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Unemployment
Unemployment rate– The Current Population Survey is a joint project of the BLS and the Bureau of the Census
– Every month, 1,600 CPS interviewers survey 60,000 households to establish job market status of each member of the household.
– Working-age population (WAP) = all people aged 16 years and over not jailed, hospitalized, institutionalized nor in the U.S. Armed Forces. (WAP = L + those not in L )
– Labor force (L) is the number of people employed plus the number unemployed (L = E + U ).
– The CPS counts as employed (E ) all those in the WAP who, during the prior week, either
1. Worked at least 1 hour in a paid job or 15 hours unpaid in family business.
2. Were not working but who had jobs from which they were temporarily absent.
– The CPS counts as unemployed (U ) all those in the WAP who, during the prior week,
1. Weren’t working but were available for work,
2. Looked for work during the previous 4 weeks OR were waiting to be recalled to a job from which they had been laid off.
– The unemployment rate:u = x 100% U .
L
Year Labor Force Employed Unemployed u
2001 143,768,917 136,939,333 6,829,583 4.75
2002 144,856,083 136,480,917 8,375,167 5.78
2003 146,499,500 137,729,250 8,770,250 5.99
2004 147,379,583 139,239,750 8,139,833 5.52
2005 149,291,750 141,713,500 7,578,250 5.08
2006 151,412,500 144,420,083 6,992,417 4.62
2007 153,126,333 146,049,500 7,076,833 4.62
2008 154,329,250 145,368,417 8,960,833 5.81
=
Types of unemployment Frictional (uf ): workers temporarily between jobs because of a move/career change.
Structural (us ): workers displaced by automation.
Cyclical (uc ): workers who loose their jobs due to recession.
u = uf + us + uc
Natural rate of unemployment (un ≈ 5%): It’s the rate at which inflation remains constant.
uf + us = 5%
uc = 0.81%
Unemployment
Unemployment 1900 to 2010
2011 researchstlouisfedorgUNRATE
0
5
10
15
20
25
30
1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Year
Un
emp
loym
ent
Rat
e
Alternate measures of unemployment
Unemployed workers who have actively looked for work for 4 weeks
Discouraged workers are unemployed and have stopped looking for workbecause they think no work is available for them
Other marginally attached workers are unemployed, would like, and ableto work but have not looked for work recently
Underemployed are PT workers who want to work FT but cannot due to economic reasons
u1 = % of LF unemployed 15 weeks or longer
u2 = % of LF who lost jobs or completed temporary work
u3 = official unemployment rate
u4 = u3 + discouraged workers
u5 = u4 + Other marginally attached workers
u6 = u5 + underemployed
u6
u5
u3
UNRATE, U4RATE, U5RATE, U6RATE
Alternate measures of unemployment1994-2010
u4
Unemployment Rates by Race/Ethnicity 1973-2010
Black
Hispanic
White
Asian
LNS14000006, LNS14000003LNU04032183, LNS14000009
Unemployment Rates by Gender 1960-2010
Male
Female
2011 researchstlouisfedorgUSALFFEMADSMEI, USAEMPFEMADSMEI,
USALFMALEADSMEI, USAEMPMALADSMEI
Unemployment Rates by Education 1992-2010
HS dropout
HS no college
Some college orAssoc Degree
Bachelor’s Degreeor higher
LNS14027662, LNS14027689LNS14027660, LNS14027659
Unemployment Rates by Age1970-2010
Teenagers
20-24 year olds
Adults
USAURANAA, USAUR24NAA, USAURTNAA
Unemployment rate and average duration1948 to 2010
Avg Duration of unemployment
Unemployment
UNRATEUEMPMEAN
Unemployment Rates by Industry
Source: www.bls.gov
2001-2011
Unemployment Rates by Industry
Source: www.bls.gov
2001-2011
Unemployed Persons by Reason for Unemployment, 1967-2005
0
10
20
30
40
50
60
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Year
Per
cen
t
Job losers
Job leavers
Reentrants
New entrants
Unemployed Persons by Duration of Unemployment, 1948-2002
• Although most spells of unemployment do not last very long, most weeks of unemployment can be attributed to workers who are in very long spells
0
10
20
30
40
50
60
70
1940 1950 1960 1970 1980 1990 2000 2010
Year
Per
cent
Less than 5 weeks
5-14 weeks
More than 26 weeks
15-26 weeks
Flows Between Employment and Unemployment
Employed(E workers) Unemployed
(U Workers)
Job Losers ( p E )
Job Finders ( q U )
Suppose a person is either working or unemployed. At any point in time, some workers lose their jobs and unemployed workers find jobs.
If the probability of losing a job equals p, there are p E job losers.
If the probability of finding a job equals q, there are q U job finders.
Dynamic Flows in the US Labor Market, May 1993
Employed:119.2 million
Unemployed:8.9 million
Out of Labor Force:65.2 million
1.8 million
2.0 million
1.5 million
1.7 million
3.2 million
3.0 million
Job Search
• The asking wage makes the worker indifferent between continuing his search activities and accepting the job offer at hand
• An increase in the benefits from search raises the asking wage and lengthens the duration of the unemployment spell
• An increase in search costs reduces the asking wage and shortens the duration of the unemployment spell
The Wage Offer Distribution
$5 $8 $22 $25
Frequency
Wage
The wage offer distribution gives the frequency distribution of potential job offers A given worker can get a job paying anywhere from $5 to $25 per hour What is the probability that the worker receives a wage offer between 5 and $8?
The Asking Wage
Wage Offer at Hand
Dollars
MC
MR
$100
The marginal revenue curve gives the gain from an additional search. It is downward sloping because the better the offer at hand, the less there is to gain from an additional search .
The marginal cost curve gives the cost of an additional search. It is upward sloping because the better the job offer at hand, the greater the opportunity cost of an additional search.
The asking wage equates the marginal revenue and the marginal cost of search
$20$15
MC$10
MC$20
MC$15 = MR$15
MR$10
MR$20
Wage
Dollars
1015
MC
MR0
MR1
Wage
MC0
MC1
MR
People with higher discount rates are more worried about the present than their futuresSo they have little to gain from additional searches
UI benefits reduce the cost of searching for the right jobSo there is much to gain from additional searches
10 15
The Asking Wage
10Wage
MC0
MC1
MR
• The internet can greatly reduce the costs associated with job search.
• Kuhn and Skuterud (2004):
• D-in-D estimates: people using the Internet found work 0.3 months faster (perhaps because the Internet helps secure a high w offer quicker)
• This result vanishes in a regression that controls educational attainment, gender, and age.
Why? The Internet is ineffective, used to meet UI job search requirements, or used by people who do not put in the time and effort to find work (selection bias).
15
The Asking Wage
Dollars
The Relationship Between the Probability of Finding a New Job and UI Benefits
• Before the 2008 recession, UI ended at 26 weeks.• The probability of finding a new job spikes when UI benefits are exhausted • The probability of finding a new job spikes again at 15 weeks after benefits are exhausted
US increased UI benefits from 26 to 99 weeks
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96 101(Weeks of UI benefits)
.08
.06
.04
.02
.00
• Hence, UI benefits should lengthen the duration of unemployment spells
Funding the UI System: Imperfect Experience Rating
Tax rate
0
0.1%
5.4%
UI is funded by payroll tax on employers—the more lay offs the higher the tax
The state determines up to what level to tax payrolls
In California, the first $7000 paid to employees is taxed at a rate of between 0.1% to 5.4%
Firm layoff Rate in the Pastl0 l1
Funding the UI System: Imperfect Experience Rating
Tax rate
0
0.1%
5.4%
If the firm has a layoff rate less than l0, for each employee, the firm pays a tax to the Federal UI fund equal to the lesser of
(0.1%)(wh)
(0.1%)($7000)
l
or
Firm layoff Rate in the Pastl0 l1
Funding the UI System: Imperfect Experience Rating
Tax rate
0
0.1%
5.4%
If the firm has a layoff rate between l0 and l1, for each employee, the firm pays a tax to the Federal UI fund equal to the lesser of
(t)(wh)
(t)($7000)
l
t
or
Firm layoff Rate in the Pastl0 l1
Funding the UI System: Imperfect Experience Rating
Tax rate
0
0.1%
5.4%
lFirm layoff Rate in the Past
l0 l1
If the firm has a layoff rate greater than l1, for each employee, the firm pays a tax to the Federal UI fund equal to the lesser of
(5.4%)(wh)
(5.4%)($7000)or
Hence, firms with high layoff rates are subject to perfect experience rating, meaning firms with low layoff rates subsidize firms with high layoff rates
Efficiency Wages and Unemployment
The shirking model• If workers are equally productive in a perfectly competitive labor market, they get
paid w* whether they
– work productively (which is costly)
– goof off or make long distance phone calls at work (shirk)
• Workers may shirk after they are hired because
– their incentives are not perfectly aligned with the owner’s (principal-agent)
– information about their performance is limited (asymmetric information)
– getting fired after being caught doesn’t prevent them from working for someone else making w* (moral hazard)
• Solutions:
– Increased monitoring (costly and not perfect)
– Bonding (e.g., employee don’t get student loans paid off if they quit early)
– Piece rate pay (brownnosers lobby supervisors for the ‘best’ working conditions)
– Paying wage wNS that exceeds w* (efficiency wage), which makes being fired costly (w = wNS – w*)
w*
If shirking is not a problem, the market clears at wage w*. Shirking may occur because fired workers can find work somewhere else making w*.At high unemployment (N – E0), workers toe the line at a slightly higher wage w0 because high unemployment attracts workers who will not shirk at w0.
S
w0
E0
The Determination of the Efficiency Wage
U
Employment
Dollars
D
N
SNS
At low unemployment (N – E1) firms have to pay much more to inhibit shirking
Hence the no-shirking supply curve is upward sloping, and asymptotically approaches S.
w1
E1
The Determination of the Efficiency Wage
Dollars
Employment
D
N
w*
S
w0
E0
U
The Determination of the Efficiency Wage
The efficient wage model suggests that some unemployment is necessary to keep employees in line (structural unemployment)
Efficiency wage wNS is given by the intersection of the no-shirking supply curve and demand curve
wNS
ENS
SNSDollars
Employment
D
N
S
w*
The Determination of the Efficiency Wageand Economic Contraction
SNS
D0
w*
w*0
wNS0
wNS
D1
A fall in output demand reduces labor demand, reducing the competitive wage.
If firms pay an efficiency wage, the contraction also reduces the efficiency wage
Efficiency wage theory suggests that wages are sticky because the decline in wNS
is much smaller than the fall in w*.
E0 EmploymentN
S
E1
Dollars
1
1
w*
D
An increase in UI benefits decreases no-shirking labor supply•the wage needed to inhibit shirking (wNS)•Unemployment (N – E) •The cost of getting caught shirking (wNS – w*)
wNS
E EmploymentN
S
Dollars
SNS
The Determination of the Efficiency Wageand UI Benefits
and increases
The Wage Curve: The Relation Between Wage Levels and Unemployment Across Regions
Unemployment Rate
Wage
Efficiency wages may play an important role in unemployment
Geographic regions that offer higher wage rates also tend to have lower unemployment rates
Hence, the greater is the surplus of workers (u), the lower the wage???
Yes if shirking is problematic
wNS1
u1 u0
wNS0
AS
Recessionary Gap
AD
PL
A recessionary gap occurs when GDP is less than potential GDP.
Resources, capital, and workers are not being fully utilized, and so u is high.
As a result, there is downward pressure on wages…
….prices fall
GDP YFE
PL
Note: Unemployment insurance replaces a
portion of a newly unemployed worker’s income. Designed to prevent the “next” Great Depression.
The Phillips Curve
AS
Inflationary Gap
AD
PL
GDPYFE
An inflationary gap occurs when GDP exceeds potential GDP.
Workers are working overtime and firms are competing for their labor, resulting in low u
As a result, there is upward pressure on wages…
….prices fall
PL
The Phillips Curve
The business cycle
The figure shows recent cycles in real GDP.
Recessions began in mid-1990 and in first quarter of 2001.
The longest expansion in U.S. history ran from the March 1991 to March 2001.
When GDP decreases
The unemployment rate increases
And a little later, the inflation rate decreases
As real GDP increases toward potential GDP, unemployment falls toward its natural rate, which leads to an eventual rise in inflation.
The Phillips Curve
(1948-1969)
-4
-2
0
2
4
6
8
10
2 3 4 5 6 7Unemployment Rate
Infl
atio
n R
ate
Source: http://wwwblsgov/
The Phillips Curve
The Phillips curve describes the negative correlation between the inflation rate and the unemployment rate The curve implies that an economy faces a trade-off between inflation and unemployment
(1961-2005)
0
2
4
6
8
10
12
14
3 4 5 6 7 8 9 10
Unemployment Rate
Ra
te o
f In
fla
tio
n
6162
6365
64
66
67
68
69
70
71
72
73
74
75
7677
78
79
80
81
82
83
84
86
858887
89 91
90
929394
9596979899
00 01
03
02
05
The Phillips Curve
What happened?
Inflation expectations were changing
Expected Inflation
• The yields on two different kinds of Treasury securities are used to calculate a measure of inflation expectations:– nominal treasury notes– treasury inflation-protected securities (TIPS)– Their difference is called the TIPS spread
• Because the market's expectations for inflation are priced TIPS, the measure that is derived from the yields is a good estimate of the market's estimate of future inflation
• The calculation involves correcting for some biases:– inflation-risk premium– liquidity premium
The Phillips Curve
• The liquidity premium (LP): difference between the yields on 10-year on-the-run and off-the-run treasury notes
• Spread (or bias) is equal to the difference between inflation expectations from the Survey of Professional Forecasters (SPF) and the TIPS-derived expected inflation (TIPS)
• Regressing spread (or bias) on LP and LP2 gives predicted bias:
bias = + 1∙LP + 2∙LP2
• Subtracting this from TIPS-derived expected inflation yields an unbiased estimate of expected inflation:
e = TIPS – bias (LP)
picks up the bias due to inflation risk
picks up the bias due to liquidity
Expected Inflation
The Phillips Curve
5
Short Run
Long Run
Rate of Inflation
Unemployment Rate
The economy is initially at the point where there is no inflationand a 5 percent unemployment rate
The Phillips Curve
0
3
7
Short Run
Long Run
Rate of Inflation
Unemployment Rate
If monetary policy increases the inflation rate to 7 percent, job searchers will suddenly find many jobs that meet their reservation wage and the unemployment rate falls in the short run
5
The Phillips Curve
0
Over time, workers realize that the inflation rate is higher and will adjusttheir reservation wage upward, returning the economy to having u = 5% and = 7
3
7
Short Run
Long Run
Rate of Inflation
Unemployment Rate
0
5
In the long run, therefore, there is no trade-off between inflation and unemployment
In the long run, the unemployment rate is still 5 percent, but there is nowa higher rate of inflation
The Phillips Curve
-4
-3
-2
-1
0
1
2
3
4
4 5 6 7 8 9 10
Unemployment Rate
In
flat
ion
Rat
e
t tu x
1t t tu x
Source: http://wwwblsgov/
et t tu x
Increasing UI benefitsMore stringent antitrust legislation
decreases market power
NAIRU or Natural Rate of unemployment
NAIRU
increases
NAIRU
decreases
The Augmented Phillips Curve(1975-2005)
x is all other variables affecting wage setting is the markup of firm’s unit price over unit cost
is positive (but if = 0, Phillips curve)
Unemployment and Interest Rates
The unemployment rate lags the The unemployment rate lags the federal funds rate byfederal funds rate bya couple of yearsa couple of years
?
1954-2011
Unemployment and Interest Rates1987-2011
u
Unemployment and Interest Rates1989-2008
Fed Funds Rate
u
Unemployment and Interest Rates1989-2008
Fed Funds Rate (lagged one year)
u
Unemployment and Interest Rates1989-2008
Fed Funds Rate (lagged two years)
u
Unemployment in Europe
Table 12-3. Percentage of Unemployed Workersin Spells Lasting At Least 12 Months
Country 1990 2006
Belgium 68.7 56.6
Denmark 29.9 20.4
Germany 46.8 57.2
France 38.0 44.0
Ireland 66.0 34.3
Italy 69.8 52.9
Netherlands 49.3 45.2
Spain 54.0 29.5
United Kingdom 34.4 22.1
United States 5.5 10.0
Source: OECD Employment Outlook, Statistical Annex, Paris: OECD, 2007, Table G.
0
3
6
9
12
15
1960 1970 1980 1990 2000 2010
Year
Un
em
plo
ym
en
t R
ate
US
France
Germany
Italy
UK
• Unemployment in Western Europe is a combination of…
– high unemployment insurance benefits
– employment protection restrictions
– wage rigidity
Unemployment in Europe
US increased UI benefits from 26 to 99 weeks