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CHAPTER SIX
Unemployment
macroeconomics
fifth edition
N. Gregory Mankiw
PowerPoint Slides
by Ron Cronovich
2003 Worth Publishers, all rights reserved
Chapter objectives
The natural rate of unemployment:
what it means
what causes it
understanding its behavior in the
real world
CHAPTER 6
Unemployment
slide 2
CHAPTER 6
Unemployment
Unemployment
Unemploymentrate
rate
CHAPTER 6
Natural
Naturalrate
rateofofunemployment
unemployment
Unemployment
slide 4
CHAPTER 6
Unemployment
slide 5
Assumptions:
1. L is exogenously fixed.
2. During any given month,
s = fraction of employed workers
that become separated from their jobs,
f = fraction of unemployed workers
that find jobs.
Unemployment
slide 6
Employed
Unemploye
d
f U
CHAPTER 6
Unemployment
slide 7
# of
employed
people who
lose or leave
their jobs
CHAPTER 6
s E
U
f
# of
unemployed
people who
find jobs
Unemployment
slide 8
= s E
= s (L U )
= s L s U
CHAPTER 6
Unemployment
slide 9
Example:
Each month, 1% of employed workers
lose their jobs (s = 0.01)
0.05, or 5%
0.01
Lsf
Us
0.010.19
CHAPTER 6
Unemployment
slide 10
policy implication
A policy will reduce the natural
rate of unemployment only if it
lowers s
or increases f.
CHAPTER 6
Unemployment
slide 11
CHAPTER 6
Unemployment
slide 12
occurs because
workers have different abilities,
preferences
jobs have different skill requirements
geographic mobility of workers not
instantaneous
flow of information about vacancies and
job candidates is imperfect
CHAPTER 6
Unemployment
slide 13
Sectoral shifts
def: changes in the composition of demand
among industries or regions
CHAPTER 6
Unemployment
slide 14
CASE STUDY:
1960
Other industry
Services
57.9%
2000
73.5%
4.2%
1.6%
9.9%
28.0%
CHAPTER 6
Unemployment
7.7%
17.2%
slide 15
Unemployment
slide 16
CHAPTER 6
Unemployment
CHAPTER 6
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.
CHAPTER 6
Unemployment
1. job search
CHAPTER 6
Unemployment
slide 20
CHAPTER 6
Real
wage
Rigi
d
real
wag
e
Suppl
y
Unemployme
nt
Demand
Labor
Amount
of
labor
Unemployment
Amount of
labor willing to
work
slide 21
CHAPTER 6
slide 22
CHAPTER 6
Unemployment
slide 23
Unemployment
slide 24
1st Q 1997
Teenagers
16.6%
17.0%
Single
mothers
8.5%
9.1%
All workers
5.3%
5.3%
Unemployment
slide 25
2. Labor unions
Unions exercise monopoly power to
secure higher wages for their members.
Unemployment
slide 26
of total
ratio
531
12.3%
12.9%
103.4
construction
6,881
18.4
19.0
151.0
manufacturing
18,149
14.6
15.5
105.9
transportation
4,441
24.1
25.4
127.8
2,981
22.6
23.7
104.2
wholesale trade
4,540
5.5
5.9
105.8
retail trade
20,505
4.5
5.0
117.8
7,648
2.1
2.8
90.1
services
34,261
5.9
6.8
103.3
government
19,155
37.4
41.8
121.1
119,092
13.6%
15.0%
118.0
mining
all
slide 27
Unemployment
slide 28
CHAPTER 6
Unemployment
slide 29
amount of time
these workers
spent
unemployed
as % of total time
all workers spent
unemployed
1-4
39%
6.5%
5-14
31%
20.5%
15 or more
30%
73.0%
CHAPTER 6
Unemployment
slide 30
Unemployment
slide 31
1965
1965
1970
1970
1975
1975
Unemployment
Unemploymentrate
rate
CHAPTER 6
1980
1980
1985
1985
1990
1990
1995
1995
2000
2000
Natural
Naturalrate
rateofofunemployment
unemployment
Unemployment
slide 32
8
7
6
5
4
$ per
3 hour
2
1
0
1945 1950 1955
The
The trend
trend in
in the
the
real
real minimum
minimum
wage
wage is
is similar
similar
to
to the
the behavior
behavior
of
of the
the natural
natural
rate
rate of
of
unemployment.
unemployment.
1960 1965 1970 1975 1980
Unemployment
slide 33
Union membership
Union membership
selected years
year
percent of labor
force
1930
12%
1945
35%
1954
35%
1970
27%
1983
20.1%
2002
13.2%
CHAPTER 6
Unemployment
Since
Since the
the early
early
1980s,
1980s, the
the
natural
natural rate
rate of
of
unemploy-ment
unemploy-ment
and
and union
union
membership
membership
have
have both
both fallen.
fallen.
But,
But, from
from 1950s
1950s
to
to about
about 1980,
1980,
the
the natural
natural rate
rate
rose
rose while
while union
union
membership
membership fell.
fell.
slide 34
Sectoral shifts
Inflation-adjusted price of oil
90
Since
Since midmid1980s,
1980s,
oil
oil prices
prices less
less
volatile,
volatile, so
so
fewer
fewer sectoral
sectoral
shifts.
shifts.
80
70
60
50
40
30
20
10 barrel, in 2001 dollars)
(per
0
1970
1975
1980
CHAPTER 6
1985
Unemployment
1990
1995
2000
slide 35
Demographics
1970s:
The Baby Boomers were young.
Young workers change jobs more
frequently (high value of s).
CHAPTER 6
Unemployment
slide 36
12
10
8
6
4
2
0
1960
1965
CHAPTER 6
1970
1975
Unemployment
1980
1985
1990
1995
2000
Year
slide 37
Unemployment
slide 38
Chapter summary
1. The natural rate of unemployment
rate of unemployment
depends on the rates of job separation
and job finding
2. Frictional unemployment
Unemployment
slide 39
Chapter summary
3. Structural unemployment
Unemployment
slide 40
Chapter summary
5. Behavior of the natural rate in the U.S.
Unemployment
slide 41
CHAPTER 6
Unemployment
slide 42