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Lecture 6

Lecture 6. Unemployment. Basic fact: varies a lot. More recent information. http://www.google.com/publicdata?ds=usunemployment&met=unemployment_rate&tdim=true&dl=en&hl=en&q=unemployment+rate. Current unemployment rates. Varies a lot across difference groups. Age groups Races Education

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Lecture 6

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  1. Lecture 6 Unemployment

  2. Basic fact: varies a lot

  3. More recent information • http://www.google.com/publicdata?ds=usunemployment&met=unemployment_rate&tdim=true&dl=en&hl=en&q=unemployment+rate

  4. Current unemployment rates

  5. Varies a lot across difference groups • Age groups • Races • Education • Gender • Cities • Industries and occupations

  6. Questions to be answered • Why unemployment • Why fluctuations over time • Why variations across different groups

  7. Two types of unemployment • The frictional unemployment and the structural unemployment • The frictional unemployment: • Also equilibrium unemployment. • It occurs when the matches between employees and employers are not very good, or no longer very good because of shocks.

  8. Two types of unemployment • The structural unemployment: • Occurs when firms do not lower their wages to hire more workers, when unemployment workers are willing to work for less.

  9. Nobel Laureates in 2010 Peter Diamond Dale Mortensen Christopher Pissarides MIT Northwestern London School of Economics

  10. Frictional unemployment • L: the labor force • E: the number of employed workers • U: the number of unemployed. L = E + U

  11. Frictional unemployment • L is fixed • s is rate of job separation • f is rate of finding job • In equilibrium, People who find jobs = people who are separated from jobs fU = sE = s(L-U)

  12. Frictional unemployment • Rearranging this equation, we have: • u is the unemployment rate

  13. Discussions: • When f and s changes: • Higher f  lower unemployment rate • Higher s  higher unemployment rate

  14. Frictional unemployment • It takes time to match workers and jobs. • Example 1: sectoral shift: • We have negative shocks to the auto industry and positive shocks to the computer industry. • The auto industry needs less workers while the computer industry needs more workers.

  15. Frictional unemployment • Example 1: sectoral shift • It takes more time for auto workers to move to computer industry because they may not have adequate experience. • Overall unemployment would rise.

  16. Frictional unemployment: Example 2– market size • Market size

  17. The Matching Model applicants vacancies • A thicker market (more applicants and more vacancies). • Average distance is closer. • Better match. • Better wage and lower unemployment rate.

  18. Factors that may affect frictional unemployment • Internet sites such as monster.com etc • The unemployment insurance

  19. George Costanza as the Latex Salesman • http://www.youtube.com/watch?v=_T35QhLx_KI

  20. The Obama stimulus package • The Obama stimulus package extends the length of having unemployment benefit – from five years to 2 to 3 years. • Earned income tax credit – the Obama plan pays each worker with income less than $70,000 an additional credit of $400 if one works.

  21. The Obama stimulus package • Several republican governors rejected the stimulus money. • Rick Perry: rejects the $555 million of Texas’ stimulus funds directed at unemployment insurance on March 2009. • Mark Sanford from South Carolina also did that but later (June 2010) accepted the stimulus money.

  22. Frictional unemployment • The Illinois experiment in 1985: unemployed workers are randomly selected into two groups. • The first group would get $500 bonus if they find jobs within 11 weeks; • The second group if not offered this option. • The first group on average gets jobs in 17 weeks, while the 2nd group gets jobs in 18.3 weeks.

  23. Discussions • Older workers vs young workers? • Older workers has a lower separation rate  lower unemployment. • Lower education – easy to leave jobs and the cost of the firms to fire them is also low  higher unemployment.

  24. Structural unemployment

  25. Structural unemployment • Labor demand: from lecture 3 MPL = W  Rewrite this equation: Higher the wage, lower the demand for labor.

  26. Labor demand Wage Labor demand Labor

  27. Labor supply • If people’s willingness to work does not depend on wages  Labor supply is vertical. • If people’s willingness to work depends on wages (higher wage willing to work more)  Labor supply is positively sloped.

  28. Labor supply If labor supply does not depend on wage Wage If labor supply depends on wage Labor

  29. Labor supply • A very important public policy question. • A key difference between republicans and democrats.

  30. The tax debate (09/10) • Obama wanted to abolish the Bush tax cut for those who earn 250,000 or more (currently at either 33% or 35%). Tax rates for those would be raised up to 39% • Republicans wanted to keep it. • Compromise: keep them for two years. Obama was heavily criticized by democrates on this.

  31. Laffer curve A lower tax rate • a higher after-tax wage • people are willing to work more • a higher level of output • a higher tax revenue for the government This argument critically depends on labor supply function.

  32. Laffer curve Republicans think current tax rate is at this region Tax Revenue Tax Rate t* 0 100

  33. Laffer curve – is it true? • For men, the labor supply DOES NOT depend wages – men work regardless. • For women, no concensus.

  34. Equilibrium: no structural unemployment Wage equilibrium wage w* Labor demand Equilibrium workers L* Labor

  35. Structural unemployment: wage > w* Wage Labor supply > labor demand wage equilibrium wage w* Labor demand Equilibrium workers L* Labor

  36. Structural unemployment • Why wage > w*? • The minimum wage • Unions and collective bargain • Efficiency wage

  37. Minimum wage • Federal minimum wage: • 7/24/2008: $6.55 • 7/24/2009: $7.25 • At the heart of debate  an increase of minimum wage would lead to a higher unemployment.

  38. Minimum wage • Card and Krueger (1994): New Jersey raised its minimum wage in 1992, from $4.25 to $5.05 • Wage and employment data from 400 fast food restaurants in both Pennsylvania and New Jersey before and after the minimum wage increase.

  39. Minimum wage • They find: • Wages do increase more in New Jersey • Restaurants do not hire fewer workers in New Jersey. In fact, New Jersey actually added 2.5 workers more per restaurant.

  40. Minimum wage • Two possible reasons: • Restaurants often operate with several vacancies – they could not fill them before – now they can. • The prices of burgers in New Jersey went up.

  41. Minimum wage • Very influential study  it directly affects public policies. • Clinton, in his State of Union Address in 1/25/1995, said: • “I believe the weight of the evidence is that a modest increase does not cost jobs, and may even lure people back into the labor market.”

  42. Unions and collective bargaining • Unions typically bargain for wages and firms decide how many workers to hire. • Union workers make more but firms hire less number of workers.

  43. Example: UAW • During the bailout discussion of the auto industry, one prominent issue is the pay of the United Auto Workers (UAW) • GM official: • Wage: $39.68, including base pay, cost-of-ling adjustment, night-shift premiums, overtime, holiday and vacation pay. • Benefits: $33.58, including health-care, pension and other benefits.

  44. Example: UAW • UAW: • $27.81 per hour for a typical UAW-represented assembler at GM. • GM official number includes the benefit costs of retirees who are no longer on the payroll.

  45. Unemployment rate

  46. Efficiency wages • Example: Henry Ford’s $5 workday • In 1914, the prevailing wage was between $2 and $3 per day. • Henry Ford raised salary at $5 per day  resulted in a much lower turn over rate, and higher effort.

  47. Efficiency wages • Solow (1979) introduces the idea. • Shapiro and Stiglitz’s shirking model • George Akerlof’s fair wage hypothesis • Firms pay higher salary in order to make their workers to have better nutrition  a higher level of effort. (Could be true in developing countries).

  48. Summary • Unemployment includes frictional unemployment and structural unemployment. • Frictional unemployment arises because matches between workers and employers take time. • Structural unemployment arises because wages are not flexible enough (rigid), i.e., wages are too high  supply of workers > demand of workers.

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