considerably over the short run. These fluctuations will be the focus of chapters 9-13 later this semester. For this chapter, though, our goal is to understand the red line: the so-called �natural rate of unemployment.� Figure 6-1 on p.156. Source of data: U.S. Department of Labor, Bureau of Labor Statistics (via FRED, the Economic and Financial Database of the St. Louis Federal Reserve Bank.) Point out to students that the actual unemployment rate fluctuates considerably over the short run. These fluctuations will be the focus of chapters 9-13 later this semester. For this chapter, though, our goal is to understand the red line: the so-called �natural rate of unemployment.�

5. slide 4 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 Section 6-1 Section 6-1

6. slide 5 Assumptions: 1. L is exogenously fixed. 2. During any given month, s = fraction of employed workers that become separated from their jobs, f = fraction of unemployed workers that find jobs.

7. slide 6 The transitions between employment and unemployment figure 6-2, p. 157 The size of the boxes (containing the words �employed� and �unemployed�) are not proportional to the number of people in each category. figure 6-2, p. 157 The size of the boxes (containing the words �employed� and �unemployed�) are not proportional to the number of people in each category.

8. slide 7 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:

9. slide 8 Solving for the �equilibrium� U rate f ?U = s ?E = s ?(L �U ) = s ?L � s ?U Solve for U/L: (f + s)?U = s ?L so,

10. slide 9 Example: Each month, 1% of employed workers lose their jobs (s = 0.01) Each month, 19% of unemployed workers find jobs (f = 0.19) Find the natural rate of unemployment:

11. slide 10 policy implication A policy will reduce the natural rate of unemployment only if it lowers s or increases f.

12. slide 11 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

13. slide 12 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

14. slide 13 Sectoral shifts def: changes in the composition of demand among industries or regions example: Technological change increases demand for computer repair persons, decreases demand for typewriter repair persons example: A new international trade agreement causes greater demand for workers in the export sectors and less demand for workers in import-competing sectors. It takes time for workers to change sectors, so sectoral shifts cause frictional unemployment. Sometimes the unemployment caused by sectoral shifts is severe. Due to increasing imports of cheaper foreign-made textiles, the U.S. textile industry has been in decline for years. Many workers in this industry have lost jobs. Many of these workers are in their 50s and have worked in this industry for decades. Such workers are unlikely to have the skills necessary to get jobs available in newly booming industries, and they are less likely to invest in the acquisition of the necessary skills for these jobs. Hence, such workers are at greater risk for becoming �discouraged workers.� Sometimes the unemployment caused by sectoral shifts is severe. Due to increasing imports of cheaper foreign-made textiles, the U.S. textile industry has been in decline for years. Many workers in this industry have lost jobs. Many of these workers are in their 50s and have worked in this industry for decades. Such workers are unlikely to have the skills necessary to get jobs available in newly booming industries, and they are less likely to invest in the acquisition of the necessary skills for these jobs. Hence, such workers are at greater risk for becoming �discouraged workers.�

15. slide 14 CASE STUDY: Structural change over the long run All figures are industry shares in U.S. GDP. �Other industry� includes construction, mining, electricity, water, and gas. From 1960 to 2000, there are huge changes in all four categories. Manufacturing falls by about a third. Even the �tiny� category of agriculture drops by nearly two-thirds:from 4.2% to 1.6% of GDP. These changes represent HUGE structural shifts, which vastly alter the kinds of jobs in demand. Source: World Development Indicators, World Bank. All figures are industry shares in U.S. GDP. �Other industry� includes construction, mining, electricity, water, and gas. From 1960 to 2000, there are huge changes in all four categories. Manufacturing falls by about a third. Even the �tiny� category of agriculture drops by nearly two-thirds:from 4.2% to 1.6% of GDP. These changes represent HUGE structural shifts, which vastly alter the kinds of jobs in demand. Source: World Development Indicators, World Bank.

16. slide 15 More examples of sectoral shifts Late 1800s: decline of agriculture, increase in manufacturing Late 1900s: relative decline of manufacturing, increase in service sector 1970s: energy crisis caused a shift in demand away from gas guzzlers toward smaller cars. In our dynamic economy, smaller sectoral shifts occur frequently, contributing to frictional unemployment. Most of the examples on this and the previous slides are big changes that have occurred over many years. These examples give students a good idea of what sectoral shifts are. Perhaps more important for the natural rate, though, are the many smaller changes that occur more frequently. Ours is a dynamic economy: the structure of demand is shifting almost continuously, due to changes in preferences, technology, and the location of production. As a result, there is a near-continual flow of newly frictionally unemployed workers. Sectoral shifts are distinct from recessions (which also cause unemployment). In recessions, there is a general fall in demand across industries, and the unemployment that results is cyclical. Sectoral shifts, though, are changes in the composition of demand across industries, and lead to frictional unemployment as described above. Most of the examples on this and the previous slides are big changes that have occurred over many years. These examples give students a good idea of what sectoral shifts are. Perhaps more important for the natural rate, though, are the many smaller changes that occur more frequently. Ours is a dynamic economy: the structure of demand is shifting almost continuously, due to changes in preferences, technology, and the location of production. As a result, there is a near-continual flow of newly frictionally unemployed workers. Sectoral shifts are distinct from recessions (which also cause unemployment). In recessions, there is a general fall in demand across industries, and the unemployment that results is cyclical. Sectoral shifts, though, are changes in the composition of demand across industries, and lead to frictional unemployment as described above.

17. Public Policy and Job Search Govt programs affecting unemployment 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 You might want to �hide� (omit) this slide from your presentation if you plan on doing the class discussion in Slide 29, which asks students to think of things the government can do to try to reduce the natural rate of unemployment. You might want to �hide� (omit) this slide from your presentation if you plan on doing the class discussion in Slide 29, which asks students to think of things the government can do to try to reduce the natural rate of unemployment.

18. UI pays part of a worker�s former wages for a limited time after losing his/her job. UI increases search unemployment, because it: reduces the opportunity cost of being unemployed reduces the urgency of finding work hence, reduces f Studies: The longer a worker is eligible for UI, the longer the duration of the average spell of unemployment. Unemployment insurance (UI) The text includes a nice case study on unemployment insurance (pp.160-161). It discusses evidence that unemployment insurance reduces the job finding rate. The text includes a nice case study on unemployment insurance (pp.160-161). It discusses evidence that unemployment insurance reduces the job finding rate.

19. 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. Benefits of UI

20. slide 19 Why is there unemployment? There are two reasons why f < 1: 1. job search 2. wage rigidity

21. slide 20 Unemployment from real wage rigidity Figure 6-3 on p.162. Abbreviation: �eq�m� = equilibrium Figure 6-3 on p.162. Abbreviation: �eq�m� = equilibrium

22. slide 21 Unemployment from real wage rigidity Other texts define �structural unemployment� as unemployment that results from a mismatch between the skills or locations of workers and the skill or location requirements of job openings. This would occur, for example, if there were a decrease in demand for domestic steel (and hence steel workers) and a simultaneous increase in demand for financial consulting services (and hence employees of such firms). However, if wages are perfectly flexible, then the decrease in demand for steel workers would simply cause their wage to fall until all were again employed, and the increase in demand for workers in financial firms would simply increase until equilibrium in that labor market was reestablished. So, the critical ingredient for structural unemployment is wage rigidity. Hence Mankiw�s definition. Other texts define �structural unemployment� as unemployment that results from a mismatch between the skills or locations of workers and the skill or location requirements of job openings. This would occur, for example, if there were a decrease in demand for domestic steel (and hence steel workers) and a simultaneous increase in demand for financial consulting services (and hence employees of such firms). However, if wages are perfectly flexible, then the decrease in demand for steel workers would simply cause their wage to fall until all were again employed, and the increase in demand for workers in financial firms would simply increase until equilibrium in that labor market was reestablished. So, the critical ingredient for structural unemployment is wage rigidity. Hence Mankiw�s definition.

23. slide 22 Reasons for wage rigidity 1. Minimum wage laws 2. Labor unions 3. Efficiency wages

24. slide 23 1. The minimum wage The minimum wage is well below the eq�m wage for most workers, so it cannot explain the majority of natural rate unemployment. However, the minimum wage may exceed the eq�m wage of unskilled workers, especially teenagers. If so, then we would expect that increases in the minimum wage would increase unemployment among these groups.

25. slide 24 The minimum wage in the real world: In Sept 1996, the minimum wage was raised from $4.25 to $4.75. Here�s what happened: Teens and single mothers are more likely to be in minimum wage jobs than workers from other demographic groups. These data show that these groups experienced higher unemployment after the minimum wage was raised in September 1996. These increases are not due to aggregate shocks, as the overall unemployment rate was the same in both periods. Teens and single mothers are more likely to be in minimum wage jobs than workers from other demographic groups. These data show that these groups experienced higher unemployment after the minimum wage was raised in September 1996. These increases are not due to aggregate shocks, as the overall unemployment rate was the same in both periods.

26. slide 25 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. Employed union workers are insiders whose interest is to keep wages high. Unemployed non-union workers are outsiders and would prefer wages to be lower (so that labor demand would be high enough for them to get jobs). See p.165 for more discussion about insiders and outsiders. See p.165 for more discussion about insiders and outsiders.

27. Union membership and wage ratios by industry, 2001 These data show that union workers (and non-union workers represented by unions) earn about 18% more than non-union workers in the same industry. Also, there is a positive correlation between the proportion of workers in unions or covered by union contracts and the wage ratio (the correlation equals 0.5). Before revealing the �U % of total� column, you might ask your students which of these industries they think are most heavily unionized. source: Bureau of Labor Statistics (stats.bls.gov) Key to columns: 2. �U % of total� = number of union members as a % of total # of employed workers. 3. �RBU % of total� = number of nonunion workers represented by a union as % of the total # of employed workers. 4. Wage ratio = 100 times X/Y, where X is (a weighted average of) the mean weekly earnings of union & RBU workers, Y is the mean weekly earnings of nonunion workers in the industry. (The weights in X are the number of union & RBU workers). The last row gives data for all workers in the industries shown. The table omits data for the agriculture industry; there were fewer than 50,000 union workers in agriculture, so the BLS did not report average weekly earnings for union workers in agriculture. These data show that union workers (and non-union workers represented by unions) earn about 18% more than non-union workers in the same industry. Also, there is a positive correlation between the proportion of workers in unions or covered by union contracts and the wage ratio (the correlation equals 0.5). Before revealing the �U % of total� column, you might ask your students which of these industries they think are most heavily unionized. source: Bureau of Labor Statistics (stats.bls.gov) Key to columns: 2. �U % of total� = number of union members as a % of total # of employed workers. 3. �RBU % of total� = number of nonunion workers represented by a union as % of the total # of employed workers. 4. Wage ratio = 100 times X/Y, where X is (a weighted average of) the mean weekly earnings of union & RBU workers, Y is the mean weekly earnings of nonunion workers in the industry. (The weights in X are the number of union & RBU workers). The last row gives data for all workers in the industries shown. The table omits data for the agriculture industry; there were fewer than 50,000 union workers in agriculture, so the BLS did not report average weekly earnings for union workers in agriculture.

28. 3. Efficiency Wage Theory Theories in which high wages increase worker productivity: attract higher quality job applicants increase worker effort and reduce �shirking� reduce turnover, which is costly improve health of workers  (in developing countries) The increased productivity justifies the cost of paying above-equilibrium wages. The result: unemployment

29. slide 28 Question for Discussion: Use the material we�ve just covered to come up with a policy or policies to try to reduce the natural rate of unemployment. Note whether your policy targets frictional or structural unemployment. It is useful to pause your lecture at this point and give students an opportunity to apply what you�ve covered so far to answer this policy question. Possible answers: Stop raising the (nominal) minimum wage, so that its real value will gradually erode to zero. Regulate unions (just like other monopolies are regulated) to reduce unions� impact on wages. Reduce the generosity of unemployment insurance. Government employment agencies to increase the accessibility of information about job vacancies and available workers. Public funding to help retrain workers displaced from jobs in declining industries. Suggestions for conducting the discussion: If you ask for responses immediately after posing the question, it is likely that a small number of students will volunteer to participate - the same students that always do, the ones that are the best prepared and/or the quickest thinkers. To elicit participation from a larger number of students, I suggest the following: Pair students up. Allow 10 minutes for the students, working in their pairs, to come up with answers to the question. During this time, circulate around the room and ask the pairs if you can be of assistance, either to help them get started or give feedback on what they�re coming up with. Then, reconvene the class and ask for volunteers. Doing this increases the quantity and quality of participation: students who would not otherwise participate are more likely to do so because they have had time to formulate their answers and have had a chance to run their answers by a classmate. Additionally, even students who don�t participate will have at least had the opportunity to discuss the question with one other student. It is useful to pause your lecture at this point and give students an opportunity to apply what you�ve covered so far to answer this policy question. Possible answers: Stop raising the (nominal) minimum wage, so that its real value will gradually erode to zero. Regulate unions (just like other monopolies are regulated) to reduce unions� impact on wages. Reduce the generosity of unemployment insurance. Government employment agencies to increase the accessibility of information about job vacancies and available workers. Public funding to help retrain workers displaced from jobs in declining industries. Suggestions for conducting the discussion: If you ask for responses immediately after posing the question, it is likely that a small number of students will volunteer to participate - the same students that always do, the ones that are the best prepared and/or the quickest thinkers. To elicit participation from a larger number of students, I suggest the following: Pair students up. Allow 10 minutes for the students, working in their pairs, to come up with answers to the question. During this time, circulate around the room and ask the pairs if you can be of assistance, either to help them get started or give feedback on what they�re coming up with. Then, reconvene the class and ask for volunteers. Doing this increases the quantity and quality of participation: students who would not otherwise participate are more likely to do so because they have had time to formulate their answers and have had a chance to run their answers by a classmate. Additionally, even students who don�t participate will have at least had the opportunity to discuss the question with one other student.

30. slide 29 The duration of U.S. unemployment, average over 1993-2003 Source: Bureau of Labor Statistics (stats.bls.gov) and author�s calculations. How to interpret this data: The second column shows the percentage of all unemployed workers whose spell lasted the number of weeks shown (average over January 1993 to May 2003). The number in the third column is a ratio. The denominator is the total number of weeks spent unemployed, obtained by multiplying the total number of unemployed persons by the number of weeks of the average spell of unemployment. The numerator is, for each category, the number of people in that category times the duration of the average spell of unemployment for that category. Thus, the number in the last column is the share of total time spent unemployed attributed to workers in that category. 6.5% of total time spent unemployed was spent by people who were unemployed for less than 5 weeks. 73% of total time spent unemployed is attributed to people who were unemployed for 15 or weeks or longer. The data on this slide are more recent than in the text (second paragraph of p.168), but make the same point: More spells of unemployment are short term (39%) than medium term (31%) or long term (30%). But, most of the time spent unemployed is long-term.Source: Bureau of Labor Statistics (stats.bls.gov) and author�s calculations. How to interpret this data: The second column shows the percentage of all unemployed workers whose spell lasted the number of weeks shown (average over January 1993 to May 2003). The number in the third column is a ratio. The denominator is the total number of weeks spent unemployed, obtained by multiplying the total number of unemployed persons by the number of weeks of the average spell of unemployment. The numerator is, for each category, the number of people in that category times the duration of the average spell of unemployment for that category. Thus, the number in the last column is the share of total time spent unemployed attributed to workers in that category. 6.5% of total time spent unemployed was spent by people who were unemployed for less than 5 weeks. 73% of total time spent unemployed is attributed to people who were unemployed for 15 or weeks or longer. The data on this slide are more recent than in the text (second paragraph of p.168), but make the same point: More spells of unemployment are short term (39%) than medium term (31%) or long term (30%). But, most of the time spent unemployed is long-term.

31. slide 30 The duration of unemployment The data: More spells of unemployment are short-term than medium-term or long-term. Yet, most of the total time spent unemployed is attributable to the long-term unemployed. This long-term unemployment is probably structural and/or due to sectoral shifts among vastly different industries. Knowing this is important because it can help us craft policies that are more likely to succeed. Regarding the point about structural unemployment and sectoral shifts: Structural unemployment - workers are waiting for jobs to become available, but there just aren�t enough jobs to go around; hence, this can be long-term unemployment. Sectoral shifts across vastly different industries, e.g. a shift in demand from textiles to software design; obviously, jobs in these industries require vastly different skill sets. Sectoral shifts can occur among similar industries (e.g., demand shifts from desktop to laptop computers), but this is less likely to produce long-term unemployment. Regarding the point about structural unemployment and sectoral shifts: Structural unemployment - workers are waiting for jobs to become available, but there just aren�t enough jobs to go around; hence, this can be long-term unemployment. Sectoral shifts across vastly different industries, e.g. a shift in demand from textiles to software design; obviously, jobs in these industries require vastly different skill sets. Sectoral shifts can occur among similar industries (e.g., demand shifts from desktop to laptop computers), but this is less likely to produce long-term unemployment.

32. slide 31 TREND: The natural rate rises from 1960s to early �80s, then falls from mid-80s to 2000 The purpose of this slide is to establish the trend behavior of the natural rate in recent decades: rising until the early 80s, then falling from the mid-80s to about 2000. The following slides will show (mostly) that the theories learned in this chapter are consistent with the trend behavior of the natural rate. The graph on this slide is an edited version of the first graph in this chapter (slide X). To better show the movement in the natural rate over time, I�ve given the other series a duller color and altered the vertical scale. The purpose of this slide is to establish the trend behavior of the natural rate in recent decades: rising until the early 80s, then falling from the mid-80s to about 2000. The following slides will show (mostly) that the theories learned in this chapter are consistent with the trend behavior of the natural rate. The graph on this slide is an edited version of the first graph in this chapter (slide X). To better show the movement in the natural rate over time, I�ve given the other series a duller color and altered the vertical scale.

33. slide 32 EXPLAINING THE TREND: The minimum wage �in today�s dollars� means in May 2002 dollars. The smooth, light blue line is the trend line for the real minimum wage. The trend in the real minimum wage rises until the mid to late 1970s, then falls. The peak in this trend comes a few years before the peak in the natural rate, though. (We probably shouldn�t put too much weight on the behavior of the trend line at the very end of the sample, as it was generated by Excel as a crude polynomial trend. We will need a few more years of data to determine the trend�s behavior in the late 1990s through today.) Here�s a good website with info on the minimum wage, including tables of dates it was raised and so forth: http://www.dol.gov/esa/minwage/main.htm Department of Labor, Employment Standards Administration �in today�s dollars� means in May 2002 dollars. The smooth, light blue line is the trend line for the real minimum wage. The trend in the real minimum wage rises until the mid to late 1970s, then falls. The peak in this trend comes a few years before the peak in the natural rate, though. (We probably shouldn�t put too much weight on the behavior of the trend line at the very end of the sample, as it was generated by Excel as a crude polynomial trend. We will need a few more years of data to determine the trend�s behavior in the late 1990s through today.) Here�s a good website with info on the minimum wage, including tables of dates it was raised and so forth: http://www.dol.gov/esa/minwage/main.htm Department of Labor, Employment Standards Administration

34. slide 33 EXPLAINING THE TREND: Union membership source: AFL-CIO website (http://www.aflcio.org/aboutunions/joinunions/whyjoin/uniondifference/uniondiff11.cfm) and, for the 2003 figure, see http://stats.bls.gov/news.release/union2.nr0.htm Also see http://www.lib.umich.edu/govdocs/steclab.html#unions good set of links to info on labor unions http://stats.bls.gov/news.release/union2.toc.htm The BLS� annual news release of info on union membership, earnings. Earlier in the chapter, we saw cross-sectional data that showed a positive correlation between the union wage premium and union members� share of the labor force across industries. We would expect that, other things equal, changes over time in the aggregate share of unions in employment should be associated with similar changes in unions� impact on average wages, and hence on the natural rate of unemployment. In plain English, we would expect that the decline in the extent of unionization shown on this slide would correspond to a decline in the natural rate of unemployment. Unfortunately for the theory, this is only true for the time period beginning in the early 1980s, when the natural rate started coming down. From the 1950s through 1980, the natural rate rose, but union membership fell. Does this mean the theory is not relevant? Not necessarily, as other things (other determinants of the natural rate) were not constant during this time period. source: AFL-CIO website (http://www.aflcio.org/aboutunions/joinunions/whyjoin/uniondifference/uniondiff11.cfm) and, for the 2003 figure, see http://stats.bls.gov/news.release/union2.nr0.htm Also see http://www.lib.umich.edu/govdocs/steclab.html#unions good set of links to info on labor unions http://stats.bls.gov/news.release/union2.toc.htm The BLS� annual news release of info on union membership, earnings. Earlier in the chapter, we saw cross-sectional data that showed a positive correlation between the union wage premium and union members� share of the labor force across industries. We would expect that, other things equal, changes over time in the aggregate share of unions in employment should be associated with similar changes in unions� impact on average wages, and hence on the natural rate of unemployment. In plain English, we would expect that the decline in the extent of unionization shown on this slide would correspond to a decline in the natural rate of unemployment. Unfortunately for the theory, this is only true for the time period beginning in the early 1980s, when the natural rate started coming down. From the 1950s through 1980, the natural rate rose, but union membership fell. Does this mean the theory is not relevant? Not necessarily, as other things (other determinants of the natural rate) were not constant during this time period.

35. slide 34 EXPLAINING THE TREND: Sectoral shifts From earlier in the chapter: Sectoral shifts are a source of job separations and lead to frictional unemployment. We would expect that a decrease in the frequency and magnitude of sectoral shifts would be associated with a lower rate of job separations, less frictional unemployment, and a lower natural rate of unemployment. Unfortunately, there is no single �index of sectoral shocks.� However, we know that large changes in oil prices are one source of sectoral shocks. A significant fall in the price of oil causes a decrease in demand for workers at oil fields in Oklahoma and Texas, and an increase in demand for workers at factories that produce SUVs. A significant increase in oil prices would do the opposite. The graph shows data on the price of oil since 1970. First, consider the period 1970-1985. The price of oil in today�s dollars fluctuated between $15 and $85. Now consider the period since 1986. The real price of oil fluctuated in a much more narrow range (from $12 to $47, or, if you exclude the one spike during the Gulf War, from $12 to $32). Main point: In the 1970s until 1985, sectoral shifts were more prevalent, and the natural rate was rising. Since 1986, sectoral shifts were less prevalent, and the natural rate was falling. From earlier in the chapter: Sectoral shifts are a source of job separations and lead to frictional unemployment. We would expect that a decrease in the frequency and magnitude of sectoral shifts would be associated with a lower rate of job separations, less frictional unemployment, and a lower natural rate of unemployment. Unfortunately, there is no single �index of sectoral shocks.� However, we know that large changes in oil prices are one source of sectoral shocks. A significant fall in the price of oil causes a decrease in demand for workers at oil fields in Oklahoma and Texas, and an increase in demand for workers at factories that produce SUVs. A significant increase in oil prices would do the opposite. The graph shows data on the price of oil since 1970. First, consider the period 1970-1985. The price of oil in today�s dollars fluctuated between $15 and $85. Now consider the period since 1986. The real price of oil fluctuated in a much more narrow range (from $12 to $47, or, if you exclude the one spike during the Gulf War, from $12 to $32). Main point: In the 1970s until 1985, sectoral shifts were more prevalent, and the natural rate was rising. Since 1986, sectoral shifts were less prevalent, and the natural rate was falling.

36. slide 35 EXPLAINING THE TREND: Demographics 1970s: The Baby Boomers were young. Young workers change jobs more frequently (high value of s). Late 1980s through today: Baby Boomers aged. Middle-aged workers change jobs less often (low s).  For details on this, plus one other explanation involving productivity, see pp.169-170.For details on this, plus one other explanation involving productivity, see pp.169-170.

37. slide 36 The rise in European Unemployment Figure 6-4 in the text (p.172) For this slide, I just used artwork supplied by the publisher. I think it would look better to make a graph from scratch (like the others in these PowerPoints), but I can�t locate the original data used to construct this chart. If you know where I can find it, I�d be grateful if you�d email me! roncron@unlv.nevada.edu Figure 6-4 in the text (p.172) For this slide, I just used artwork supplied by the publisher. I think it would look better to make a graph from scratch (like the others in these PowerPoints), but I can�t locate the original data used to construct this chart. If you know where I can find it, I�d be grateful if you�d email me! roncron@unlv.nevada.edu

38. slide 37 The rise in European Unemployment Two explanations: 1. Most countries in Europe have generous social insurance programs. 2. Shift in demand from unskilled to skilled workers, due to technological change.

39. slide 38 Chapter summary 1. The natural rate of unemployment the long-run average or �steady state� rate of unemployment depends on the rates of job separation and job finding 2. Frictional unemployment due to the time it takes to match workers with jobs may be increased by unemployment insurance

40. slide 39 Chapter summary 3. Structural unemployment results from wage rigidity: the real wage remains above the equilibrium level caused by: minimum wage, unions, efficiency wages 4. Duration of unemployment most spells are short term but most weeks of unemployment are attributable to a small number of long-term unemployed persons

41. slide 40 Chapter summary 5. Behavior of the natural rate in the U.S. rose from 1960 to early 1980s, then fell possible explanations: trends in real minimum wage, union membership, prevalence of sectoral shifts, and aging of the Baby Boomers 6. European unemployment has risen sharply since 1980 probably due to generous unemployment insurance there and a technology-driven shift in demand away from unskilled workers

42. slide 41