Macroeconomics Slides: Unemployment and Labor Market PDF

Macroeconomics N. Gregory Mankiw Unemployment and the Labor Market Presentation Slides © 2022 Worth Publishers, all rights reserved  IN THIS CHAPTER, YOU WILL LEARN: …about the natural rate of...

Macroeconomics N. Gregory Mankiw Unemployment and the Labor Market Presentation Slides © 2022 Worth Publishers, all rights reserved  IN THIS CHAPTER, YOU WILL LEARN: …about the natural rate of unemployment: what it means what causes it understanding its behavior in the real world 3 The CHAPTER 1 National Science Income of Macroeconomics 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. Actual and natural rates of unemployment, U.S., 1950–2020 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 How Is Unemployment Measured? The unemployment rate is the percentage of the labor force that is unemployed. Number unemployed Unemployment rate =  100 Labor force How Is Unemployment Measured? The labor-force participation rate is the percentage of the adult population that is in the labor force. Labor force participation rate Labor force =  100 Adult population  The Breakdown of the Population in August 2021 Unemployment Rate = 100  8.4 ÷ 161.5 = 5.2% Employed Labor Force (153.2 million) (161.5 million) Adult US data: Population Population: (261.6 million) http://research.stlouisfed.org/fred2/series/CNP16OV Unemployed (8.4 million) Labor Force: http://research.stlouisfed.org/fred2/series/CLF16OV Labor Force Employed: http://research.stlouisfed.org/fred2/series/CE16OV Participation Rate = 100 Unemployed:  161.5 ÷ 261.6 = 61.7% http://research.stlouisfed.org/fred2/series/unemploy Not in labor force Not in the Labor Force: (100.1 million) http://research.stlouisfed.org/fred2/series/LNS15000000 Unemployment Rate: https://fred.stlouisfed.org/series/UNRATE Labor Force Participation Rate: https://fred.stlouisfed.org/series/CIVPART Copyright © 2004 South-Western Civilian Labor Force Participation Rate Participation Rate = 100 × Labor Force / Population CIVPART = 100 × CLF16OV / CNP16OV Source: http://research.stlouisfed.org/fred2/series/CIVPART Copyright © 2004 South-Western  Keep and Eye on the Unemployment Rate and the Participation Rate Population Labor Force Employed Unemployed Unemployment Rate (%) Participation Rate (%) Situation A 10 10 9 1 10 100 Situation B 10 9 9 0 0 90 In this made-up example, an unemployed person drops out of the labor force after repeated failures to find a job. (Such people are called discouraged workers.) The unemployment rate “improves”. But the labor market picture is unchanged. Lesson: A fall in the unemployment rate represents a genuine improvement only if the participation rate has not fallen at the same time. Copyright © 2004 South-Western  Unemployment and Age Source: Unemployment Rate: 16 to 19 years https://fred.stlouisfed.org/series/LNU04000012. Unemployment Rate: 25 to 54 years https://fred.stlouisfed.org/series/LNU04000060. Neither series is seasonally adjusted. Copyright © 2004 South-Western  Unemployment and Race Source: Unemployment Rate: Black or African American https://fred.stlouisfed.org/series/LNU04000006. Unemployment Rate: White https://fred.stlouisfed.org/series/LNU04000003. Neither series is seasonally adjusted. Copyright © 2004 South-Western  Unemployment and Sex Source: Unemployment Rate: Men https://fred.stlouisfed.org/series/LNS14000001. Unemployment Rate: Women https://fred.stlouisfed.org/series/LNS14000002. Seasonally adjusted. Copyright © 2004 South-Western  Unemployment and Education Source: Unemployment Rate: College Graduates: Bachelor's Degree and Higher, 25 years and over https://fred.stlouisfed.org/series/LNU04027662. Unemployment Rate: High School Graduates, No College, 25 years and over https://fred.stlouisfed.org/series/LNU04027660. Unemployment Rate: Less than a High School Diploma, 25 years and over https://fred.stlouisfed.org/series/LNU04027659. Not seasonally adjusted. Copyright © 2004 South-Western  Figure 3: Labor Force Participation Rate: Sex Source: Civilian Labor Force Participation Rate: Men https://fred.stlouisfed.org/series/LNU01300001. Civilian Labor Force Participation Rate: Women https://fred.stlouisfed.org/series/LNU01300002 Copyright © 2004 South-Western  What explains the rise in the female participation rate? New technology in the home Women have more time available for paid work Improved birth control Fewer children to take care of Changing political and social attitudes Greater employment opportunities for educated women Copyright © 2004 South-Western What explains the fall in the male participation rate? Longer schooling Earlier retirement and longer lives Higher female employment More fathers stay home to raise children Copyright © 2004 South-Western Assumptions 1. L is exogenously fixed. 2. During any given month, s = rate of job separation, fraction of employed workers who become separated from their jobs f = rate of job finding, fraction of unemployed workers who find jobs s and f are exogenous The transitions between employment and unemployment 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: Finding the “equilibrium” unemployment rate f ×U = s ×E = s ×(L – U) = s ×L – s ×U Solve for U/L: (f + s) × U = s × L so, U s = L s+f Example: Each month, 1% of employed workers lose their jobs (s = 0.01) 19% of unemployed workers find jobs (f = 0.19) Find the natural rate of unemployment: U s 0.01 = = = 0.05, or 5% L s + f 0.01+ 0.19 Policy implication A policy will reduce the natural rate of unemployment only if it lowers s or increases f. Why is there unemployment? (1 of 2) 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 search 2. wage rigidity Job search and 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 and preferences jobs have different skill requirements geographic mobility of workers is not instantaneous flow of information about vacancies and job candidates is imperfect Sectoral shifts Sectoral shifts: changes in the composition of demand among industries or regions Example: technological change more jobs repairing computers, fewer jobs repairing typewriters Example: a new international trade agreement labor demand increases in export sectors, decreases in import-competing sectors These scenarios result in frictional unemployment. More examples of sectoral shifts, part 1 Industrial revolution (1800s): agriculture declines, manufacturing soars “China” Shock (2000–2010s): decline in manufacturing (located in the Midwest), services (located along the coasts) soar Health care spending as % of GDP: 1960 1980 2000 2020 5.2% 9.1% 13.8% 17.7% In our dynamic economy, smaller sectoral shifts occur frequently, contributing to frictional unemployment. More examples of sectoral shifts, part 2 Government programs affecting unemployment include: Government employment agencies disseminate info about job openings to better match workers and 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 the worker loses his/her job. UI increases frictional unemployment because it reduces the opportunity cost of being unemployed the urgency of finding work Both of the above reduce f (the rate of job finding) Unemployment insurance (UI) Eligibility in the United States Eligibility: Unemployed through no fault of your own (fires and quits are case-by-case basis). Able, ready, and willing to work immediately (and show you are looking for work while receiving benefits). Have earned enough wages in the base period to qualify (definitions vary by state). Unemployment insurance (UI) Claims in the United States Claims: Individual States run programs but receive money from the Federal Government. Currently, most state systems use outdated computer systems; it is difficult to make quick changes. Racial disparities in having claims approved and length of time for approval. States vary in their documentation requirements. Unemployment insurance (UI) Benefits in the United States Benefits: Replacement Rate: Benefits are a percentage of your previous wages (varies by state; about 50 percent). States set a cap on total weekly benefits. Standard benefits last 26 weeks. In normal times, benefits are considered taxable income. Expanded Benefit (EB) Program: During bad economic times, the length of benefits can be extended by 13 or 20 weeks (depending on the state of economic conditions). Unemployment insurance (UI) during Covid in the United States Additional 13-week extension starting March 2020, with an extra 600 dollars a week (CARES Act). Additional 11-week extension starting December 2020, with an extra 300 or 400 dollars a week depending on the state and other eligibility requirements. Additional 25-week extension starting March 2021, with an extra 300 dollars a week (American Rescue Plan). Extra $ per week due to outdated computer systems and adjusting the replacement rate. Initial research finding that the extra 600 dollars a week did not cause unemployment. Benefits of UI By allowing workers more time to search: UI may lead to better matches between jobs and workers, leading to greater productivity and higher incomes. “Do Unemployment Insurance Benefits Improve Match Quality? Evidence from Recent U.S. Recessions” reveals: “Longer UI benefit durations decrease the mismatch between workers’ educational attainments and the educational requirements of jobs.” “We find bigger effects of UI on match quality for those more likely to be liquidity constrained—women, non-whites and less-educated workers.” “UI extensions improve the functioning of the labor market.”  Social support in Kazakhstan (2023) Support for 1 to 6 months income for last 24 months is takes into account Up to 45% from loss income https://www.gov.kz/memleket/entities/karagan da/press/news/details/510539?lang=ru NOW YOU TRY Questions for discussion Based on the previous slides, are unemployment insurances expansions helpful or hurtful to the economy? Why? How would you judge the U.S. response to Covid, in terms of unemployment benefits? What ways could the UI system be improved? Why is there unemployment? (2 of 2) U s The natural rate of unemployment: = L s +f Two reasons why f < 1: DONE ✓ 1. job search Next ➔ 2. wage rigidity  Why Are There Always Some People Unemployed? In an ideal labor market, wages would adjust to balance the supply and demand for labor, ensuring that all workers are fully employed. Wage Labor Supply WE Labor Demand QE Quantity of labor  Unemployment from real wage rigidity, part 1 If the real wage is stuck above its equilibrium level, there aren’t enough jobs to go around.  Unemployment from real wage rigidity, part 2 If the real wage Then, firms must ration the is stuck above scarce jobs among workers. its equilibrium level, there aren’t enough Structural unemployment: jobs to go The unemployment resulting around. from real wage rigidity and job rationing. Reasons for wage rigidity 1. Minimum-wage laws 2. Labor unions 3. Efficiency wages 1. Minimum-wage laws The minimum wage may exceed the equilibrium wage of unskilled workers. Evidence shows that minimum wages above 60 percent to 66 percent of the median local wage increase unemployment. However, evidence also shows if the minimum wage is not set “too high,” then the unemployment effects are minimal. But, the minimum wage cannot explain the majority of the natural rate of unemployment, as most workers’ wages are well above the minimum wage. Unemployment from a Wage Above the Equilibrium Level Wage Labor Surplus of labor = supply Unemployment W H WE Labor demand 0 LD LE LS Quantity of Labor Minimum wage in Kazakhstan is 85 000 KZT in 2025 Does t is have any effect on unemployment rate? 2. Labor unions Unions exercise monopoly power to secure higher wages for their members. When the union wage exceeds the equilibrium wage, unemployment results. Insiders: employed union workers whose interest is to keep wages high Outsiders: unemployed non-union workers who prefer equilibrium wages, so there would be enough jobs for them  UNIONS AND COLLECTIVE BARGAINING A strike will be organized if the union and the firm cannot reach an agreement. A strike refers to when the union organizes a withdrawal of labor from the firm.  UNIONS AND COLLECTIVE BARGAINING A successful strike makes some workers better off and other workers worse off. Workers in unions (insiders) reap the benefits of collective bargaining, while workers not in the union (outsiders) bear some of the costs.  Are Unions Good or Bad for the Economy? Critics argue that unions cause the allocation of labor to be inefficient and inequitable. Wages above the competitive level reduce the quantity of labor demanded and cause unemployment. Some workers benefit at the expense of other workers.  Are Unions Good or Bad for the Economy? Advocates of unions contend that unions are a necessary antidote to the market power of firms that hire workers. They claim that unions are important for helping firms respond efficiently to workers’ concerns. 3. Efficiency wages Theories in which higher wages increase worker productivity by: attracting higher-quality job applicants increasing worker effort and reducing “shirking” reducing turnover, which is costly to firms improving health of workers (in developing countries) Firms willingly pay above-equilibrium wages to raise productivity. Result: structural unemployment  Henry Ford’s experiment Henry Ford introduced the assembly line technique in automobile production, thereby ushering in a productivity revolution In 1914, Ford began paying his workers $5 per day, which was far above the norm It is $150 per day in 2023 money See for yourself using the BLS’s inflation calculator: https://www.bls.gov/data/inflation_calculator.h tm And keep in mind that workers were far, far less productive back then Copyright © 2004 South-Western  Henry Ford’s experiment Turnover and absenteeism fell. Productivity rose so much that Ford’s costs fell Henry Ford himself called the $5- a-day wage “one of the finest cost-cutting moves we ever made” Copyright © 2004 South-Western The duration of unemployment The long-term (27 weeks or more) unemployed Discouraged workers Discouraged workers: workers who have given up on looking for a job and are considered out of the labor force (U-4 Unemployment rate) Marginally attached workers: persons not in the labor force who want and are available for work and who have looked for a job but have not recently looked for work Discouraged workers are included in marginally attached workers. (U-5 Unemployment rate) When combined with people who work part time for economic reasons, it shows the U-6 unemployment rate. U-3 vs U-6 Unemployment Rates  Labor force participation Age White Men White Women Black Men Black Women 16-19 12.9% 10.1% 22.3% 19.6% 20-24 6.5 4.9 13.8 9.3 25-54 2.7 2.8 5.4 4.7 Unemployment in Europe, 1960–2013 Why unemployment rose in Europe but not the United States Shock Technological progress shifting labor demand from unskilled to skilled workers in recent decades Effect in the United States An increase in the “skill premium”—the wage gap between skilled and unskilled workers Effect in Europe Higher unemployment, due to generous government benefits for unemployed workers and strong union presence KZ labour statistics KZ labour statistics - Share of self-employed in employed population: 31% on average in 2002-2021 - 23.9% in 2019 It is lower in developed countries: - US – 6.1% - Germany – 9.6% - Japan – 10.1% - France – 12.1% - Singapore – 13.5% - UK – 15.6% Much lower in Middle East countries: - Qatar – 0.4% - Kuwait – 1.8% - Bahrain – 2.7% - UAE – 4.9% Much higher in developing countries: - Indonesia – 51.8% - Pakistan – 56.3% - Nigeria – 79.9% - Niger – 95.1% Data source: ILO data KZ: many industries with low productivity are the main employers A - wholesale & retail trade B - agriculture C - education D - construction E - transportation & storage F - manufacturing G - healthcare H - public administration & defence I - other services J - administrative & support service activities K - mining & quarrying L - professional, scientific & technical activities M - accommodation & food service activities N - financial & insurance activities O - real estate activities P - information & communication electricity, gas, steam & air conditioning Q - supply R - arts, entertainment & recreation Employed population in 2021 S - water supply More examples of sectoral shifts: current trends A- agriculture B- mining & quarrying C- manufacturing D- electricity, gas, steam & air conditioning supply E- water supply F- construction G- wholesale & retail trade H- transportation & storage I- accommodation & food service activities J- information & communication K- financial & insurance activities L- real estate activities M- professional, scientific & technical activities N- administrative & support service activities O- public administration & defence P- education Q- healthcare R- arts, entertainment & recreation S- other services Kazakhstan: Number of Employees and Probability of Automation by Industry Automation Data: McKinsey via Bridgewater Associates Kazakhstan: data Average UR in 2001-2021: 6.4% 2021: 4.9% Hidden unemployment (“discouraged workers” – those who left a hope to find a suitable job) in a form of: - self-employment for men - economic inactivity for women Kazakhstan: data Some variation across regions: - the highest: city of Almaty (5.2%), Turkestan (5.1%), Shymkent (5.0%) - the lowest: Karaganda (4.5%), Astana (4.6%) Higher unemployment among women than men: - 4.2% male UR (2021) - 5.5% female UR (2021) Lower level of unemployment among youth: 3.8% in 2021 (possibly just a statistical inaccuracy)  Kazakhstan: data EXERCISE: City of Shymkent with 21 948 officially registered unemployed is ranked among the regions with the highest UR (5.0%), while Karaganda region with 30 036 officially registered unemployed is ranked among those with the lowest UR (4.5%). How this could be? Kazakhstan: data Karaganda Shymkent city region population 1 074 466 1 375 938 adult population (16-65) 640 936 892 831 share of adult pop in total pop, % 59.7 64.9 economically active 436 265 673 392 # of employed 414 317 643 356 # of unemployed 21 948 30 036 LFPR, % 68.1 75.4 unemployment rate, % 5.0 4.5  CHAPTER SUMMARY, PART 1 The natural rate of unemployment ▪ Definition: the long-run average, or “steady-state,” rate of unemployment ▪ It depends on the rates of job separation and job finding. Frictional unemployment ▪ It is due to the time it takes to match workers with jobs. ▪ Longer unemployment benefits can increase match quality. Structural unemployment ▪ It results from wage rigidity: The real wage remains above the equilibrium level. 3 The CHAPTER 1 National Science Income of Macroeconomics  CHAPTER SUMMARY, PART 2 Unemployment Insurance in the United States ▪ Issues caused by outdated and state-run computer systems ▪ Massive expansion in benefits during Covid Duration of unemployment ▪ Most spells are for short term. ▪ Most weeks of unemployment are attributable to a small number of long-term unemployed persons. ▪ Both the 2008 and Covid recessions greatly increased long-term unemployed. 3 The CHAPTER 1 National Science Income of Macroeconomics  CHAPTER SUMMARY, PART 3 Unemployment in the United States ▪ Multiple measures of unemployment: U-3, U-6, etc. ▪ Differences across demographic groups 3 The CHAPTER 1 National Science Income of Macroeconomics