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Unemployment

Fluctuations, NAIRU, and Policies

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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

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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

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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

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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

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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 vs outsiders

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

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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)

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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

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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

employedunemployed