UNEMPLOYMENT THE FACTS General (Graph) I The US rate of unemployment - - PowerPoint PPT Presentation

UNEMPLOYMENT THE FACTS General (Graph)

I The US rate of unemployment has varied between 1% and

25% over the past 100 years

UNEMPLOYMENT THE FACTS General (Graph)

I The US rate of unemployment has varied between 1% and

25% over the past 100 years

I High rates of unemployment coincide with recessions

UNEMPLOYMENT THE FACTS General (Graph)

I The US rate of unemployment has varied between 1% and

25% over the past 100 years

I High rates of unemployment coincide with recessions I Low rates of unemployment coincide with booms

UNEMPLOYMENT THE FACTS General (Graph)

I The US rate of unemployment has varied between 1% and

25% over the past 100 years

I High rates of unemployment coincide with recessions I Low rates of unemployment coincide with booms I Since WWII the nature of unemployment variation looks

di¤erent

Breakdown of the Unemployment Figures

I By Education

Breakdown of the Unemployment Figures

I By Education I By Demographic groups

Breakdown of the Unemployment Figures

I By Education I By Demographic groups I By entry into unemployment

Breakdown of the Unemployment Figures

I By Education I By Demographic groups I By entry into unemployment I By duration of unemployment

BASIC CONCEPTS Breakdown of unemployment

I Frictional: comes from the sorting of individuals across jobs

because it takes time for workers to …nd employers and vice-versa. More unemployment can mean better sorting.

BASIC CONCEPTS Breakdown of unemployment

I Frictional: comes from the sorting of individuals across jobs

because it takes time for workers to …nd employers and vice-versa. More unemployment can mean better sorting.

I Seasonal: comes from some jobs being seasonal - fruit

picking, teaching.

BASIC CONCEPTS Breakdown of unemployment

I Frictional: comes from the sorting of individuals across jobs

because it takes time for workers to …nd employers and vice-versa. More unemployment can mean better sorting.

I Seasonal: comes from some jobs being seasonal - fruit

picking, teaching.

I Structural:

BASIC CONCEPTS Breakdown of unemployment

I Frictional: comes from the sorting of individuals across jobs

because it takes time for workers to …nd employers and vice-versa. More unemployment can mean better sorting.

I Seasonal: comes from some jobs being seasonal - fruit

picking, teaching.

I Structural:

I mismatch, by industry

BASIC CONCEPTS Breakdown of unemployment

I Frictional: comes from the sorting of individuals across jobs

because it takes time for workers to …nd employers and vice-versa. More unemployment can mean better sorting.

I Seasonal: comes from some jobs being seasonal - fruit

picking, teaching.

I Structural:

I mismatch, by industry I mismatch by location

BASIC CONCEPTS Breakdown of unemployment

I Frictional: comes from the sorting of individuals across jobs

because it takes time for workers to …nd employers and vice-versa. More unemployment can mean better sorting.

I Seasonal: comes from some jobs being seasonal - fruit

picking, teaching.

I Structural:

I mismatch, by industry I mismatch by location I excess supply of labor due to distortionary labor market

institutions

BASIC CONCEPTS Breakdown of unemployment

I Frictional: comes from the sorting of individuals across jobs

because it takes time for workers to …nd employers and vice-versa. More unemployment can mean better sorting.

I Seasonal: comes from some jobs being seasonal - fruit

picking, teaching.

I Structural:

I mismatch, by industry I mismatch by location I excess supply of labor due to distortionary labor market

institutions

I Alternative breakdown: voluntary versus involuntary

unemployment.

EMPLOYMENT FLOWS AND STEADY-STATE UNEMPLOYMENT

I Suppose probability of loosing a job on any day is l

EMPLOYMENT FLOWS AND STEADY-STATE UNEMPLOYMENT

I Suppose probability of loosing a job on any day is l I probability of …nding a job for unemployed is h

EMPLOYMENT FLOWS AND STEADY-STATE UNEMPLOYMENT

I Suppose probability of loosing a job on any day is l I probability of …nding a job for unemployed is h I In steady state ‡ow into and out of unemployment are equal

lE = hU

EMPLOYMENT FLOWS AND STEADY-STATE UNEMPLOYMENT

I Suppose probability of loosing a job on any day is l I probability of …nding a job for unemployed is h I In steady state ‡ow into and out of unemployment are equal

lE = hU

I As labor force (LF) equals E + U,

steady-state unemployment rate = U LF = l l + h

EMPLOYMENT FLOWS AND STEADY-STATE UNEMPLOYMENT

I Suppose probability of loosing a job on any day is l I probability of …nding a job for unemployed is h I In steady state ‡ow into and out of unemployment are equal

lE = hU

I As labor force (LF) equals E + U,

steady-state unemployment rate = U LF = l l + h

I Also called the Natural rate of unemployment

JOB SEARCH

I Where do the ‡ows come from?

JOB SEARCH

I Where do the ‡ows come from? I Unemployed workers apply for jobs

JOB SEARCH

I Where do the ‡ows come from? I Unemployed workers apply for jobs I Every so often they get an o¤er

JOB SEARCH

I Where do the ‡ows come from? I Unemployed workers apply for jobs I Every so often they get an o¤er I The wage they get o¤ered can be in some range (or

distribution)

JOB SEARCH

I Where do the ‡ows come from? I Unemployed workers apply for jobs I Every so often they get an o¤er I The wage they get o¤ered can be in some range (or

distribution)

I Depending on that range and the likelihood of getting higher

• ¤ers they will stop looking and take a job as long as it pays

as much as their asking wage, ˜ w.

JOB SEARCH

I Where do the ‡ows come from? I Unemployed workers apply for jobs I Every so often they get an o¤er I The wage they get o¤ered can be in some range (or

distribution)

I Depending on that range and the likelihood of getting higher

• ¤ers they will stop looking and take a job as long as it pays

as much as their asking wage, ˜ w.

I They will decide their asking wage at the beginning of their

job search.

JOB SEARCH

I Where do the ‡ows come from? I Unemployed workers apply for jobs I Every so often they get an o¤er I The wage they get o¤ered can be in some range (or

distribution)

I Depending on that range and the likelihood of getting higher

• ¤ers they will stop looking and take a job as long as it pays

as much as their asking wage, ˜ w.

I They will decide their asking wage at the beginning of their

job search.

I As long as nothing about the market changes they will have

no reason to change the asking wage as they search.

Bene…t (or revenue) from higher asking wage

I Clearly the higher the asking wage the higher will be the

worker’s income when she eventually takes a job.

Bene…t (or revenue) from higher asking wage

I Clearly the higher the asking wage the higher will be the

worker’s income when she eventually takes a job.

I Raising the asking wage $1 does not make her a dollar better

• ¤ because she does not, as yet, have a job

Bene…t (or revenue) from higher asking wage

I Clearly the higher the asking wage the higher will be the

worker’s income when she eventually takes a job.

I Raising the asking wage $1 does not make her a dollar better

• ¤ because she does not, as yet, have a job

I The unemployed worker will have to search longer for the

higher paid job.

Bene…t (or revenue) from higher asking wage

I Clearly the higher the asking wage the higher will be the

worker’s income when she eventually takes a job.

I Raising the asking wage $1 does not make her a dollar better

• ¤ because she does not, as yet, have a job

I The unemployed worker will have to search longer for the

higher paid job.

I Every further dollar she raises her asking wage …nding a job

becomes relatively more di¢cult

Bene…t (or revenue) from higher asking wage

I Clearly the higher the asking wage the higher will be the

worker’s income when she eventually takes a job.

I Raising the asking wage $1 does not make her a dollar better

• ¤ because she does not, as yet, have a job

I The unemployed worker will have to search longer for the

higher paid job.

I Every further dollar she raises her asking wage …nding a job

becomes relatively more di¢cult

I The change in the bene…t (or revenue) associated with each

additional dollar (MR) is decreasing as the asking wage rises

Cost of higher asking wage

I Making applications is costly in terms of direct expenses

(paper, stamps) and time.

Cost of higher asking wage

I Making applications is costly in terms of direct expenses

(paper, stamps) and time.

I As the unemployed worker raises her asking wage the number

• f applications she has to make will also rise.

Cost of higher asking wage

I Making applications is costly in terms of direct expenses

(paper, stamps) and time.

I As the unemployed worker raises her asking wage the number

• f applications she has to make will also rise.

I At …rst the increased number of applications is small but the

more she asks for, so the costs rise more quickly.

Cost of higher asking wage

I Making applications is costly in terms of direct expenses

(paper, stamps) and time.

I As the unemployed worker raises her asking wage the number

• f applications she has to make will also rise.

I At …rst the increased number of applications is small but the

more she asks for, so the costs rise more quickly.

I The marginal cost (MC) of increasing the wage is increasing

I Determination of the asking wage

I Determination of the asking wage

I The searching worker sets the marginal cost equal to the

marginal revenue from search.

I Determination of the asking wage

I The searching worker sets the marginal cost equal to the

marginal revenue from search.

I She sets her asking wage before she starts to search and stops

searching whenever she gets an o¤er of employment at the asking wage or higher.

I Determination of the asking wage

I The searching worker sets the marginal cost equal to the

marginal revenue from search.

I She sets her asking wage before she starts to search and stops

searching whenever she gets an o¤er of employment at the asking wage or higher.

I Shifting the curves

I Determination of the asking wage

I The searching worker sets the marginal cost equal to the

marginal revenue from search.

I She sets her asking wage before she starts to search and stops

searching whenever she gets an o¤er of employment at the asking wage or higher.

I Shifting the curves

I Because it lowers the opportunity cost of employment, the

Unemployment Insurance (UI) bene…ts an unemployed worker receives reduces the marginal cost of searching to a worker. – The MC curve shifts right and increases ˜ w.

I Determination of the asking wage

I The searching worker sets the marginal cost equal to the

marginal revenue from search.

I She sets her asking wage before she starts to search and stops

searching whenever she gets an o¤er of employment at the asking wage or higher.

I Shifting the curves

I Because it lowers the opportunity cost of employment, the

Unemployment Insurance (UI) bene…ts an unemployed worker receives reduces the marginal cost of searching to a worker. – The MC curve shifts right and increases ˜ w.

I increased o¤er arrival? (the internet?)

I Determination of the asking wage

I The searching worker sets the marginal cost equal to the

marginal revenue from search.

I She sets her asking wage before she starts to search and stops

searching whenever she gets an o¤er of employment at the asking wage or higher.

I Shifting the curves

I Because it lowers the opportunity cost of employment, the

Unemployment Insurance (UI) bene…ts an unemployed worker receives reduces the marginal cost of searching to a worker. – The MC curve shifts right and increases ˜ w.

I increased o¤er arrival? (the internet?) I increased lay-o¤ rate?

I Determination of the asking wage

I The searching worker sets the marginal cost equal to the

marginal revenue from search.

I She sets her asking wage before she starts to search and stops

searching whenever she gets an o¤er of employment at the asking wage or higher.

I Shifting the curves

I Because it lowers the opportunity cost of employment, the

Unemployment Insurance (UI) bene…ts an unemployed worker receives reduces the marginal cost of searching to a worker. – The MC curve shifts right and increases ˜ w.

I increased o¤er arrival? (the internet?) I increased lay-o¤ rate?

I Note: The search model is usually viewed as a model of

frictional unemployment but the model can be extended to incorporate structural unemployment due to mismatch

EFFICIENCY WAGES

I This is a theory of how the equilibrium wage could be above

the market clearing level

EFFICIENCY WAGES

I This is a theory of how the equilibrium wage could be above

the market clearing level

I All the previous models have implicitly assumed that the …rm

can see how much the worker produces.

EFFICIENCY WAGES

I This is a theory of how the equilibrium wage could be above

the market clearing level

I All the previous models have implicitly assumed that the …rm

can see how much the worker produces.

I In that case, a worker who does not produce as expected will

not be paid.

EFFICIENCY WAGES

I This is a theory of how the equilibrium wage could be above

the market clearing level

I All the previous models have implicitly assumed that the …rm

can see how much the worker produces.

I In that case, a worker who does not produce as expected will

not be paid.

I The competitive equilibrium wage occurs at the intersection of

the demand and (for simplicity the vertical) supply curve

I Costly monitoring

I Costly monitoring

I Suppose it’s expensive for the …rm to observe a worker’s e¤ort

level

I Costly monitoring

I Suppose it’s expensive for the …rm to observe a worker’s e¤ort

level

I If he can get another job instantaneously, why should the

worker exert any e¤ort?

I Costly monitoring

I Suppose it’s expensive for the …rm to observe a worker’s e¤ort

level

I If he can get another job instantaneously, why should the

worker exert any e¤ort?

I If there is unemployment, a small chance of getting caught

shirking gives the workers reason to work

I Costly monitoring

I Suppose it’s expensive for the …rm to observe a worker’s e¤ort

level

I If he can get another job instantaneously, why should the

worker exert any e¤ort?

I If there is unemployment, a small chance of getting caught

shirking gives the workers reason to work

I The no-shirking condition

I Costly monitoring

I Suppose it’s expensive for the …rm to observe a worker’s e¤ort

level

I If he can get another job instantaneously, why should the

worker exert any e¤ort?

I If there is unemployment, a small chance of getting caught

shirking gives the workers reason to work

I The no-shirking condition

I If the unemployment level is high …rms need only o¤er a low

wage to stop shirking

I Costly monitoring

I Suppose it’s expensive for the …rm to observe a worker’s e¤ort

level

I If he can get another job instantaneously, why should the

worker exert any e¤ort?

I If there is unemployment, a small chance of getting caught

shirking gives the workers reason to work

I The no-shirking condition

I If the unemployment level is high …rms need only o¤er a low

wage to stop shirking

I If the unemployment is low …rms need to o¤er high wages so

that the penalty associated with shirking is su¢ciently severe to make them work.

I Costly monitoring

I Suppose it’s expensive for the …rm to observe a worker’s e¤ort

level

I If he can get another job instantaneously, why should the

worker exert any e¤ort?

I If there is unemployment, a small chance of getting caught

shirking gives the workers reason to work

I The no-shirking condition

I If the unemployment level is high …rms need only o¤er a low

wage to stop shirking

I If the unemployment is low …rms need to o¤er high wages so

that the penalty associated with shirking is su¢ciently severe to make them work.

I This trade-o¤ generates the No-Shirking curve (NS)

I The e¢ciency wage equilibrium

I The e¢ciency wage equilibrium

I The equilibrium wage is one that is on the labor demand curve

and makes the workers just indi¤erent between shirking and working

I The e¢ciency wage equilibrium

I The equilibrium wage is one that is on the labor demand curve

and makes the workers just indi¤erent between shirking and working

I The equilibrium wage is above the competitive market wage

I The e¢ciency wage equilibrium

I The equilibrium wage is one that is on the labor demand curve

and makes the workers just indi¤erent between shirking and working

I The equilibrium wage is above the competitive market wage

I Shifts to the NS curve

I The e¢ciency wage equilibrium

I The equilibrium wage is one that is on the labor demand curve

and makes the workers just indi¤erent between shirking and working

I The equilibrium wage is above the competitive market wage

I Shifts to the NS curve

I Unemployment insurance payments diminish the penalty from

getting caught shirking - the NS curve shifts up