Unemployment

1. Unemployment Chapter #7

2. Introduction • Unemployment & output are tightly linked – but not perfect • Unemployment is a lagging economic indicator • Can be a mistaken guide to policy • Rising GDP may be of little solace to those still without a job • Costs of unemployment not equally distributed • Finding a job takes time • Job matching process illustrated by the Beveridge Curve • Shows unemployment rate vs. number of job openings • During Great Recession (2007-09) & years following unemployment high, but job vacancies higher in period following recession

3. The Anatomy of Unemployment • Five key characteristics of unemployment in the U.S. • Large unemployment rate variations across groups defined by age, race, or experience. • High turnover in the labor market. Flows in/out of employment high relative to # employed. • A significant part of turnover is cyclical: Layoffs/separations high in recessions, and voluntary quits in booms. • Most newly unemployed remain unemployed for only a short time. • Much of unemployment consists of people who will be unemployed for quite a long time. • The size of the labor force is determined from surveys by the BLS • Labor force = unemployed (U) + employed (E) • Unemployed is one who is out of work and who either • Has actively looked for work during the previous 4 weeks OR • Is waiting to be recalled to a job after having been laid off • Employed is one who during the reference week (including 12th of month): • Did at least one hour of work for pay in the last week • Worked at least 15 hours as unpaid worker for enterprise owned by a family member OR • Was not working, but only temporarily absent from work (ex. vacation or maturity leave)

4. Unemployment Variations Across Groups • The aggregate unemployment rate tells us the share of the labor force that is unemployed • The aggregate number conceals wide variations across various segments of the population • Teenagers have much higher unemployment rates than older workers • Female unemployment was higher than male unemployment through the 1970s, but now lower than male unemployment • Black unemployment is higher than that of their white cohorts • The relationship between the aggregate unemployment rate, u, and that of groups is: (1), where wi are the fraction of the civilian LF that falls within a specific group

5. The Unemployment Pool • At any point in time there is a given number (pool) of unemployed people • Labor market turnover, flows in/out of unemployment is large • A person can become unemployed for one of four reasons: • New entrant or reentrant into the LF • Quit a job to look for better one & register as unemployed while searching • Laid off • Lose a job (fired or firm closes) • There are three ways of moving out of the unemployment pool: • Hired into a new job • Laid off may be recalled • Unemployed stop looking for a job, and thus move out of the labor force • Unemployment rises when more people are entering the pool than leaving • Job losses represent ½; voluntary separations, new entrants& reentrants ½. • Average 2012 monthly manufacturing flows • Added 2.1 / 100 employees to payrolls • Removed 2 / 100 employees from payrolls

6. Cyclical & Frictional Unemployment • Frictional unemployment exists when the economy is at full employment • Results from the structure of the labor market, including: • The nature of jobs in the economy • Social habits • Labor market institutions • Frictional unemployment rate = natural rate of unemployment • Cyclical unemployment is in excess of frictional unemployment • Occurs when output is below the full employment level • The presence of cyclical unemployment indicates a downturn in the economy • Unemployed persons suffer both from their income loss and from the related social problems that long periods of unemployment cause • Costs of cyclical unemployment: • Okun’s law: 1% increase in unemployment reduces output by 2% • Distributional impact of unemployment may be more dire for some groups than others (Ex. Teenagers vs. older workers) • In addition to lost output from unemployment, there is reduced tax revenues • Social costs of unemployment: • Include increased divorce rates, suicide rates, and depression

7. Determinants of the Natural Rate Can be thought of in terms of the duration and frequency of unemployment • Duration depends on cyclical factors and structure of the labor market: • Market organization, including employment agencies, youth employment services…. • Demographics of labor force • Ability & desire to keep looking for a job, depends on unemployment benefits (allow longer job searches, ↓ severity of losing job) • Benefits ↑ measured unemployment through reporting effects (estimate ↑ is ≈ 0.5%): • To collect benefits must actively seeking work  some seek even if they do not want the job to qualify • Another issue unemployment spell duration (continuous unemployment) • Unemployment duration = average length of time a person remains unemployed • Frequency = average number of timesper period that worker is unemployed • Two basic determinants of frequency: • Variability of demand for labor across different firms in econ • Rate at which new workers (begin as unemployed) enter labor force

8. Estimates of the Natural Rate • Equation for natural rate of unemployment is similar to equation (1): (2) • Natural rate is weighted average of natural rates of subgroups in the LF • Several adjustments are needed to account for: • Changing composition of the LF, including increasing share of teenagers • Changes in fundamental determinants of natural rate, including unemployment benefits • CBO provides an official full-employment-unemployment rate estimate • If actual unemployment rate is above/below natural rate, u >/< u*, Y </> Y* • During 1973-88 US unemployment above demographic adjustment estimated natural • Some argue: unemployment over long periods cannot move too far from natural => natural rate have ↑ • One explanation is unemployment hysteresis: extended periods of high unemployment ↑ natural rate • Unemployed use to not working • Unemployed discouraged • Long unemployment spells might signal firms undesirability of worker& firms avoid hiring such workers