ISL244E Macroeconomics Problem Session- 9

1. ISL244EMacroeconomicsProblem Session-9 by Research Assistant Serkan Değirmenci D202/09-10.04.2012

2. Today • BLANCHARD (2009), Macroeconomics - Chapter 6: THE LABOR MARKET:(6.3-6.4-6.5) !!! (btw pages: 135-156) • Quick Check (QC): (1-3) (Page: 153) • Dig Deeper (DD): (4-7) (Page: 153-154) • Explore Further (EF): (8-9) (Page: 154) NEXT - Chapter 7: PUTTING ALL MARKETS TOGETHER: THE AS-AD MODEL(btw pages: 157-183) • Quick Check (QC): (1-4) (Page: 181) • Dig Deeper (DD): (5-11) (Page: 181-183) • Explore Further (EF): (12-13) (Page: 183)

3. A Tour of the Labor Market-Turkey =LF/15+ =U/LF

4. Flows of Workers-Turkey • İlgili dönemde işgücü hareketleri; • Aralık 2011 döneminde 1 milyon 649 bin kişi işe yeni başlamış veya iş değiştirmiş olup, bunun toplam istihdam içindeki oranı % 7'dir. İşe yeni başlayan veya iş değiştirenlerin % 28,7'si 25-34 yaş grubundadır. • Bu dönemde işe başlayan veya iş değiştirenlerin % 20,2’si "sanayi", % 38'i "hizmetler", % 22,4'ü "inşaat" sektöründe, % 19,4'ü ise "tarım" sektöründe işe başlamıştır. • Mevcut işsizlerin % 17,8’ini (458 bin kişi) bu dönemde işten ayrılanlar oluşturmaktadır.

5. 2011 yılı Aralık döneminde mevsim etkilerinden arındırılmış istihdam edilenlerin sayısında bir önceki döneme göre 123 bin kişilik, işsiz sayısında ise 7 bin kişilik azalış söz konusudur. Mevsim etkilerinden arındırılmış işgücüne katılma oranı bir önceki döneme göre 0,3 puanlık azalış ile % 49,5, istihdam oranı 0,4 puanlık azalış ile % 44,8, işsizlik oranı ise herhangi bir değişim göstermeyerek % 9,3 seviyesinde gerçekleşmiştir.

6. Figure 6-2

7. Chapter-6-QC-1 (Page: 153) • Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly. a. Since 1950, the participation rate in the United States has remained roughly constant at 60%. False. The participation rate has increased over time. (see page 136) => the participation rate has steadliy increased over time… b. Each month, the flows into and out of employment are very small compared to the size of the labor force. False. (see Figure 6.2 on page 137) c. Fewer than 10% of all unemployed workers exit the unemployment pool each year. False.(see Figure 6.2 on page 137) => (seepage 137-138) 45% d. The unemployment rate tends to be high in recessions and low in expansions. True. (seepage 139 andFigure 6-3) e. Most workers are typically paid their reservation wage. False.(seepage 142 => wagedetermination) f. Workers who do not belong to unions have no bargaining power. Uncertain/False. The degree of bargaining power depends on the nature of the job and the employee’s skills. (seepage 142 => wagedetermination) g. It may be in the best interest of employers to pay wages higher than their workers’ reservation wage. True. (seepage 143 => efficiencywages) h. The natural rate of unemployment is unaffected by policy changes. False. (seepage 149)

8. Chapter-6-QC-2 (Page: 153) • Answer the following questions using the information provided in this chapter. (seepage 137 Figure 6-2) a. As a percentage of the employed workers, what is the size of the flows into and out of employment (i.e., hires and separations) each month?(Monthly hires + monthly separations)/monthly employment =(4.4+4.6)/122=7% b. As a percentage of the unemployed workers, what is the size of the flows from unemployment into employment each month?1.4/6.2=23% c. As a percentage of the unemployed, what is the size of total flows out of unemployment each month? What is the average duration of unemployment?(1.4+1.4)/6.2=45%. Duration is 1/.45 or 2.2 months. d. As a percentage of the labor force, what is the size of the total flows into and out of the labor force each month?(3+2.8+1.4+1.4)/128.2= 6%. e.What percentage of flows into the labor force do new workers entering the labor force constitute?new workers: 0.4/(3+1.4)=9%.

9. Chapter-6-QC-3 (Page: 153) • The natural rate of unemployment(seesection 6.5) Suppose that the markup of goods prices over marginal cost is 6%, and that the wage-setting equation is W=P(1-u), where u is the unemployment rate. a. What is the real wage, as determined by the price-setting equation? b. What is the natural rate of unemployment? c. Suppose that the markup of prices over costs increases to 12%. What happens to the natural rate of unemployment? Explain the logic behind your answer. ANSWER: a. W/P=1/(1+)=1/1.06=0.943 b. Wage setting: u=1-W/P=5.7% c. W/P=1/1.12=0.89; u=1-.89=11%. The increase in the markup lowers the real wage. Algebraically, from the wage-setting equation, the unemployment rate must rise for the real wage to fall. So the natural rate increases. Intuitively, an increase in the markup implies more market power for firms, and therefore less production, since firms will use their market power to increase the price of goods by reducing supply. Less production implies less demand for labor, so the natural rate rises. !!! ATTENTION: Difference between explanation and comment!

10. Chapter-6-DD-4 (Page: 153) • Reservation wages (see page 143 => efficiency wages) In the mid-1980s, a famous supermodel once said that she would not get out of bed for less than $10,000 (presumably per day). a. What is your own reservation wage? b. Did your first job pay more than your reservation wage at the time? c. Relative to your reservation wage at the time you accept each job, which job pays more: your first one or the one you expect to have in 10 years? d. Explain your answers to parts (a) through (c) in terms of the efficiency wage theory. ANSWERS: a. Answers will vary.  b-c. Most likely, the difference between your actual wage and your reservation wage will be higher for the job you will have ten years later.   d. The later job is more likely to require training, which means you will be costly to replace, and will probably be a much harder job to monitor, which means you may need an incentive to work hard. Efficiency wage theory suggests that your employer will be willing to pay a lot more than your reservation wage for the later job, to make the job valuable to you, so you will stay at it and work hard.

11. Chapter-6-DD-5 (Page: 153) • The existence of unemployment (see page 143 => bargaining) a. Suppose the unemployment rate is very low. How easy is it for firms to find workers to hire? How easy is it for workers to find jobs? What do your answers imply about the relative bargaining power of workers and firms when the unemployment rate is very low? What do your answers imply about what happens to the wage as the unemployment rate gets very low? b. Given your answer to part (a), why is there unemployment in the economy? (What would happen to real wages if the unemployment rate were equal to zero?) ANSWERS: a. When the unemployment rate is very low, it is very difficult for firms to find workers to hire and very easy for workers to find jobs. As a result, the bargaining power of workers is very high when the unemployment rate is very low. Therefore, the wage gets very high as the unemployment rate gets very low. b. Presumably, the real wage would grow without bound as the unemployment rate approached zero. Since a worker could always find a job, there would be nothing to constrain aggressive wage bargaining. At any positive rate of unemployment, however, there is some constraint on worker bargaining power.

12. Chapter-6-DD-6 (Page: 153) • Bargaining power and wage determination (see page 143 => bargaining) Even in the absence of collective bargaining, workers do have some bargaining power that allows them to receive wages higher than their reservation wage. Each worker’s bargaining power depends both on the nature of the job and on the economy-wide labor markets conditions. Let’s consider each factor in turn. a. Compare the job of a delivery person and a computer network administrator. In which of these jobs does a worker have more bargaining power? Why? b. For any given job, how do labor market conditions affect a worker’s bargaining power? Which labor market variable would you look at to assess labor market conditions? c. Suppose that for given labor market conditions [the variable you identified in part (b)], worker bargaining power throughout the economy increases. What effect would this have on the real wage in the medium run? in the short run?What determines the real wage in the model described in this chapter?

13. Chapter-6-DD-6 (Page: 153) ANSWERS: a. The computer network administrator has more bargaining power. She is much harder to replace. b. The rate of unemployment is the most important indicator of labor market conditions. When the rate of unemployment increases, it becomes easier for firms to find replacements, and worker bargaining power falls. c.In our model, the real wage is always given by the price-setting relation: W/P=1/(1+). Since the price-setting relation depends on the actual price level and not the expected one, this relation holds in the short run and the medium run of our model.

14. Chapter-6-DD-7 (Page: 153) • The informal labor market You learned in Chapter 2 that informal work at home (e.g., preparing meals, taking care of children) is not counted as part of GDP. Such work also does not constitute employment in labor market statistics. With these observations in mind, consider two economies, each with 100 people, divided into 25 households, each composed of four people.In each household, one person stays at home and prepares the food, two people work in the non-food sector, and one person is unemployed. Assume that the workers outside food preparation produce the same actual and measured output in both economies. In the first economy, EatIn, the 25 food-preparation workers (one per household) cook for their families at home and do not work outside the house. All meal are prepared and eaten at home. The 25 food preparation workers in this economy do not seek work in the formal labor market (and when asked, they say they are not looking for work). In the second economy, EatOut,the 25 food preparation workers are employed by restaurants. All meals are purchased in restaurants.

15. Chapter-6-DD-7 (Page: 154) a. Calculate measured employment and unemployment and the measured labor force for each economy. Calculate the measured unemployment rate and participation rate for each economy. In which economy is measured GDP higher? b. Suppose now that EatIn’s economy changes. A few restaurants open, and the food-preparation workers in 10 households take jobs restaurants. The members of these 10 households now eat all of their meals in restaurants. The food-preparation workers in the remaining 15 households continue to work at home and do not seek jobs in the formal sector. The members of these 15 households continues to eat all of their meals at home. Without calculating the numbers, what will happen to measured employmentand unemployment and to the measured labor force, unemployment rate, and participation rate in EatIn? What will happen to measured GDP in EatIn? c. Suppose that you want to include work at home in GDP and the employment statistics. How would you measure the value of work at home in GDP? How would you alter the definitions of employment, unemployment and out of the labor force? d. Given your new definitions in part (c), would the labor market statistics differ for EatIn and EatOut? Assuming that the food produced by these economies has the same value, would measured GDP in these economies differ? Under your new definitions, would the experiment in part (b) have any effect on the labor market or GDP statistics for EatIn?

16. Chapter-6-DD-7 (Page: 154) ANSWERS: a. * Measured GDP is higher in EatOut. b. The measured labor force and participation rate rise. Measured employmentrises. Measured unemployment does not change, but the measured unemployment rate falls.Measured GDP will rises. c. To adjust the labor market statistics, you would have to estimate the number ofworkers informally employed at home and add them to the measured employed. To the extent that workers employed informally at home were measured asunemployed, you would have to reduce measured unemployment accordingly. To theextent that workers employed informally at home were considered out of the laborforce, counting these workers as employed would increase the size of the labor force.

17. Chapter-6-DD-7 (Page: 154) ANSWERS: • To adjust the GDP statistics, you would have to estimate the value-added of final goods produced at home. You could make comparisons to similar goods produced outside the home, or make comparisons to workers involved in similar industries outside the home, estimate the relevant wage and hours worked, and calculate value-added as the cost of labor, as is done for government services. In either case, you need to calculate value-added, since intermediate goods—groceries, cleaning supplies, child care supplies, and so on—involved in the production of at-home goods are already counted in GDP as final goods in the formal sector. d. If food preparation at home is counted in GDP and workers involved in foodpreparation at home are counted as employed, then the labor market statistics and measured GDP would be the same in the two economies and the experiment in part (b) would have no effect.

18. Chapter-6-EF-8 (Page: 154) • Unemployment spells and long-run unemployment According to the data presented in this chapter, about 45% of unemployed workers leave unemployment each month. a. What is the probability that an unemployed worker will still be unemployed after one month? two months? six months? Now consider the composition of the unemployment pool. We will use a simple experiment to determine the proportion of the unemployment who have been unemployed six months or more. Suppose the number of unemployed workers is constant and equal to x (where x is some constant). Each month, 45% of the unemployed find jobs, and an equivalent number of previously employed workers become unemployed. b. Consider the group of x workers who are unemployed this month. After a month, what percentage of this group will still be unemployed? (Hint: If 45% of unemployed workers find jobs every month, what percentage of the original x unemployed workers did not find jobs in the first month?) c. After a second month, what percentage of the original x unemployed workers has been unemployed for at least two months? (Hint: Given your answer to part (b), what percentage of those unemployed for at least one month do not find jobs in the second month?) After the sixth month, what percentage of the original x unemployed workers has been unemployed for at least six months?

19. Chapter-6-EF-8 (Page: 154) This percentage applies to the economy at any time (remember that we started with an arbitrary month). Under our assumptions, the percentage of the unemployed who have been unemployed six months or more is constant. d. Using Table B-44 of the Economic Report of the President (www.access.gpo.gov/eop/), compute the proportion of unemployed who have been unemployed six months or more (27 weeks or more) for each year between 1996 and 2003. How do these numbers compare with the answer you obtained in part (c)? Can you guess what may account for the difference between the actual numbers and the answer you obtained in this problem? (Hint: Suppose that the probability of exiting unemployment goes down the longer you are unemployed.)

20. Chapter-6-EF-8 (Page: 154) ANSWERS: a. 55%; (0.55)2= 30%; (0.55)6 = 2% b. 55% c. second month: (0.55)2=30%; sixth month: (0.55)6 = 2% d. Average proportion 27 weeks or more over 1990-1999= 16.1% 1996: 17% 2000: 11% 1997: 16% 2001: 12% 1998: 14% 2002: 18% 1999: 12% 2003: 22% • The long-term unemployed exit unemployment less frequently than the average unemployed worker.

21. Chapter-6-EF-9 (Page: 154) • Go to the Web site maintained by the Turkish Statistical Institute (www.turkstat.gov.tr). Find the Labor Force Statistics. Look under the link “Data.” a. What are the latest monthly data on the size of the Turkish civilian labor force, on the number of the unemployed, and on the unemployment rate? b. How many people are employed? c. Compute the change in the number of unemployed from the first number in the table to the most recent month in the table. Do the same for thenumber of employed workers. Is the decline in unemployment equal to the increase in employment? Explain in words. ANSWERS: a-b. Answers will depend on when the page is accessed. c.The decline in unemployment does not equal the increase in employment, because the labor force is not constant.

22. to be continued…