slide 1

U.S. Unemployment, U.S. Unemployment, 1958-20021958-2002

2

3

4

5

6

7

8

9

10

11

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

slide 4

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

slide 5

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

slide 6

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.

slide 7

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

slide 8

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

slide 9

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.

slide 10

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.

slide 11

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