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Intermediate macroeconomics chapt06

Chapter 6:

Historical Data (US)

Historical Data (EU)

Variations in Unemployment
Demographic Groups, 1997

White-M White-F Black-M












Civilian Labor Force
Individuals between 16 and 64, who are employed for pay
or unemployed
Individuals in prisons or mental hospitals, children, and
retired are excluded

Members of the labor force who are:

– 16 years of age or older
– out of work
– actively looking for work
Unemployment rate = No. of unemployed workers as a %
of the labor force

Discouraged Workers
Members of the labor force who quit looking for jobs (e.g.,
the homeless)
Unemployment rate is underestimated by 2 to 3% because
discouraged workers are excluded

Frictional Unemployment
Unemployment of individuals who are searching for jobs or
waiting between jobs
Supply-side effect and transitional

Structural Unemployment
Unemployment due to fundamental economic changes that
eliminate some jobs, while creating other jobs for which
qualified workers may not be readily available
Normal due to technological advancement and changes in
consumer preferences

Cyclical Unemployment
Unemployment caused by contraction in economic
activities (i.e., recession)
Needs public policy to increase employment

Natural Rate of Unemployment
An average rate around which the actual unemployment
rate fluctuates
The average of last and next 10 years unemployment rate
Future unemployment rate is set at 5.5%

Duration of Unemployment
Short-term if frictional
Long-term if structural or cyclical
Evidence from 1974 is mixed

– 60% of the spells of unemployment ended
within one month
– 69% of the weeks of unemployment occurred in
spells that lasted two or more months

Duration of Unemployment
If policy goal is to reduce the natural rate of
unemployment, we need long-term investment in job
creation (education, training, etc.)
If policy goal is to reduce the unemployment rate, we need
short-term investment in job retention and information

Unemployment Rate
L = Labor Force
E = Employment
U = unemployment
E = L – U and U = L – E
U/L = Unemployment Rate

Job Loss
s = the rate of job separation: the fraction of “employed”
workers who lose jobs each month
sE = the number of “employed” workers who lose jobs
each month

Job Gain
f = the rate of job finding: the fraction of “unemployed”
workers who find jobs each month
fU = the number of “unemployed” workers who find jobs
each month

Employment-Unemployment Transition
The rates of job separation and job finding determine
the rate of unemployment.
Job Separation (s)


Job Finding (f)

Steady State Unemployment Rate
In a steady-state labor market: fU = sE
fU = s(L – U)
fU = sL – sU
sU + fU = sL
(s + f)U = sL

U/L = s / s+f

s = 0.01: on average, jobs last 100 months
f = 0.20: on average, unemployment lasts 5 months
U/L = 0.01/0.21 = 4.8%

Policy Implications
Public policy to reduce the rate of job separation and/or
increase the rate of job finding will lower the natural rate of
Public policy to lower the natural rate of unemployment
must either reduce the rate of job separation or increase
the rate of job finding

Policy and Frictional Unemployment
Job Fairs:

– provide information on job openings, which
lowers f and increases U/L

Policy and Frictional Unemployment
Unemployment Benefits: U/L could increase
– Some unemployed workers may refuse job offers and wait for
higher ones, lowering f
– Some employed workers may not care losing jobs since their
incomes are partially compensated, increasing s

Wage Rigidity and Unemployment
Real Wage






Amount of labor hired



Amount of labor willing to work

Wait Unemployment
Unions setting wages higher than the market wage
Some union members must remain unemployed
Unemployed union members must “wait” for job openings

Minimum Wage law
Workers are paid a wage rate above the market rate

– Help those who are employed
– Hurt those who are unemployed

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