unemployment - rongsheng tang...

Unemployment

Rongsheng Tang

Washington U. in St. Louis

August, 2016

Rongsheng Tang (Washington U. in St. Louis) Unemployment August, 2016 1 / 44

Overview

FactsThe steady state rate of unemploymentTypes of unemploymentEfficiency wages and unemploymentUnemployment compensationThe Phillips CurveUnemployment difference between European countries and US


Unemployment: Facts

Figure:


Unemployment: Facts

Residential segregation and black unemployment:

recent research has concluded that part of the racial gap inunemployment rates can be attributed to the very high levels ofresidential segregation experienced by blacks in the United States

Figure:


Unemployment: Facts

There are four ways in which a worker could be unemployed:

1 lose jobs due to layoffs or plant closings2 leave jobs (quit)3 job seekers reenter the labor market after spending some time in the

non-market sector4 job seekers are new to the job market


Unemployment: Facts

Figure:


The Steady-State Rate of Unemployment

Steady state rate of unemployment:

the unemployment rate that will be observed in the long run as aresult of labor flow

Figure:



In the steady statelE = hU

sinceLF = E + U

we can solve for the stead-state unemployment rate

unemployment rate =ULF

=l

l + h

which is also called nature rate of unemployment.



Here is an example:

suppose the probability that employed workers lose their jobs in anygiven month is 0.01,the probability that unemployed workers find work in any givenmonth is 0.1.then the steady state unemployment rate is 9.1 percent



Figure:


Types of Unemployment

Frictional unemploymentSeasonal unemploymentStructural unemploymentCyclical unemployment



Frictional unemployment:

both workers and firms need time to locate each other and to digestthe information about the value of the job matchit leads to short unemployment spells,it is “productive”

Seasonal unemployment:

workers in both the garment and the auto industries are laid offregularly because new models are introduced with clockworkregularity



Structural unemployment:

some persons looking for work do not fit the jobs availablein the economy some sectors are growing and other sectors aredeclining, the skills might be specific to job or industry, as a result, theunemployment spells of the displaced workers might last for a longtime because they must retool their skills.

Cyclical unemployment:

in recession firms require a smaller workforce to satisfy the shrinkingconsumer demand and employers lay off many workers


Job Search and Frictional Unemployment

Different firms offer different job opportunities and because workersare not fully informed about where the “best” jobs are located, it takestime to find the available opportunities.When should the worker stop searching and settle for the job offer athand?worker’s trade-off: the longer he searches, the more likely he will get ahigh wage offer, however, the more it costs to find that job.



Non-sequential search:

worker decides before he begins his search that he will randomly visit,say, 20 firms in the labor market and accept the job that pays thehighest wage.

Sequential search:

Before the worker sets out on the search process, he decides which joboffers he is willing to accept.for instance, he is not willing to work for less than 12 , and will acceptif the wage offer exceeds 12.

The asking wage

the threshold wage that determines if the unemployed worker acceptsor rejects incoming job offers.The unemployment spell will last longer the larger is the asking wage.



Figure:Rongsheng Tang (Washington U. in St. Louis) Unemployment August, 2016 20 / 44

Job Search and Frictional UnemploymentWorker’s asking wage depends on worker’s discount rate as well asunemployment insurance.

Figure:



The job search model has two key predictions about the length ofunemployment spell:

unemployment spells will last longer when the cost of searching fallsandunemployment spell will last longer when the benefits from searchingrise.



Evidence from some surveys

In 1980, white unemployed youth in the US reported that their askingwage was 4.3, and black unemployed youth reported 4.22.Workers who reported higher asking wages had longer unemploymentspellsIn UK, a 10 percent increases in the asking wage increases the lengthof the unemployment spell by at least 5 percentHigher asking wages led to higher post-unemployment wages

I a 10 percent increase in the asking wage increased thepost-unemployment wage by 5 percent for young whites and by 3 percentfor young blacks.



Job search and the Internet

As early as 2000, 25 percent of unemployed persons in the USreported that they used the Internet in their job search.It is widely believed that such a technological shift in the technology ofjob search could have a substantial impact on the speed of job search.

An empirical study finds that this hope may be misplaced.

In 2000, the typical job searcher who used the Internet took 3.4months to find a job, as compared to 3.7 months for a worker whoavoided the Web.Once one controls for the underlying differences, say educationattainment, gender and age, the advantage disappear.


The Inter-temporal Substitution Hypothesis andCyclical Unemployment

Some studies have proposed that even the large increase inunemployment observed during a severe economic downturn mighthave a voluntary component.Workers have an incentive to allocate their time to work activitiesduring those periods of the life cycle when the wage is high and toconsume leisure when the wage is low and leisure is cheap.During recessions workers are more than willing to reduce their laborsupply , as a result, part of the unemployment observed duringeconomic downturns might be voluntary.


The Sectoral Shifts Hypothesis and StructuralUnemployment

A number of alternative models have been proposed to explain whystructural unemployment might arise in a competitive market.Workers who are searching for jobs do not have the qualifications tofill the available vacancies.

I eg. layoffs from manufacturing industry may not have enough usefulskill to computer industry

The sectoral shifts hypothesis suggests that there will be a pool ofworkers who are unemployed for long spells because of a structuralimbalance between the skills of unemployed workers and the skillsthat employer are looking for.It has been estimated that sectoral shifts might explain about 25 to 40percent of unemployment.The sectoral shifts resulting from the oil-price shock of 1973, mayhave accounted for about 60 percent of the 3.5 percentage pointincrease in the unemployment rate between 1973 and 1975.


Efficiency Wages and Unemployment

Due to high monitoring cost, firm might use efficiency wages to “buy”the worker’s cooperation.Because the firm pays above-market wages, efficiency wage modelsgenerate involuntary unemployment.



There are no market pressures forcing the efficiency wage wNSdownward toward the competitive wage w∗

Workers do not shirk in this labor marketThere is involuntary unemployment, E − ENS


Efficiency Wages and UnemploymentWages will be relatively sticky over the business cycle.


Efficiency Wages and UnemploymentSome recent work documented the existence of a downward-sloping curvethat summarizes the relation between wage levels and unemployment.



Hard to explain through excess supply theoryIt should be high wage that are associated with unemployment,precisely the opposite of what is implied by the downward-slopingwage curveEfficiency wage: in high unemployment rate area, there is no need topay high wage to encourage workers not to shirk.


Unemployment Compensation: Facts

In 2008, the Unemployment Insurance system distributed $40.7billion in benefits.Not all the unemployed worker are eligible for UI, in 2002, only 44percent of unemployed workers received UI benefit.Eligible workers can collect UI benefits after a waiting period of oneweek, but the benefit cut in the 26th week.The higher the weekly wage, the higher the level of benefits to whichthe worker is entitled. However, there is both a minimum and amaximum level of weekly benefits.Replacement ratio: the proportion of weekly earnings that arereplaced by UI benefits, on average it is 38 percent.There is a positive correlation between the replacement ratio and theduration of the unemployment spell.

I A 25 percent rise in the replacement ratio (from 0.4 to 0.5) increase theaverage duration of an unemployment spell by about 15 to 25 percent.


Unemployment Compensation: FactsA job seeking worker’s chance of finding a job improves dramatically theweek the benefits run out.


Unemployment Compensation: Facts

The UI system not only lengthens the duration of unemployment spells,but also leads to a higher post-unemployment wage.

Evidence suggests that a permanent extension of the 26-week limit toa 39-week limit would likely increase the number of long-termunemployed by 7 percent.A 10 percent increase in the replacement ratio increases thesubsequent wage of male workers by 7 percent and of women by 1.5percent.


Unemployment Compensation: ImperfectExperience RatingUnemployment insurance is funded by a payroll tax on employers.

The tax rate depends on a number of variables, including the generalstate of the economy, the layoff history of the firm in that industry,and the firm’s own layoff history.


Unemployment Compensation: ImperfectExperience Rating

Suppose economic conditions worsen temporarily.

The financing of the UI system implies that employers who lay offmany workers do not pay the entire costs of the worker’s “salary”during the unemployment spell.The firm can then lay off many workers and shift part of the payroll toother taxpayers during the period of economic hardship and then hireback when the economy recover


Unemployment Compensation: ImperfectExperience Rating

Nearly 70 percent of laid-off workers return to their former employerat the end of the unemployment spell.

I workers do not want to look for alternative employment because theyexpect to be recalled to their jobs,

I firms do not want to look for other workers because the existing pool ofworkers is valuable to the firm.

The evidence indicates that imperfect experience rating has asubstantial impact on the layoff behavior of firms.


The Phillips CurveIn 1958, A.W.H.Phillips published a famous study documenting a negativecorrelation between the rate of inflation and the rate of unemployment inthe United Kingdom from 1861 to 1957.


The Phillips Curve


The Phillips CurveBecause of the existence of natural rate of unemployment, others arguedeconomic theory implies that the long-run Phillips curve must be vertical.


The Unemployment Gap between Europe and theUnited States

Figure:


The Unemployment Gap between Europe and theUnited StatesIt used to be the case that the European unemployment problem consistedmainly of persons who were in very long unemployment spells.

Figure:


The Unemployment Gap between Europe and theUnited States

Unemployment insurance tends to be much more generous in westernEuropean countries than in the United States, in terms of both thelevel and the duration of benefitsMany European countries also have enacted strict employmentprotection regulations that restrict the right of employers to fireworkers at will or that require employers to pay sizable severance payat the time of layoff.Payroll taxes are very high in many European countries.Wages in the US are more flexible.


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