Introductory Macroeconomics Lecture 4 PDF

Introductory Macroeconomics Lecture 4: Fundamental Macro Concepts, Part Three Jonathan Thong Daniel Minutillo 2nd Semester 2024 1 Labour Market Outcomes 2  This Lecture More fundamental m...

Introductory Macroeconomics Lecture 4: Fundamental Macro Concepts, Part Three Jonathan Thong Daniel Minutillo 2nd Semester 2024 1 Labour Market Outcomes 2  This Lecture More fundamental macro concepts Employment and unemployment – Labour market states – Hours and underutilisation – Labour market transitions – Long term unemployment BOFAH Chapter 5 3  Importance of Labour Market Outcomes Labour market outcomes an important determinant of well-being, for individuals and families – unemployment a major source of unhappiness (especially long-term unemployment) – employment conditions also major determinant of well-being (wages, benefits, hours) Well-functioning labour market important for efficient allocation of workers to most productive tasks Many economic theories implicitly assume economy is close to some notion of ‘ full employment ’ (i.e., the level of employment that is attained when the economy is operating at or close to it’s productive capacity) 4 Labour Market States 5  Labour Market States Working-age population (aged between 15 and 64 in Australia) is divided into three labour market ‘states’ or outcomes N = population not in the labour force E = population employed U = population unemployed The sum of the employed and the unemployed is the labour force E + U = L = labour force 6  Participation and Unemployment Rates The participation rate is the fraction of the working-age population that is in the labour force L E+U participation rate = = L+N E+U +N The unemployment rate is the fraction of the labour force that is not employed U U unemployment rate = = L E+U 7  Labour Force Survey How old are you? – if aged 15-64, you are in the working age population Are you working this week? – if yes, you are employed, in E – if no, are you actively looking for a job this month? * if yes, you are unemployed, in U * if no, you are not in the labour force, in N 8 Labour Market Status in Australia 9  Labour Market States, Jan 2024 Data (in millions) N = 7.345 E = 14.201 U = 0.578 L = 14.779 Implies L participation rate = = 0.668 L+N U unemployment rate = = 0.039 L 10 Recent Trends in Participation 11 Participation Rate by Gender 12 Unemployment by Gender 13 Hours and Underutilisation 14 Employment and Hours Worked 15  Full-Time vs. Part-Time Workers are surveyed about their usual hours and their actual hours in survey week Full-time employment, working 35 hours or more in usual week Part-time employment, working less than 35 hours in usual week Underemployed, either – part-time workers available for more hours – full-time workers actually working part-time hours in survey week (‘for economic reasons’) Underutilisation, sum of underemployment and unemployment 16 Full-Time vs. Part-Time 17 Full-Time vs. Part-Time by Gender 18 Unemployment and Underutilisation 19 Labour Market Transitions 20  Labour Market Transitions People transition between labour market states E, U, N – transition E → U : some employed people become unemployed – transition U → E: some unemployed people become employed – transition N → E, U : some people not in the labour force join the labor force – transition E, U → N : some people in the labour force leave the labour force What are the typical numbers of people changing their labour market status each month? 21  Labour Market Transitions, Early 2020 job-to-job transitions 96% 1% average monthly transition rates Employment 13 million 21% 3% 1% 4% 23% Unemployment Not in Labour Force 0.7 million 7 million 3% 56% 93% 22  Labour Market Transitions So in a typical month, about – 0.01 × 13 million = 130 thousand people transition E → U – 0.21 × 0.7 million = 147 thousand people transition U → E – 0.07 × 7 million = 490 thousand people transition N → U, E – (0.23 × 0.7 million) + (0.03 × 13 million) = 551 thousand people transition U, E → N In short, there is considerable churn in the labour market. Many people are changing labour market status every month! Gross labour market flows larger than net change in the number of people (i.e. the stock) in these labour market states. 23  Simple Model of Labour Market Transitions Using a model, we can study labour labour market transition to get a deeper understanding of unemployment rate dynamics. Assume there are only two states, E and U Employed workers separate at rate s in period t, transition E → U Unemployed workers find employment at rate f , transition U → E Change in the number of unemployed workers from period t to t + 1 Ut+1 − Ut = sEt − f Ut 24  Simple Model of Labour Market Transitions In ’steady-state’ (unemployment is stable over time) Ut+1 = Ut This occurs when flows into unemployment equal flows out of unemployment sE = f U Labour force is L = U + E so unemployment rate in steady state is U U U 1 s u= = = f = f = L U +E U + sU 1+ s+f s 25  A Numerical Example Suppose the separation rate is s = 0.03 per month and the job finding rate is f = 0.47 per month. This implies that the steady state unemployment rate is 0.03 u= = 0.06, or 6% per month 0.03 + 0.47 A fall in the job finding rate to f = 0.22 per month implies steady state unemployment 0.03 u= = 0.12, or 12% per month 0.03 + 0.22 26  Job Creation and Job Destruction Does unemployment rise in recessions because firms fire workers or because firms stop hiring new workers? – firms fire workers (job destruction channel) : increase in the separation rate s – firms stop hiring new workers (job creation channel): fall in the finding rate f Both matter, but ‘job creation channel’ channel matters more because it is extremely sensitive to the state of the business cycle Monitor job creation in real-time by looking at vacancies 27 Vacancies 28 Australian Wage Growth 29 Long term unemployment 30  Long-term trends in unemployment Unemployment can be decomposed into three broad categories: Frictional unemployment arises from the job matching process. Structural unemployment arises from changes to the underlying structure of the economy, resulting in a mismatch be- tween the skills and capabilities demanded and sup- plied. This can be be a result from technological ad- vances or changing tastes. Cyclical unemployment arises from business cycle fluctuations. 31  The Natural Rate of Unemployment Full employment is when the labour market is ’at capacity’. – This occurs when there is only frictional and structural unemployment (i.e., cyclical unemployment = 0). The natural rate of unemployment is the unemployment rate that occurs when there is full employment. – We do not directly observe the natural rate of unemployment, we can only estimate it. – The natural rate of unemployment will fluctuate according to long term demographic and structural changes or if there are profound disruptions to the labour market. 32 The Natural Rate of Unemployment 33  Learning Outcomes 1 Understand how the unemployment rate is calculated. Critically reflect on what it does and doesn’t say. Reflecting on how the LFS accounts for the different labour market states. 2 Understand terms in relation to underemployment, including labour hours, part-time, and underutilisation. 3 Be familiar with broad trend in labour market data. 4 Understand transition dynamics in the labour market. 5 Understand the significance of job creation in labour market dynamics. 6 Understand the different categories of employment and how they contribute to the natural rate of unemployment. 34  New Formula(s) and Notation Ut+1 − Ut = sEt − f Ut (Labour Market Transition Equation) E number of employed L number in labour pool (= E + U ) N number not participating U number of unemployed f job finding rate s job separation rate   U u unemployment rate = L 35  Next Lecture Beginning of Short-run macroeconomics Introduction to short-run macroeconomics – trends vs. cycles – potential output and output gaps – Okun’s law: unemployment and output gaps – overview of business cycle theory BOFAH chapter 6 36