Unemployment

Mankiw, 2009
Natural Rate of Unemployment
-The average rate of unemployment around which the
economy fluctuates.

Average:

5 and 6%

People Wanting a Job but Does Not Have One

1 out of every 18
Steady-State Rate of Unemployment
-The average rate of unemployment around which the
economy fluctuates.

This equation shows that the steady-state

rate of unemployment U/L depends on
the rates of job separation s and job
finding f.
Job Search and
Frictional
Unemployment
The unemployment
caused by the time it
takes workers to search
for a job.
Causes of Frictional
Unemployment
The types of goods that firms and households
demand vary over time.

Different regions produce different goods, the

demand for labor may be rising in one part of the
country and falling in another.

Sectoral shifts are always occurring, and

because it takes time for workers to change
sectors, there is always frictional unemployment.
Public Policy & Frictional Unemployment
Many public policies seek to decrease the natural rate of
unemployment by reducing frictional unemployment.

Unemployment Insurance
Unemployed workers can collect a fraction of their wages for a
certain period after losing their jobs. Although the precise terms of the program
differ from year to year and from state to state, a typical worker covered by
unemployment insurance in the United States receives 50 percent of his or her
former wages for 26 weeks. In many European countries, unemployment-
insurance programs are significantly more generous.
Pros Cons
OF UNEMPLOYMENT INSURANCE OF UNEMPLOYMENT INSURANCE

Reduces Economic Hardship: Softens the Increases Frictional Unemployment: Encourages

financial impact of unemployment on workers. unemployed individuals to be less urgent in their job search
and more selective about job offers, which reduces the rate

Income Stability: Provides workers with of job finding.

greater certainty about their incomes during

unemployment. Raises the Natural Rate of Unemployment: Due to extended
job search times and increased job separations.

Better Job Matching: Allows workers to take

Less Incentive for Stable Employment: Workers may be less
the time to find jobs that better match their
motivated to seek jobs with stable employment prospects or
skills and preferences, potentially leading to
negotiate for job security guarantees, knowing they have
more satisfying and productive employment.
unemployment insurance as a safety net.
Real Wage Rigidity & Structural Unemployment

Wage rigidity—the failure of wages to adjust to a level at which labor supply

equals labor demand.

Structural Unemployment- The unemployment resulting from wage rigidity

and job rationing.

Workers are unemployed not because they are actively searching for the jobs
that best suit their individual skills but because there is a fundamental
mismatch between the number of people who want to work and the number of
jobs that are available.
3 causes of wage
rigidity
1. Minimum-wage laws
2. Power of Unions
3. Efficiency wages
Minimum-Wage Laws (US PERSPECTIVE)
Government-Induced Wage Rigidity:
Prevents wages from falling to equilibrium levels.
Minimum-wage laws set a legal minimum for wages.
Minimum wage usually between 30-50% of the average manufacturing wage.

Impact on Unskilled Workers:

Raises wages above equilibrium for unskilled and inexperienced workers.
Reduces the quantity of labor firms demand for these workers.

Effect on Teenage Unemployment:

Greatest impact on teenagers due to low marginal productivity and on-the-job training co
A 10% increase in minimum wage reduces teenage employment by 1-3%.

Political Debate:
Advocates:
Aim to raise the income of the working poor.
Acknowledge unemployment but prioritize poverty alleviation.
Opponents:
Argue it increases unemployment and is poorly targeted.
Suggest many minimum-wage earners are middle-class teenagers.
Characteristics of Minimum-Wage Workers (US
PERSPECTIVE)

Around 76 million American workers are paid hourly, making up 59% of all wage
and salary workers. Of these, 267,000 earned exactly the minimum wage, and
1.5 million earned less due to exemptions and reporting inaccuracies.

Women are more likely than men to earn minimum wage, with 3% of women and
1% of men earning at or below the minimum.

Younger workers are more affected, with half of minimum wage earners being
under 25. About 7% of teenagers and 2% of workers aged 25 and over earned
minimum wage or less.

Less educated workers are more likely to earn minimum wage, with 2% of high
school graduates and 1% of college graduates earning at or below the minimum.

Part-time workers are more likely to earn minimum wage, with 5% of part-timers
compared to 1% of full-timers earning at or below the minimum.

The leisure and hospitality industry has the highest proportion of minimum wage
workers (about 12%), with three-fifths of minimum wage earners working in food
services and drinking places.
Unions & Collective Bargaining
Unionized workers' wages are determined through bargaining between union
leaders and firm management, often resulting in wages above the equilibrium level.
This leads to fewer workers being hired, a lower rate of job finding, and increased
structural unemployment. Additionally, non-unionized firms may raise wages to
prevent unionization, contributing to wage rigidity.

Unions create a conflict between employed workers (insiders) who want to keep
wages high and unemployed workers (outsiders) who are disadvantaged by these
higher wages. The resolution of this conflict varies by country. In the U.S., wage
bargaining occurs at the firm level, while in Sweden, it happens at the national level
with government involvement. Sweden's centralized bargaining may help keep
wages closer to equilibrium, preventing high unemployment despite a strong union
presence.
Efficiency Wages
There are several efficiency-wage theories:

1. Nutrition: In poorer countries, higher wages allow workers to afford better nutrition, leading to increased
productivity. This is less relevant in wealthier countries where wages are already sufficient for maintaining
good health.

2. Labor Turnover: In developed countries, higher wages reduce labor turnover by encouraging employees to
stay with the firm, thus saving on hiring and training costs.

3. Workforce Quality: Higher wages attract and retain better employees, reducing adverse selection where
only less capable workers remain if wages are lowered.

4. Worker Effort: High wages incentivize workers to put in more effort because the cost of losing their job is
higher. This reduces shirking and improves productivity.

All these theories share the idea that firms benefit from paying higher wages, leading to wages above the
equilibrium level. This results in lower job finding rates and higher unemployment.
Transitions Into and Out of the Labor
Force
Our previous discussions of labor-market dynamics have overlooked the
movement of individuals into and out of the labor force. While our model
assumes a fixed labor force, real-world scenarios involve significant
movement. About one-third of the unemployed are new entrants, including
young workers seeking their first jobs and individuals re-entering the labor
market. Nearly half of all unemployment spells end with the person
leaving the labor force rather than finding a job.

These movements complicate unemployment statistics. Some who

identify as unemployed may not be actively seeking work and should be
considered out of the labor force. Conversely, discouraged workers who
have stopped looking for jobs are not counted in unemployment statistics,
even though their joblessness remains a social issue.
Conclusion

Unemployment represents wasted Unfortunately, neither frictional Yet public policy is not powerless in the

resources. Unemployed workers have unemployment nor structural fight to reduce unemployment. Job-

the poten- tial to contribute to national unemployment can be easily reduced. training programs, the unemployment-

income but are not doing so. Those The government cannot make job insurance system, the minimum wage,

searching for jobs to suit their skills are search instantaneous, and it cannot and the laws governing collective

happy when the search is over, and easily bring wages closer to equilibrium bargaining are often topics of political

those waiting for jobs in firms that pay levels. Zero unemploy- ment is not a debate. The policies we choose are

above-equilibrium wages are happy plausible goal for free-market likely to have important effects on the

when positions open up. economies. econ- omy’s natural rate of

unemployment.