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Makro ch7

macroeconomics ch7

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13 views5 pages

Makro ch7

macroeconomics ch7

Uploaded by

kamiltsugamibusiness
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Unemployment and the Labor Market

Natural Rate of Unemployment

Definition
The natural rate of unemployment is the long-run average level of
unemployment around which the economy fluctuates. It reflects the
unemployment rate when the labor market is in steady-state equilibrium.

 During a Recession: The actual unemployment rate rises above


the natural rate due to job losses.

 During an Economic Boom: The actual unemployment rate falls


below the natural rate as firms hire more aggressively.

Historical Context:
Between 1950 and 2020, the U.S. unemployment rate exhibited
fluctuations, with spikes during recessions like the 1980s and 2008
financial crises.

Model of the Natural Rate of Unemployment

Key Terms:

1. Labor Force (L): The total number of workers, both employed (E)
and unemployed (U).

2. Unemployment Rate: U/LU/LU/L, the fraction of the labor force that


is unemployed.

Assumptions:

1. The labor force (L) is fixed.

2. Each month:

o sss: The rate of job separation, the fraction of employed


workers who lose their jobs.

o fff: The rate of job finding, the fraction of unemployed workers


who find jobs.

Example:
If 1% of workers lose jobs each month (s=0.01s = 0.01s=0.01) and 19% of
unemployed workers find jobs (f=0.19f = 0.19f=0.19), the natural
unemployment rate is approximately 5%.
The Steady-State Condition

The labor market is in steady-state equilibrium when the unemployment


rate remains constant over time. This occurs when the number of people
losing jobs equals the number of people finding jobs.

Policy Implication:
To reduce the natural rate of unemployment, policies must lower sss (job
separation rate) or increase fff (job finding rate).

Why Is There Unemployment?

Even when the economy operates efficiently, some unemployment


persists due to two primary reasons:

1. Job Search and Frictional Unemployment

2. Wage Rigidity

Frictional Unemployment

Definition
Frictional unemployment arises because workers take time to search for
jobs that best match their skills and preferences.

Reasons for Frictional Unemployment:

 Workers and jobs vary in skills and preferences.

 Geographic mobility of workers is not instantaneous.

 Information about job openings and candidates is imperfect.

Sectoral Shifts
Changes in the composition of demand among industries or regions
contribute to frictional unemployment.

 Example: During the Industrial Revolution, workers transitioned


from agriculture to manufacturing, causing temporary
unemployment.

 Modern Example: The "China Shock" (2000–2010s) led to declines


in U.S. manufacturing employment as production moved to China,
while service sector jobs grew.

Unemployment Insurance (UI)


What Is UI?
Unemployment insurance provides partial wage replacement for workers
who lose their jobs through no fault of their own. While it offers financial
support, UI also reduces the urgency to find new employment, lowering fff
(the rate of job finding).

Eligibility in the U.S.

 Must have been unemployed through no fault of their own.

 Must actively seek work while receiving benefits.

 Benefits are typically capped and last 26 weeks, though extensions


occur during economic downturns.

COVID-19 Example:
During the pandemic, unemployment benefits were expanded under the
CARES Act, providing an additional $600 per week, which helped stabilize
household incomes.

Wage Rigidity

Definition
Wage rigidity occurs when real wages remain above the equilibrium level,
causing structural unemployment because firms cannot hire all willing
workers.

Causes of Wage Rigidity:

1. Minimum Wage Laws

o Set a legal floor for wages, potentially exceeding the


equilibrium wage for low-skilled workers.

o Evidence: When minimum wages are above 60–66% of the


median local wage, unemployment often rises.

2. Labor Unions

o Unions negotiate higher wages for members, often exceeding


equilibrium levels.

o Insiders (union members) benefit from higher wages, while


outsiders (non-union workers) face unemployment.

3. Efficiency Wages

o Firms voluntarily pay above-market wages to boost worker


productivity by:
 Attracting better applicants.

 Reducing turnover.

 Encouraging greater effort.

Example: Henry Ford’s “$5 Day” in 1914 doubled typical wages, reducing
absenteeism and improving productivity.

Discouraged Workers and Broader Measures of Unemployment

1. Discouraged Workers
Individuals who stop seeking work due to repeated failures are not
counted in the labor force.

2. U-6 Unemployment Rate


Combines discouraged workers, marginally attached workers, and
those working part-time for economic reasons. It provides a more
comprehensive measure of labor underutilization.

Example: In 2020, the U-6 unemployment rate spiked due to pandemic-


related job losses, highlighting broader labor market distress.

Unemployment in Europe vs. the U.S.

Why Higher Unemployment in Europe?

1. Generous unemployment benefits reduce the urgency to find new


jobs.

2. Strong union presence limits labor market flexibility.

Example: Technological advances in the 1990s increased demand for


skilled workers. In the U.S., wages adjusted to incentivize skill acquisition.
In Europe, wage rigidity contributed to higher unemployment.
Investor Tips

1. Monitor Labor Market Dynamics: Rising unemployment signals


weaker economic activity, which can depress consumer-oriented
stocks.

2. Analyze Policy Changes: Expansions in unemployment benefits


may reduce short-term spending but improve long-term productivity
by enhancing job matching.

3. Consider Wage Trends: Sectors facing higher minimum wage laws


or strong unionization may experience cost pressures, impacting
profitability.

4. Evaluate Broader Indicators: High U-6 rates signal deeper labor


market challenges, affecting growth-sensitive industries.

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