Economics 2 Professor Christina Romer Spring 2016 Professor David Romer

LECTURE 19

EMPLOYMENT AND UNEMPLOYMENT IN THE LONG RUN

March 31, 2016

I. OVERVIEW

II. HISTORICAL EVIDENCE OF TECHNOLOGICAL CHANGE

A. New production techniques

B. New goods

C. Better institutions

III. SOURCES OF TECHNOLOGICAL PROGRESS

A. Supply and demand diagram for invention

B. Factors that could shift the supply and demand curves

C. Policies to encourage technological progress

IV. EMPLOYMENT AND POTENTIAL OUTPUT

A. Effects of an increase in N*/POP

B. Effects of an increase in POP

V. DETERMINANTS OF THE NORMAL EMPLOYMENT-TO-POPULATION RATIO AND THE NORMAL REAL WAGE

A. Review and modification of labor supply/labor demand diagram

B. Change in workers’ tastes (Married women)

C. Change in labor demand (Low-skilled males)

D. The large rise in real wages over time

VI. THE NATURAL RATE OF UNEMPLOYMENT

A. Definition

B. Job rationing

C. Job search

LECTURE 19 Employment and Unemployment in the Long Run

March 31, 2016

Economics 2 Christina Romer Spring 2016 David Romer

Announcements

• Midterm 2 Logistics:

• Thursday, April 7, 3:30–5:00

• Sections 109, 110, 111, 112 (GSIs Dounia Saeme and Jeanette Ling) go to 245 Li Ka Shing Center (corner of Oxford and Berkeley Way).

• Everyone else come to the usual room (2050 VLSB).

• You do not need a blue book; just a pen.

Announcements (continued)

• Midterm Format:

• Sample midterm.

• Problems; true/false/uncertain questions; multiple choice.

• Midterm Coverage:

• All of the material since the first midterm (starting with monopoly) and up through lecture on April 5th (saving and investment).

• Lecture, section, textbook, and additional readings.

Announcements (continued) • Places to Get Help:

• Professor Office Hours: Monday, April 4th, 3:30-5:30. No office hours on Wednesday, April 6th.

• GSI office hours.

• Review session on Tuesday, April 5th, 5:15-6:30 p.m. in 2050 VLSB.

I. OVERVIEW

Material for Today

• Finish up discussion of technological change.

• Move on to discussion of employment and unemployment in the long run.

Aggregate Production Function

(1)

(2)

(3) •

Technological change is a key determinant of economic growth.

• Argument by elimination: If it is not N*/POP or K*/N*, it must be T.

•

II. HISTORICAL EVIDENCE OF TECHNOLOGICAL CHANGE

New Production Techniques

• New machines (electric motor)

• New methods of organization and management (assembly line, accounting).

Early Textile Mill

Modern Textile Factory

New Products

• Another way to create improvements in the standard of living.

Better Institutions

• Opening up to trade (U.S.)

• More reliance on market forces (China)

• More stable governments and more secure property rights

III. SOURCES OF TECHNOLOGICAL PROGRESS

D1

Q

P S1

P1

Q1

Market for Inventions

Factors Increasing the Supply of Inventions

Q

P

D1

P1

Q1

S1 S2

1. Luck

2. Education

3. Spillovers from investment

4. More secure property rights

5. Others?

P2

Q2

Factors Increasing the Demand for Inventions

Q

P

D1

P1

Q1

S1 1. More secure

property rights

2. Increased competition

3. National emergencies

4. Others?

P2

Q2

D2

Policies to Encourage Technological Progress

• Increase education

• Subsidize research and development, particularly for basic science

• Encourage investment

• Make property rights more secure

IV. EMPLOYMENT AND POTENTIAL OUTPUT

Decomposition of Potential Output per Person

where:

• Y* is potential output;

• POP is population;

• N* is normal employment.

• is the normal employment-to-population ratio.

• is normal average labor productivity.

Employment-to-Population Ratio in the U.S.

Source: Frank, Bernanke, Antonovics, and Heffetz, Principles of Economics.

Source: Charles Jones and Dietrich Vollrath, Economic Growth.

Employment and Potential Output

• Increases in will raise .

• But, the effect is limited:

• can’t vary very much.

• There are countervailing effects on average labor productivity: An increase in POP for a given lowers because it reduces .

•

V. DETERMINANTS OF THE NORMAL EMPLOYMENT-TO-POPULATION RATIO

AND THE NORMAL REAL WAGE

The Labor Market

S

D

w

N

Long-Run Labor Market Diagram

S

D (MRPL/P)

Real Wage,

w*

w1∗

N* N1∗

Labor Force Participation Rate for Women in the U.S.

Source: Bureau of Labor Statistics.

50

55

60

65

70

75

1971

1975

1979

1983

1987

1991

1995

1999

2003

2007

2011

Per

cent

Source: Claudia Goldin, “Gender Gap,” The Concise Encyclopedia of Economics.

An Increase in Labor Supply (Women in the U.S.)

S1

D (MRPL/P)

Real Wage,

w*

w1∗

w2∗

N* N1∗N2

∗

S2

Labor Force Participation Rate for Women in the U.S.

Source: Bureau of Labor Statistics.

50

55

60

65

70

75

1971

1975

1979

1983

1987

1991

1995

1999

2003

2007

2011

Per

cent

Female Labor Force Participation Rate in the U.S., the U.K., and Japan

Source: Organisation for Economic Co-operation and Development (OECD).

50

55

60

65

70

75

1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011

U.S.

U.K. Japan

Labor Force Participation Rate – High School Graduates, No College, 25 yrs. & over, Men

Source: Bureau of Labor Statistics.

A Fall in Labor Demand (Less Educated Men)

S

D1

Real Wage,

w*

N*

w1∗

w2∗

N2∗N1

∗

Real Wages in the U.K. over the Very Long Run

From: Clark, “The Condition of the Working Class in England, 1209-2004”

Large Increases in Capital and Improvements in Technology

S

D1

Real Wage,

w*

w1∗

N* N1∗ N2

∗

D2

w2∗

VI. THE NATURAL RATE OF UNEMPLOYMENT

The U.S. Unemployment Rate, 1948–2016

Source: FRED; data from Bureau of Labor Statistics.

Unemployment in the U.S., Japan, and France

Source: FRED.

The Natural Rate of Unemployment

• The economy’s normal or usual unemployment rate.

Types and Sources of Unemployment

• Cyclical unemployment

• Caused by output being below potential

• Structural unemployment

• Caused by job rationing

• Frictional unemployment

• Caused by turnover and job search

Normal or natural unemployment consists of structural and frictional unemployment.

Job Rationing

S

D (MRPL/P)

Real Wage,

w*

w1∗

N* ND∗ N1

∗ NS∗

w�

Structural unemployment

Sources of Job Rationing

• Minimum wage laws

• Unions

• Efficiency wages