Essay on 352 Mankiw8e Chap07 SV

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IN CHAPTER 7, YOU WILL LEARN:
…about the natural rate of unemployment:

 what it means
 what causes it
 understanding its behavior in the real world

CHAPTER 7

Unemployment

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Natural rate of unemployment
 Natural rate of unemployment:
The average rate of uneployment

 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 7

Unemployment

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Actual and natural rates of unemployment,
U.S., 1960–2013
12

Unemployment rate
10

Percent of labor force
8
6
4
2

Natural rate of unemployment 0
1960 7 1965
1970 1975 1980 1985 1990 1995 2000 2005 2010
CHAPTER
Unemployment

3

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

CHAPTER 7

Unemployment

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Assumptions:
1. L is exogenously fixed.
…[Labor force is constant]

2. During any given month, s =rate of job separations fraction of employed workers that become separated from their jobs f =rate of job findings fraction of unemployed workers that find jobs s and f are exogenous
CHAPTER 7

Unemployment

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The transitions between employment and unemployment s E

Employed

Unemploye d f U
CHAPTER 7

Unemployment

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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:

# of employed people who lose or leave their jobs
CHAPTER 7

s E
U

Unemployment

=

f
# of unemployed people who find jobs 7

Finding the “equilibrium” U rate f U = s x E = s x ( L-U)
Solve for U/L: f x U =s x L – s x U so, f x U + s x U = sL, U( f+s ) =sL
U (f+s)/ L= sL/L  U(f+s)/L(f+s)=s/f+s
U/L = s/(f+s)

CHAPTER 7

Unemployment

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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:

CHAPTER 7

Unemployment

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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
CHAPTER 7

Unemployment

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Policy implication
 A policy will reduce the natural rate of unemployment only if it lowers s or increases f.

CHAPTER 7

Unemployment

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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: Why?

CHAPTER 7

Unemployment

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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 search
2. wage rigidity

CHAPTER 7

Unemployment

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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
CHAPTER 7

Unemployment

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Sectoral shifts
 def: 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
CHAPTER 7

Unemployment

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CASE STUDY:

Structural change over the long run CHAPTER 7

Unemployment

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More examples of sectoral shifts
 Industrial revolution (1800s): agriculture declines, manufacturing soars

 Energy crisis (1970s): demand shifts from larger cars to smaller ones

…