slides_econ20a_labor_market

Frictional and structural unemployment problem with

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Unformatted text preview: n are willing to ¯ work. Firms bid up the real wage w to attract workers. ◮ If w > w firms find more workers willing to work than firms ¯ care to hire. Jobseekers drive down the real wage. Upshot: the labor market moves toward equilibrium (w , N ). ¯¯ Frictional and Structural Unemployment ◮ Problem with supply and demand model above. No worker who wishes to work another hour at the prevailing wage w is unable to find an employer. ¯ Unemployment (defined as people looking for work but not working) would be zero! ◮ How can this be? ◮ Supply and demand is a useful way of thinking about the determination ¯ of w and N but doesn’t tell the whole story. ¯ ◮ Example Landlords and tenants ◮ Frictional unemployment – unemployment that arises from the matching process of workers searching for suitable jobs and firms searching for suitable employees. ◮ Structural unemployment – long-term and chronic unemployment arising from imbalances in skills and characteristics of workers and the needs of firms. The Natural Rate and Cyclical Unemployment Define the natural rate of unemployment as the level of unemployment when output and and employment are at their full-employment levels. So it reflects unemployment that is dues to frictional unemployment and structural unemployment. If denote the unemployment rate by u , then the natural rate is u and is the ¯ ¯ and Y . ¯ level of unemployment associated with N Define Cyclical unemployment as the difference between the actual unemployment rate and the natural rate. Potential Output ¯ ¯ Y = AF (K , N ) (1) ¯ where N is the market clearing quantity in labor market. ◮ Key Assumption N is determined today. K is determined in the previous time period. That is, it takes time to build machinery and structures. This assumption is maintained throughout the course. ◮ ¯ ¯ Anything that changes N will change Y The Costs of Unemployment ◮ Economic costs ◮ Periods of cyclical unemployment are times of depressed output the economy could produce more at full employment (potential output) ◮ Broader costs ◮ ◮ Psychological rise in stress and mental illness ◮ Human capital those who are unemployed experience a deterioration in skills Equity ◮ ◮ The costs fall on those who are unemployed These costs fall heavily on specific groups...
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