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Unemployment

Unemployment. Fluctuations, NAIRU, and Policies. We know stuff about unemployment General idea of what it measures: factor utilization Employed Unemployed Not in labour force UR = U/(U+E) = U/L It fluctuates a lot in short run It does not change considerably in long run

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Unemployment

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  1. Unemployment Fluctuations, NAIRU, and Policies

  2. We know stuff about unemployment • General idea of what it measures: factor utilization • Employed • Unemployed • Not in labour force • UR = U/(U+E) = U/L • It fluctuates a lot in short run • It does not change considerably in long run • It can be sorted by causes • Frictional • Structural • seasonal • Cyclical

  3. Translation of a relatively constant unemployment rate in the long run: • Population grows • Labour force grows • Growth in employment matches labour force growth • Some jobs are eliminated every year • Some jobs are created every year • Jobs created > jobs eliminated, in most years • Cyclical unemployment mostly mirrors changes in GDP

  4. Consequences of unemployment: • Lost output • Okun’s Law (Okun’s rule of thumb): • 1% increase in unemployment = about 2% lost GDP • Unemployment hysteresis • While out of work, one cannot maintain qualification • Short-run unemployment may translate in higher NAIRU or smaller labour force • Personal costs • It stinks to be unemployed

  5. Why does unemployment rate fluctuate? • New Classical theories • There are AD/AS shocks, all the time • Every new equilibrium has a different number of workers • AD/AS model • Labour market model • Lower wage = > some quit = voluntary decision • Even business cycles in general can be viewed this way

  6. Why does unemployment rate fluctuate? • New Keynesian theories • Sticky wages • Long-term relationships • Good will • Contracts • Menu costs • It is COSTLY to change wages • Efficiency wages • Incomes, health, and productivity • Competing for heterogeneous workers • Costly monitoring of effort • Unions • Insiders vsoutsiders • There is no distinction between short-run and long run in new classical theories • There is no cyclical unemployment, just NAIRU • New classical: “in the long run, we are all dead” (JM Keynes) • Both groups of theories treat long run same

  7. NAIRU = frictional + structural unemployment rates • Frictional • New entries • Search • Structural • Structure of the economy constantly changes • Technological progress • Increase in incomes • Normal, inferior, and luxury goods/services • International structure of employment constantly changes • Treaties • Policies constantly change • Employment insurance EI • Entrance requirements (into occupations)

  8. Changes in NAIRU • Demography • More young people = more new entries • Changes in demand structure • Unemployment hysteresis • While out of work, one cannot maintain qualification • Short-run unemployment may translate in higher NAIRU or smaller labour force • Globalization • Labour markets • Demand structure • Policies • Employment insurance EI

  9. Stock and flow models • In equilibrium, number of becoming unemployed (per week) = number of finding jobs (per week) • Want to reduce unemployed => change the flows • Reduce the flow to unemployment • Increase the flow to employment • Assist with information about employment opportunities • Subsidize re-training

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