u.s. unemployment, 1958-2002
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slide 1
U.S. Unemployment, U.S. Unemployment, 1958-20021958-2002
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1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
Per
cen
t o
f la
bo
r fo
rce
Unemployment rate Natural rate of unemployment
Natural Rate of UnemploymentNatural Rate of Unemployment
Natural rate of unemployment: the average rate of unemployment around which the economy fluctuates.
In a recession, the actual unemployment rate rises above the natural rate.
In a boom, the actual unemployment rate falls below the natural rate.
slide 3
Example:Example:
Each month, 1% of employed workers lose their jobs (s = 0.01)
Each month, 19% of unemployed workers find jobs (f = 0.19)
Find the natural rate of unemployment:
0.010.05, or 5%
0.01 0.19U sL s f
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Why is there unemployment?Why is there unemployment?
If job finding were instantaneous (f = 1), then all spells of unemployment would be brief, and the natural rate would be near zero.
There are two reasons why f < 1:
1. job search
2. wage rigidity
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Job Search & Frictional UnemploymentJob Search & Frictional Unemployment
frictional unemployment: caused by the time it takes workers to search for a job
occurs even when wages are flexible and there are enough jobs to go around
occurs because workers have different abilities,
preferences jobs have different skill requirements geographic mobility of workers not
instantaneous flow of information about vacancies and
job candidates is imperfect
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Sectoral shiftsSectoral shifts def: changes in the composition of demand
among industries or regions
example: Technological change increases demand for computer repair persons, decreases demand for typewriter repair persons
example: A new international trade agreement causes greater demand for workers in the export sectors and less demand for workers in import-competing sectors.
It takes time for workers to change sectors, so sectoral shifts cause frictional unemployment.
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Industry shares in U.S. GDP, Industry shares in U.S. GDP, 19601960
4.2%28.0%
9.9%
57.9%
Agriculture
Manufacturing
Other industry
Services
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Industry shares in U.S. GDP, Industry shares in U.S. GDP, 19971997
1.7%17.8%
8.5%
72.0%
Agriculture
Manufacturing
Other industry
Services
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Sectoral shifts aboundSectoral shifts abound
more examples: Late 1800s: decline of agriculture,
increase in manufacturing Late 1900s: relative decline of
manufacturing, increase in service sector 1970s energy crisis caused a shift in
demand away from huge gas guzzlers toward smaller cars.
In our dynamic economy, smaller (though still significant) sectoral shifts occur frequently, contributing to frictional unemployment.
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Unemployment from real wage rigidityUnemployment from real wage rigidity
Labor
Real wage
Supply
Demand
Unemployment
Rigid real wage
Amount of labor willing to work
Amount of labor hired
If the real wage is stuck above the eq’m level, then there aren’t enough jobs to go around.
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The minimum wage in the real world:The minimum wage in the real world: In Sept 1996, the minimum wage was raised
from $4.25 to $4.75. Here’s what happened:
Unemployment rates, before & after
3rd Q 1996 1st Q 1997
Teenagers 16.6% 17.0%
Single mothers
8.5% 9.1%
All workers 5.3% 5.3%
Other studies: A 10% increase in the minimum wage increases teenage unemployment by 1-3%.
slide 12
Labor unionsLabor unions
Unions exercise monopoly power to secure higher wages for their members.
When the union wage exceeds the eq’m wage, unemployment results.
Employed union workers are insiders whose interest is to keep wages high.
Unemployed non-union workers are outsiders and would prefer wages to be lower (so that labor demand would be high enough for them to get jobs).
Union membership and wage ratios by industry, 2001
118.0
121.1
103.3
90.1
117.8
105.8
104.2
127.8
105.9
151.0
103.4
15.0%
41.8
6.8
2.8
5.0
5.9
23.7
25.4
15.5
19.0
12.9%
13.6%
37.4
5.9
2.1
4.5
5.5
22.6
24.1
14.6
18.4
12.3%
119,092
19,155
34,261
7,648
20,505
4,540
2,981
4,441
18,149
6,881
531
all
government
services
fin, insu, and real est
retail trade
wholesale trade
comm. and pub util
transportation
manufacturing
construction
mining
wage ratio
RBU % of total
U % of total
# employed (1000s)
industry
RBU = nonunion workers represented by a unionwage ratio = 100(union + RBU wage)/(nonunion wage) slide 13
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