Unemployment

The Employment Report

Survey of 60k households that is released monthly, gives approximation of state of unemployment
Gives information such as demographics, size of labor force, etc.
Influences monetary policy decisions

Workers change jobs: career changes, geographic preferences, want new employer, etc.
Firms’ labor needs change: demand for firm’s product changes, technology changes, etc.

As a result, there will always be some unemployment, and this is known as frictional unemployment
Sectoral shifts are changes in composition of demand across industries, such as the increasing demand for computers after technology got better

The rate of unemployment to which the economy has a tendency to converge over time; “equilibirum rate”
- Can vary based on recessions or booms
Notation for rate of unemployment
- L = # of workers in labor force (L = E + U)
- E = # of employed workers
- U = # of unemployed workers
- U/L = unemployment rate
- s = job separation rate: the fraction of employed workers that become separated from their jobs in a given month
- f = job finding rate: the fraction of employed workers that find a job in a given month
There are two “flows” present; sE represents workers losing jobs (E -> U) and fU represents workers finding jobs (U -> E)
The steady-state represents the natural unemployment rate

s \cdot E = f \cdot U \\ s \cdot (L - U) = f \cdot U \\ sL - sU = fU \\ sL = (s + f)U \\ \frac{U}{L} = \frac{s}{s + f}

Policies that reduce the rate either lower s or increase f
Lowering the natural rate of unemployment is not necessarily desirable
- e.g. eliminating unemployment insurance does lower the unemployment rate, but it also makes quality of jobs and QoL for workers worse

Pays part of a worker’s wages for a limited time after losing their job
Increases the natural unemployment rate because it reduces f; workers are less encouraged to find work
- Big reason why the natural unemployment rate in EU is greater than in the US; high levels of UI
Benefits include better job matches, leading to greater productivity in the economy and higher incomes for workers

Government employment agencies: Provide info about job openings to match workers and jobs

Wages are rigid if they are restricted from adjusting in response to changes in supply and demand
- Examples include minimum wage laws, union contracts, efficiency wages, etc.
In a perfect world with flexible wages, employment will respond perfectly if wage are too high or low
Due to wage rigidity, there will always be some people who are unemployed because wages can’t change
Downward nominal wage rigidity can lead to unemployment when there is a negative demand shock

One source of wage rigidity is minimum wage; the wages for some jobs become too high, so companies don’t create positions for those jobs which leads to unemployment
Minimum wage doesn’t apply to most groups of workers, but it does contribute somewhat to the unemployment rate
Difficult to find solid evidence to connect minimum wage laws to unemployment
Some evidence that teenagers are hurt and low-wage older workers benefit

Unions use their labor market power to get higher wages and benefits for their workers
Unions specify wages which leads to wage rigidity
Leads to insiders vs. outsiders problem
- Union workers, or insiders, want to keep wages high
- Unemployed non-union workers, or outsiders, want to get any job but can’t get one because the wages are too high
High wages lead to outsiders remaining unemployed

Firms might pay its workers a higher-than-market wage
- Reduces turnover and training costs
- Increases worker loyalty and effort
- Reduces shirking
Also causes outsiders to remain unemployed because the firm cannot hire workers at the same wage

Firms cannot cut the wages of workers due to social norms, so instead they fire them