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ISSUES IN UNEMPLOYMENT:Public Policy and Job Search

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Macroeconomics ECO 403
VU
LESSON 18
ISSUES IN UNEMPLOYMENT
Sectoral shifts
·
def: changes in the composition of demand among industries or regions
·
Example#1 Technological change
increases demand for computer repair persons, decreases demand for typewriter repair
persons
Example#2 A new international trade agreements cause 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.
Industry shares in GDP, 1969-70
Industries
7%
Agriculture
39%
Services
38%
Manufacturing
16%
Industry shares in GDP, 2003-04
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Macroeconomics ECO 403
VU
Other
Industries
7%
Agriculture
23%
Manufacturing
Services
18%
52%
Labor Force Break up in Pakistan 2004
Community
and Social
Others
Services
2%
16%
Transport
Agriculture
6%
41%
W holesale and
Retail Trade
15%
Construction
manufacturing
6%
and mining
14%
Sectoral shifts abound
· In our dynamic economy, smaller (though still significant) sectoral shifts occur frequently,
contributing to frictional unemployment.
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Macroeconomics ECO 403
VU
Public Policy and Job Search
Govt 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
industries
Unemployment insurance (UI)
·
UI pays part of a worker's former wages for a limited time after losing his/her job.
·
UI increases search unemployment, because it:
­ reduces the opportunity cost of being unemployed
­ reduces the urgency of finding work
­ hence, reduces f
·
Studies: The longer a worker is eligible for UI,
the longer the duration of the average spell of unemployment.
Benefits of UI
·
By allowing workers more time to search, I may lead to better matches between
jobs and workers, which would lead to greater productivity and higher incomes.
Why is there unemployment?
U
s
=
T h e n a tu r a l r a te o f u n e m p lo y m e n t:
L
s +f
·
There are two reasons why f < 1:
1. Job search
2. Wage rigidity
Unemployment from real wage rigidity
Supply
Real
wage
Unemployment
Rigid
real
wage
Demand
Labor
Amount of
Amount of labor
labor hired
willing to work
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Macroeconomics ECO 403
VU
If the real wage is stuck above the equilibrium level, then there aren't enough jobs to go
around. Then, firms must ration the scarce jobs among workers.
Structural unemployment: the unemployment resulting from real wage rigidity and job
rationing.
Reasons for wage rigidity
1.
Minimum wage laws
2.
Labor unions
3.
Efficiency wages
The minimum wage
·
The minimum wage is well below the equilibrium wage for most workers, so it cannot
explain the majority of natural rate unemployment.
·
However, the minimum wage may exceed the equilibrium wage of unskilled workers,
especially teenagers.
·
If so, then we would expect that increases in the minimum wage would increase
unemployment among these groups.
The minimum wage in the real world:
·
In Sept 1996, the minimum wage was raised from $4.25 to $4.75 in US.
Unemployment rates, before & after
3rd Q 1996
1st Q 1997
Teenagers
16.6%
17.0%
Single mothers
8.5%
9.1%
All workers
5.3%
5.3%
Other studies: A 10% increase in the minimum wage increases teenage
·
unemployment by 1-3%.
Labor unions
·
Unions exercise monopoly power to secure higher wages for their members.
·
When the union wage exceeds the equilibrium wage, unemployment results.
·
Employed union workers are insiders whose interest is to keep wages high.
·
Unemployed non-union workers are outsiders and would prefer wages to be lower (so that
labor demand would be high enough for them to get jobs).
Efficiency Wage Theory
·
Theories in which high wages increase worker productivity:
­  Attract higher quality job applicants
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Macroeconomics ECO 403
VU
­  Increase worker effort and reduce "shirking"
­  Reduce turnover, which is costly
­  Improve health of workers (in developing countries)
·
The increased productivity justifies the cost of paying above-equilibrium wages.
·
The result: unemployment
The duration of unemployment
·
The data:
· More spells of unemployment are short-term than medium-term or long-term.
· Yet, most of the total time spent unemployed is attributable to the long-term
unemployed.
·
This long-term unemployment is probably structural and/or due to sectoral shifts among
vastly different industries.
·
Knowing this is important because it can help us craft policies that are more likely to
succeed.
Unemployment Rate of Pakistan
9
8
7
6
5
4
3
2
1
0
Years
The rise in European Unemployment
Two explanations:
1. Most countries in Europe have generous social insurance programs.
2. Shift in demand from unskilled to skilled workers, due to technological change.
This demand shift occurred in the U.S., too. But wage rigidity is less of a problem here, so the
shift caused an increase in the skilled-to-unskilled wage gap instead of increase in
unemployment
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Table of Contents:
  1. INTRODUCTION:COURSE DESCRIPTION, TEN PRINCIPLES OF ECONOMICS
  2. PRINCIPLE OF MACROECONOMICS:People Face Tradeoffs
  3. IMPORTANCE OF MACROECONOMICS:Interest rates and rental payments
  4. THE DATA OF MACROECONOMICS:Rules for computing GDP
  5. THE DATA OF MACROECONOMICS (Continued…):Components of Expenditures
  6. THE DATA OF MACROECONOMICS (Continued…):How to construct the CPI
  7. NATIONAL INCOME: WHERE IT COMES FROM AND WHERE IT GOES
  8. NATIONAL INCOME: WHERE IT COMES FROM AND WHERE IT GOES (Continued…)
  9. NATIONAL INCOME: WHERE IT COMES FROM AND WHERE IT GOES (Continued…)
  10. NATIONAL INCOME: WHERE IT COMES FROM AND WHERE IT GOES (Continued…)
  11. MONEY AND INFLATION:The Quantity Equation, Inflation and interest rates
  12. MONEY AND INFLATION (Continued…):Money demand and the nominal interest rate
  13. MONEY AND INFLATION (Continued…):Costs of expected inflation:
  14. MONEY AND INFLATION (Continued…):The Classical Dichotomy
  15. OPEN ECONOMY:Three experiments, The nominal exchange rate
  16. OPEN ECONOMY (Continued…):The Determinants of the Nominal Exchange Rate
  17. OPEN ECONOMY (Continued…):A first model of the natural rate
  18. ISSUES IN UNEMPLOYMENT:Public Policy and Job Search
  19. ECONOMIC GROWTH:THE SOLOW MODEL, Saving and investment
  20. ECONOMIC GROWTH (Continued…):The Steady State
  21. ECONOMIC GROWTH (Continued…):The Golden Rule Capital Stock
  22. ECONOMIC GROWTH (Continued…):The Golden Rule, Policies to promote growth
  23. ECONOMIC GROWTH (Continued…):Possible problems with industrial policy
  24. AGGREGATE DEMAND AND AGGREGATE SUPPLY:When prices are sticky
  25. AGGREGATE DEMAND AND AGGREGATE SUPPLY (Continued…):
  26. AGGREGATE DEMAND AND AGGREGATE SUPPLY (Continued…):
  27. AGGREGATE DEMAND AND AGGREGATE SUPPLY (Continued…)
  28. AGGREGATE DEMAND AND AGGREGATE SUPPLY (Continued…)
  29. AGGREGATE DEMAND AND AGGREGATE SUPPLY (Continued…)
  30. AGGREGATE DEMAND IN THE OPEN ECONOMY:Lessons about fiscal policy
  31. AGGREGATE DEMAND IN THE OPEN ECONOMY(Continued…):Fixed exchange rates
  32. AGGREGATE DEMAND IN THE OPEN ECONOMY (Continued…):Why income might not rise
  33. AGGREGATE SUPPLY:The sticky-price model
  34. AGGREGATE SUPPLY (Continued…):Deriving the Phillips Curve from SRAS
  35. GOVERNMENT DEBT:Permanent Debt, Floating Debt, Unfunded Debts
  36. GOVERNMENT DEBT (Continued…):Starting with too little capital,
  37. CONSUMPTION:Secular Stagnation and Simon Kuznets
  38. CONSUMPTION (Continued…):Consumer Preferences, Constraints on Borrowings
  39. CONSUMPTION (Continued…):The Life-cycle Consumption Function
  40. INVESTMENT:The Rental Price of Capital, The Cost of Capital
  41. INVESTMENT (Continued…):The Determinants of Investment
  42. INVESTMENT (Continued…):Financing Constraints, Residential Investment
  43. INVESTMENT (Continued…):Inventories and the Real Interest Rate
  44. MONEY:Money Supply, Fractional Reserve Banking,
  45. MONEY (Continued…):Three Instruments of Money Supply, Money Demand