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Lecture18 (1)

The lecture discusses various aspects of unemployment, including sectoral shifts, public policy, and the impact of unemployment insurance (UI). It highlights the causes of unemployment such as real wage rigidity, minimum wage laws, and labor unions, while also addressing the implications of these factors on job search and economic productivity. Additionally, it notes the rise in unemployment in Europe due to social insurance programs and a shift in demand from unskilled to skilled workers.

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Rafey Shahid
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3 views

Lecture18 (1)

The lecture discusses various aspects of unemployment, including sectoral shifts, public policy, and the impact of unemployment insurance (UI). It highlights the causes of unemployment such as real wage rigidity, minimum wage laws, and labor unions, while also addressing the implications of these factors on job search and economic productivity. Additionally, it notes the rise in unemployment in Europe due to social insurance programs and a shift in demand from unskilled to skilled workers.

Uploaded by

Rafey Shahid
Copyright
© © All Rights Reserved
Available Formats
Download as PPS, PDF, TXT or read online on Scribd
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Macroeconomics

Lecture 18
Review of the Previous
Lecture
• Purchasing Power Parity (PPP)
• Unemployment
– Natural rate of unemployment
• Frictional Unemployment
Topics under Discussion
• Sectoral Shifts
• Public Policy and Job Search
• Unemployment insurance (UI)
• Unemployment from real wage rigidity
• The minimum wage
• Labor unions
Sectoral shifts
• def: changes in the composition of demand
among industries or regions
• example: Technological change
increases demand for computer repair
persons, decreases demand for typewriter
repair persons
Sectoral shifts
example: A new international trade
agreement causes 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
Other
Industries
7%

Agriculture
39%

Services
38%

Manufacturing
16%
Industry shares in GDP, 2003-04
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%

Wholesale and
Retail Trade
15%
Construction
6% manufacturing
and mining
14%
Sectoral shifts abound
• In our dynamic economy, smaller
(though still significant) sectoral shifts
occur frequently, contributing to frictional
unemployment.
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,
UI may lead to better matches between
jobs and workers,
which would lead to greater productivity
and higher incomes.
Why is there unemployment?

• There are two reasons why f < 1:


DONE 1. job search
Next 2. wage rigidity
Unemployment from real
wage rigidity
If the real Real Suppl
wage is wage y
stuck Unemployme
above the nt
eq’m level, Rigi
then there d
aren’t real
enough wag
jobs to go e Demand
around.
Labor
Amount
Amount of
of
labor willing to
labor
Unemployment from real
wage rigidity
If the real Then, firms must
wage is ration the scarce
stuck above jobs among
the eq’m workers.
level, then Structural
there aren’t unemployment:
enough jobs the unemployment
to go resulting from real
around. wage rigidity and job
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. Results:

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 eq’m
wage, unemployment results.
Labor unions

• 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
– increase worker effort and reduce
“shirking”
– reduce turnover, which is costly
– improve health of workers
(in developing countries)
slide 21
Efficiency Wage Theory
• The increased productivity justifies the
cost of paying above-equilibrium wages.
• The result: unemployment

slide 22
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.
The duration of unemployment

• 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
8 1 8 3 8 5 8 7 8 9 9 1 9 3 9 5 9 7 9 9 0 1 0 3
19 19 19 19 19 19 19 19 19 19 20 20 Years
The rise in European
Unemployment
Percent
12
unemployed

10

2
0
1960 1965 1970 1975 1980 1985 1990 1995 2000
Year
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
Summary
• Sectoral Shifts
• Public Policy and Job Search
• Unemployment insurance (UI)
• Unemployment from real wage rigidity
• The minimum wage
• Labor unions
Upcoming Topics
• Issues in Economic Growth
– Solow Model
– Production Function
– Consumption Function
– Savings and Investment
– Depreciation
– Steady State

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