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Lecture 5 - UNEMPLOYMENT EC205.01 FALL2009 ALPER 1 OUTLINE...

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10/14/2009 1 UNEMPLOYMENT EC205.01 FALL 2009 ALPER 1 OUTLINE y The Basics y Reasons for Unemployment y Patterns of Unemployment y Natural Rate of Unemployment y Efficiency Wages EC205.01 FALL 2009 ALPER 2 THE BASICS N N N L U u U E L = + = unemployed employed force labor s: rate of job separation f: rate of job finding EC205.01 FALL 2009 ALPER 3 Unemployment rate e.g. s = 0.01 means that 1% of the employed lose jobs every month If the labor market is at the steady state (~ equilibrium): f. U = s . E

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10/14/2009 2 EC205.01 FALL 2009 ALPER 4 A Basic Model for Equilibrium Unemployment fU sE ⋅= ELU =− fU s L U ⇒= fs Us L ⇒+ = EC205.01 FALL 2009 ALPER 5 ( ) ( ) u at the equilibrium Lfs ⇒= = + 1 or u 1f s = + The Natural Rate of Unemployment in the Basic Model y Intuition: y Suppose s = 1% ‐‐‐ 1% of employed lose jobs every month y On average jobs last 100 months ( 8 years) state steady at the 1 1 s f L U u + = = On average, jobs last 100 months (~ 8 years) y Suppose f = 20% ‐‐‐ 20% of unemployed find jobs every month y Average duration of unemployment: 5 months y At the steady state: natural rate of unemployment y Policy considerations: If we desire to lower the natural rate of unemployment, then we need policies to reduce s or increase f EC205.01 FALL 2009 ALPER 6 05 . 0 2 . 0 01 . 0 01 . 0 + = + = s f s u
10/14/2009 3 Reasons of Unemployment y Previous model y Determination of the natural rate of unemployment y What are the reasons of unemployment? Ud y Unanswered y Reasons of unemployment y Job search, sectoral shift – frictional unemployment y Real wage rigidities – structural unemployment y Minimum wage laws y Unions and insiders vs. outsiders y Efficiency wages EC205.01 FALL 2009 ALPER 7 Job Search–Frictional Unemployment y Frictional unemployment: unemployment during job search y It takes time to match workers and jobs y Employment agencies and head hunters are important in reducing frictional unemployment EC205.01 FALL 2009 ALPER 8 Frictional Unemployment–Example y Example: Sectoral shifts y Types of goods and services demanded change over time y Demand for labor who produces these goods and services also changes y Cause job separation y It takes time for workers to switch sectors y As long as labor demand and labor supply are changing, frictional unemployment is unavoidable EC205.01 FALL 2009 ALPER 9

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10/14/2009 4 Frictional Unemployment – Unemployment Insurance y Unemployment insurance y
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Lecture 5 - UNEMPLOYMENT EC205.01 FALL2009 ALPER 1 OUTLINE...

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