Macroeconomics & The global economy Ace Institute of Management Chapter 6: Unemployment Instructor
Sandeep Basnyat
Sandeep_basnyat@yahoo.com
9841 892281
Macroeconomics & The global economy Ace Institute of Management Chapter 6: Unemployment Instructor
Sandeep Basnyat
Sandeep_basnyat@yahoo.com
9841 892281
Unemployment- Major Macroeconomic Issue
Major concern for all government
Develop policies to curb unemployment or increase employment rate.
However…
U.S. Unemployment, 1958-2002 What determines the natural rate of unemployment?
The actual unemployment rate fluctuates considerably over the short run: the red line: the so-called “natural rate of unemployment.”
Natural 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.
The natural rate of unemployment is the “normal” unemployment rate the economy experiences when it is neither in a recession nor a boom.
A first model of the natural rate Notation:
L = # of workers in labor force
E = # of employed workers
U = # of unemployed
U/L = unemployment rate
L = E+U or E = L – U or U = L - E
Assumptions: 1. L is exogenously fixed.
2. During any given month,
s = fraction of employed workers that become separated from their jobs,
f = fraction of unemployed workers that find jobs. s = rate of job separations
f = rate of job finding
(both exogenous)
The steady state condition Definition: the labor market is in steady state, or long-run equilibrium, if the unemployment rate is constant.
The steady-state condition is: s E = f U # of employed people who lose or leave their jobs # of unemployed people who find jobs
The transitions between employment and unemployment Employed Unemployed f U s E
Solving for the “equilibrium” U rate f U = s E
= s (L –U )
= s L – s U
f xU + sU = s L
or, (f + s)U = s L
so, Or,
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:
Policy implication A policy that aims to reduce the natural rate of unemployment will succeed only if it lowers s or increases f.
Why is there unemployment? There are two reasons:
1. Job search
2. Wage rigidity
Job 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
Sectoral 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.
Sometimes the unemployment caused by sectoral shifts is severe. Due to increasing imports of cheaper foreign-made textiles, the U.S. textile industry has been in decline for years. Many workers in this industry have lost jobs. Many of these workers are in their 50s and have worked in this industry for decades. Such workers are unlikely to have the skills necessary to get jobs available in newly booming industries, and they are less likely to invest in the acquisition of the necessary skills for these jobs. Hence, such workers are at greater risk for becoming “discouraged workers.”
Industry shares in U.S. GDP, 1960 Source: World Development Indicators, World Bank
.
Industry shares in U.S. GDP, 1997 Source: World Development Indicators, World Bank Even the “tiny” category of agriculture drops by more than half : from 4.2% to 1.7% of GDP.
Sectoral 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.
Sectoral shifts occur frequently, contributing to frictional unemployment.
Sectoral shifts are distinct from recessions (which also cause unemployment). In recessions, there is a general fall in demand across industries, and the unemployment that results is cyclical. Sectoral shifts, though, are changes in the composition of demand across industries, and lead to frictional unemployment as described above.
For your information
Assess the trend in sectoral shift in the industrial sectors in:
Nepal
India
China
Japan
South Korea
Taiwan
Malaysia, and
Vietnam
Public Policy and Job Search Govt programs affecting unemployment
Govt employment agencies: disseminate info about job openings to better match workers & jobs
Public job training programs: help workers displaced from declining industries get skills needed for jobs in growing industries
Unemployment insurance (UI) UI pays part of a worker’s former wages for a limited time after losing his/her job.
UI increases search unemployment, because it:
reduces the opportunity cost of being unemployed
reduces the urgency of finding work
hence, reduces f
Studies: The longer a worker is eligible for UI, the longer the duration of the average spell of unemployment.
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