Mankiw: Brief Principles of Macroeconomics, Second Edition (Harcourt, 2001)

1. Mankiw: Brief Principles of Macroeconomics, Second Edition (Harcourt, 2001) Ch. 9: Unemployment and Its Natural Rate

2. Two Categories of Unemployment • Long-Run Unemployment • Average unemployment rate over a long period. • Identified as Natural Rate of Unemploymentor NAIRU. • NAIRU stands for Non-accelerating inflation rate of unemployment. • Includes frictional and structural unemployment. • Short-Run Unemployment • Cyclical unemployment around the natural rate. Econ 202 Dr. Ugur Aker

3. How Does the Government Measure Unemployment? • Bureau of Labor Statistics (Department of Labor) collects information every month. • The first Friday of every month at 8:30 AM eastern time, the unemployment rate for the previous month is announced. • People of age 16 and older are classified as either EMPLOYED or UNEMPLOYED or NOT IN THE LABOR FORCE. Econ 202 Dr. Ugur Aker

4. How Does the Government Measure Unemployment? • Employed • Any one working for pay. • It may be full-time or part-time. • Unemployed • Temporary lay-off. • Waiting to start a job. • Looking for a job. • Not in the labor force • Retirees • Students • Homemakers • Inmates Econ 202 Dr. Ugur Aker

5. Long-Run Unemployment Econ 202 Dr. Ugur Aker

6. Unemployment Rates for Different Groups Econ 202 Dr. Ugur Aker

7. Definitions • Labor Force = Employed + Unemployed • Unempl. Rate (%) = Unemployed/Labor Force • Labor Force Participation Rate (%) = Labor Force/Adult Population Econ 202 Dr. Ugur Aker

8. In 1950, labor force participation rate for females was 33%. In 1998, labor force participation rate for females was 60%. Inventions to reduce household work. Birth control. Education and cultural values. In 1950, labor force participation rate for males was 87%. In 1998, labor force participation rate for males was 75%. Later entry, more schooling. Earlier retirement. Longer lives. Father-moms. Labor Force Participation Econ 202 Dr. Ugur Aker

9. http://stats.bls.gov/eag/eag.us.htm Econ 202 Dr. Ugur Aker

10. http://stats.bls.gov/eag/eag.us.htm Econ 202 Dr. Ugur Aker

11. Econ 202 Dr. Ugur Aker

12. Econ 202 Dr. Ugur Aker

13. Labor Participation Rates • In 1998, labor participation rate was 67.1% (Mankiw, p. 184). • Calculate the labor participation rates for • June 2000: 67.175%. • July 2000: 66.943% • August 2000: 67.041% • November 2000: 67.023% • December 2000: 67.138% • January 2001: 67.312% Econ 202 Dr. Ugur Aker

14. Problems Measuring Unemployment Rate • Some unemployed may in fact should be counted as “not in labor force.” • Claim to be seeking a job. • Some unemployed may be employed. • May be paid cash for jobs undertaken but claim to be unemployed. • Some “not in labor force” may be unemployed. • Discouraged workers stop seeking jobs but are willing to work. Econ 202 Dr. Ugur Aker

15. Length of Unemployment • During a year, most people who experience unemployment, stay unemployed for short periods of time. • Frictional Unemployment • Cyclical Unemployment • At a certain date, looking at cross-section data, reveals that most unemployed have been unemployed for a long time. • Structural Unemployment • Policies that are designed for one group will not help the other group. Econ 202 Dr. Ugur Aker

16. Kinds of Unemployment • Cyclical Unemployment takes place in the short run, during the business cycle. • Frictional Unemployment is part of the long run unemployment and is related to job search. • Structural Unemployment is related to wage rigidities and skill-job mismatches. Econ 202 Dr. Ugur Aker

17. Frictional Unemployment • New entrants • More than one-third of the unemployed are recent entrants. • College graduates. • Returning workers. • Workers in declining industries become unemployed and move into expanding industries. • 10% of manufacturing jobs are destroyed every year. • 3% of workers leave their jobs every year. Econ 202 Dr. Ugur Aker

18. How to Reduce Frictional U. • Shrinking the time for job searches would reduce frictional unemployment. • More information about job openings. • More information about skills and availability. • Opportunities to bring workers close to the jobs. • Public transportation for those without cars. Econ 202 Dr. Ugur Aker

19. Government Policies and Unemployment • Training programs for the structurally unemployed should make them more employable. • Unemployment Insurance softens the negative impact of unemployment. • It also allows to match workers and jobs better by letting workers not to take the first job available. Econ 202 Dr. Ugur Aker

20. Government Policies and Unemployment • Unemployment Insurance reduces the incentives to look for a job. • As the benefit period approaches the limit of 6 months, probability of finding a job increases. • Minimum wage laws may force the wage to remain above equilibrium wage and create surplus of labor. • Minimum wage survey done by Hiram students. Econ 202 Dr. Ugur Aker

21. Minimum Wage As a Price Floor S Mw Ew D Ls Ld L Le Econ 202 Dr. Ugur Aker

22. Minimum Wage • Minimum wage affects a small portion of the work force: unskilled and teenagers. • Survey by Hiram College students • Minimum wage article in The Economist, February 1 , 2001. Econ 202 Dr. Ugur Aker

23. Unions • In the US only one in six workers are unionized. • In western Europe, 3 out of four workers are unionized. • Unionized workers typically get 10-20% higher wages. • It may work similar to the minimum wage. • For monopsonies, unions increase efficiency. • Unions establish wages and work rules through collective bargaining and threat of strike. Econ 202 Dr. Ugur Aker

24. Unemployment in European Union • EU workers are more unionized. • EU unemployment benefits are more generous. • Minimum wages are raised more frequently and sometimes other wages are indexed to minimum wage. • Natural rate of unemployment in EU is higher than USA. Econ 202 Dr. Ugur Aker

25. Efficiency Wages • Efficiency wages are cases when firms keep wages above the equilibrium level. • Workers may be healthier in LDCs if they are paid above the subsistence wage. • Workers may quit the job less if they are paid above the equilibrium wage. • Workers would work harder lest they will lose the job and get the lower equilibrium wage. • Firms attract better quality of workers by paying a higher wage because of the reservation wage. Econ 202 Dr. Ugur Aker

26. Henry Ford’s Efficiency Wages • Ford offered twice the going wage to his assembly workers. • Turnover fell. • Absenteeism fell. • Productivity rose. • Discipline improved. • Loyalty increased. Econ 202 Dr. Ugur Aker

27. Asymmetric Information • Adverse selection: one of the parties in a transaction knows much more about the good or service and manipulates the situation for his/her own benefit. • To save labor costs, a firm might lower pay and end up losing better quality workers. • A borrower knows the chances of earning future income better than the lender. Those who are gamblers seek funds more than careful individuals. • Sick people would like to get health insurance more than healthy people. • Used car market has more problem cars. Econ 202 Dr. Ugur Aker

28. Asymmetric Information • Moral Hazard: The agent undertakes risky, inappropriate behavior that the principal would object if s/he only knew. • Workers might shirk on the job. • A borrower uses the funds to gamble. • A car owner drives more recklessly once s/he has a good insurance. • A person with health insurance uses the doctor for even minor colds and cuts. Econ 202 Dr. Ugur Aker