Chapter 6 Essay

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Pages: 9

N. Gregory Mankiw
PowerPoint® Slides by Ron Cronovich
CHAPTER

6

Unemployment

© 2010 Worth Publishers, all rights reserved

SEVENTH EDITION

MACROECONOMICS

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

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Unemployment

2

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.

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Unemployment

3

Actual and natural rates of unemployment in the U.S., 1960-2009
Percent of labor force

12
10

Unemployment rate

8
6
4

Natural rate of unemployment 2
0
4
CHAPTER
1 The of Macroeconomics
1960
1965Science
1970 1975
1980 1985 1990 1995 2000 2005 2010

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

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Assumptions:
1. L is exogenously fixed.
2. During any given month, s = rate of job separations, the fraction of employed workers that become separated from their jobs f = rate of job finding, fraction of unemployed workers that find jobs s and f are exogenous

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The transitions between employment and unemployment s E

Employed

Unemploye d f U
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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
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s E
U

Unemployment

=

f
# of unemployed people who find jobs 8

Finding 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 6

U s 
L sf
Unemployment

9

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

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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

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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
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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
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CASE STUDY:

Structural change over the long run Agriculture
Manufacturing
Other industry
Services

1960

77%

58%
4%
10%

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2006

28%

Unemployment

1%
9% 14%

15

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

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

 Health care spending as % of GDP:
1960: 5.2%
1980: 9.1%

2000: 13.8%
2007: 16.2%

In
In our our dynamic dynamic economy, economy, smaller smaller sectoral sectoral shifts shifts occur
occur…