Slide 0Chapter objectivesNatural Rate of UnemploymentU.S. Unemployment, 1958-2002A first model of the natural rateAssumptions:The transitions between employment and unemploymentThe steady state conditionSolving for the “equilibrium” U rateExample:policy implicationWhy is there unemployment?Job Search & Frictional UnemploymentSectoral shiftsIndustry shares in U.S. GDP, 1960Industry shares in U.S. GDP, 1997Sectoral shifts aboundPublic Policy and Job SearchUnemployment insurance (UI)Benefits of UISlide 21Unemployment from real wage rigiditySlide 23Reasons for wage rigidityThe minimum wageThe minimum wage in the real world:Labor unionsUnion membership and wage ratios by industry, 2001Efficiency Wage TheoryThe duration of U.S. unemployment, average over 1993-2002The duration of unemploymentActual & natural rates of unemployment in the U.S.EXPLAINING THE TREND: The minimum wageEXPLAINING THE TREND: Union membershipEXPLAINING THE TREND: Sectoral shiftsEXPLAINING THE TREND: DemographicsThe rise in European UnemploymentSlide 38Chapter summarySlide 40Slide 41macroeconomics fifth editionN. Gregory MankiwPowerPoint® Slides by Ron Cronovichmacro © 2002 Worth Publishers, all rights reservedTopic 6:UnemploymentCHAPTER SIXCHAPTER 6CHAPTER 6 Unemployment Unemploymentslide 2Chapter objectivesChapter objectivesThe natural rate of unemployment:what it meanswhat causes itunderstanding its behavior in the real worldCHAPTER 6CHAPTER 6 Unemployment UnemploymentNatural 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.CHAPTER 6CHAPTER 6 Unemployment Unemploymentslide 4U.S. Unemployment, U.S. Unemployment, 1958-20021958-20022345678910111955 1960 1965 1970 1975 1980 1985 1990 1995 2000Percent of labor forceUnemployment rate Natural rate of unemploymentCHAPTER 6CHAPTER 6 Unemployment Unemploymentslide 5A first model of the natural rateA first model of the natural rateNotation:L = # of workers in labor forceE = # of employed workersU = # of unemployedU/L = unemployment rateCHAPTER 6CHAPTER 6 Unemployment Unemploymentslide 6Assumptions: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 separationsf = rate of job finding(both exogenous)CHAPTER 6CHAPTER 6 Unemployment Unemploymentslide 7The transitions between The transitions between employment and unemploymentemployment and unemploymentEmployedUnemployeds Ef UCHAPTER 6CHAPTER 6 Unemployment Unemploymentslide 8The steady state conditionThe 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 jobsCHAPTER 6CHAPTER 6 Unemployment Unemploymentslide 9Solving for the “equilibrium” U rateSolving for the “equilibrium” U rate f U = s E = s (L –U )= s L – s U Solve for U/L: (f + s)U = s L so,CHAPTER 6CHAPTER 6 Unemployment Unemploymentslide 10Example: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   CHAPTER 6CHAPTER 6 Unemployment Unemploymentslide 11policy implicationpolicy implicationA policy that aims to reduce the natural rate of unemployment will succeed only if it lowers s or increases f.CHAPTER 6CHAPTER 6 Unemployment Unemploymentslide 12Why 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 search2. wage rigidityCHAPTER 6CHAPTER 6 Unemployment Unemploymentslide 13Job 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 imperfectCHAPTER 6CHAPTER 6 Unemployment Unemploymentslide 14Sectoral 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.CHAPTER 6CHAPTER 6 Unemployment Unemploymentslide 15Industry shares in U.S. GDP, Industry shares in U.S. GDP, 196019604.2%28.0%9.9%57.9%AgricultureManufacturingOther industryServicesCHAPTER 6CHAPTER 6 Unemployment Unemploymentslide 16Industry shares in U.S. GDP, Industry shares in U.S. GDP, 199719971.7%17.8%8.5%72.0%AgricultureManufacturingOther industryServicesCHAPTER 6CHAPTER 6 Unemployment Unemploymentslide 17Sectoral 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.CHAPTER 6CHAPTER 6 Unemployment UnemploymentPublic Policy and Job SearchPublic Policy and Job SearchGovt 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 industriesCHAPTER