Unemployment. Rongsheng Tang. August, Washington U. in St. Louis. Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

Transcription

1 Unemployment Rongsheng Tang Washington U. in St. Louis August, 2016 Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

2 Overview Facts The steady state rate of unemployment Types of unemployment Efficiency wages and unemployment Unemployment compensation The Phillips Curve Unemployment difference between European countries and US Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

3 Unemployment: Facts Figure: Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

4 Unemployment: Facts Figure: Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

5 Unemployment: Facts Figure: Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

6 Unemployment: Facts Residential segregation and black unemployment: recent research has concluded that part of the racial gap in unemployment rates can be attributed to the very high levels of residential segregation experienced by blacks in the United States Figure: Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

7 Unemployment: Facts There are four ways in which a worker could be unemployed: 1 lose jobs due to layoffs or plant closings 2 leave jobs (quit) 3 job seekers reenter the labor market after spending some time in the non-market sector 4 job seekers are new to the job market Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

8 Unemployment: Facts Figure: Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

9 Unemployment: Facts Figure: Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

10 Unemployment: Facts Figure: Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

11 The Steady-State Rate of Unemployment Steady state rate of unemployment: the unemployment rate that will be observed in the long run as a result of labor flow Figure: Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

12 The Steady-State Rate of Unemployment In the steady state since le = hu LF = E + U we can solve for the stead-state unemployment rate unemployment rate = U LF = which is also called nature rate of unemployment. l l + h Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

13 The Steady-State Rate of Unemployment Here is an example: suppose the probability that employed workers lose their jobs in any given month is 0.01, the probability that unemployed workers find work in any given month is 0.1. then the steady state unemployment rate is 9.1 percent Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

14 The Steady-State Rate of Unemployment Figure: Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

15 Types of Unemployment Frictional unemployment Seasonal unemployment Structural unemployment Cyclical unemployment Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

16 Types of Unemployment Frictional unemployment: both workers and firms need time to locate each other and to digest the information about the value of the job match it leads to short unemployment spells, it is productive Seasonal unemployment: workers in both the garment and the auto industries are laid off regularly because new models are introduced with clockwork regularity Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

17 Types of Unemployment Structural unemployment: some persons looking for work do not fit the jobs available in the economy some sectors are growing and other sectors are declining, the skills might be specific to job or industry, as a result, the unemployment spells of the displaced workers might last for a long time because they must retool their skills. Cyclical unemployment: in recession firms require a smaller workforce to satisfy the shrinking consumer demand and employers lay off many workers Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

18 Job Search and Frictional Unemployment Different firms offer different job opportunities and because workers are not fully informed about where the best jobs are located, it takes time to find the available opportunities. When should the worker stop searching and settle for the job offer at hand? worker s trade-off: the longer he searches, the more likely he will get a high wage offer, however, the more it costs to find that job. Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

19 Job Search and Frictional Unemployment Non-sequential search: worker decides before he begins his search that he will randomly visit, say, 20 firms in the labor market and accept the job that pays the highest wage. Sequential search: Before the worker sets out on the search process, he decides which job offers he is willing to accept. for instance, he is not willing to work for less than 12, and will accept if the wage offer exceeds 12. The asking wage the threshold wage that determines if the unemployed worker accepts or rejects incoming job offers. The unemployment spell will last longer the larger is the asking wage. Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

20 Job Search and Frictional Unemployment Figure: Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

21 Job Search and Frictional Unemployment Worker s asking wage depends on worker s discount rate as well as unemployment insurance. Figure: Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

22 Job Search and Frictional Unemployment The job search model has two key predictions about the length of unemployment spell: unemployment spells will last longer when the cost of searching falls and unemployment spell will last longer when the benefits from searching rise. Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

23 Job Search and Frictional Unemployment Evidence from some surveys In 1980, white unemployed youth in the US reported that their asking wage was 4.3, and black unemployed youth reported Workers who reported higher asking wages had longer unemployment spells In UK, a 10 percent increases in the asking wage increases the length of the unemployment spell by at least 5 percent Higher asking wages led to higher post-unemployment wages a 10 percent increase in the asking wage increased the post-unemployment wage by 5 percent for young whites and by 3 percent for young blacks. Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

24 Job Search and Frictional Unemployment Job search and the Internet As early as 2000, 25 percent of unemployed persons in the US reported that they used the Internet in their job search. It is widely believed that such a technological shift in the technology of job search could have a substantial impact on the speed of job search. An empirical study finds that this hope may be misplaced. In 2000, the typical job searcher who used the Internet took 3.4 months to find a job, as compared to 3.7 months for a worker who avoided the Web. Once one controls for the underlying differences, say education attainment, gender and age, the advantage disappear. Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

25 The Inter-temporal Substitution Hypothesis and Cyclical Unemployment Some studies have proposed that even the large increase in unemployment observed during a severe economic downturn might have a voluntary component. Workers have an incentive to allocate their time to work activities during those periods of the life cycle when the wage is high and to consume leisure when the wage is low and leisure is cheap. During recessions workers are more than willing to reduce their labor supply, as a result, part of the unemployment observed during economic downturns might be voluntary. Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

26 The Sectoral Shifts Hypothesis and Structural Unemployment A number of alternative models have been proposed to explain why structural unemployment might arise in a competitive market. Workers who are searching for jobs do not have the qualifications to fill the available vacancies. eg. layoffs from manufacturing industry may not have enough useful skill to computer industry The sectoral shifts hypothesis suggests that there will be a pool of workers who are unemployed for long spells because of a structural imbalance between the skills of unemployed workers and the skills that employer are looking for. It has been estimated that sectoral shifts might explain about 25 to 40 percent of unemployment. The sectoral shifts resulting from the oil-price shock of 1973, may have accounted for about 60 percent of the 3.5 percentage point increase in the unemployment rate between 1973 and Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

27 Efficiency Wages and Unemployment Due to high monitoring cost, firm might use efficiency wages to buy the worker s cooperation. Because the firm pays above-market wages, efficiency wage models generate involuntary unemployment. Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

28 Efficiency Wages and Unemployment Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

29 Efficiency Wages and Unemployment There are no market pressures forcing the efficiency wage w NS downward toward the competitive wage w Workers do not shirk in this labor market There is involuntary unemployment, E E NS Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

30 Efficiency Wages and Unemployment Wages will be relatively sticky over the business cycle. Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

31 Efficiency Wages and Unemployment Some recent work documented the existence of a downward-sloping curve that summarizes the relation between wage levels and unemployment. Figure: Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

32 Efficiency Wages and Unemployment Hard to explain through excess supply theory It should be high wage that are associated with unemployment, precisely the opposite of what is implied by the downward-sloping wage curve Efficiency wage: in high unemployment rate area, there is no need to pay high wage to encourage workers not to shirk. Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

33 Unemployment Compensation: Facts In 2008, the Unemployment Insurance system distributed $40.7 billion in benefits. Not all the unemployed worker are eligible for UI, in 2002, only 44 percent of unemployed workers received UI benefit. Eligible workers can collect UI benefits after a waiting period of one week, but the benefit cut in the 26th week. The higher the weekly wage, the higher the level of benefits to which the worker is entitled. However, there is both a minimum and a maximum level of weekly benefits. Replacement ratio: the proportion of weekly earnings that are replaced by UI benefits, on average it is 38 percent. There is a positive correlation between the replacement ratio and the duration of the unemployment spell. A 25 percent rise in the replacement ratio (from 0.4 to 0.5) increase the average duration of an unemployment spell by about 15 to 25 percent. Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

34 Unemployment Compensation: Facts A job seeking worker s chance of finding a job improves dramatically the week the benefits run out. Figure: Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

35 Unemployment Compensation: Facts The UI system not only lengthens the duration of unemployment spells, but also leads to a higher post-unemployment wage. Evidence suggests that a permanent extension of the 26-week limit to a 39-week limit would likely increase the number of long-term unemployed by 7 percent. A 10 percent increase in the replacement ratio increases the subsequent wage of male workers by 7 percent and of women by 1.5 percent. Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

36 Unemployment Compensation: Imperfect Experience Rating Unemployment insurance is funded by a payroll tax on employers. The tax rate depends on a number of variables, including the general state of the economy, the layoff history of the firm in that industry, and the firm s own layoff history. Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

37 Unemployment Compensation: Imperfect Experience Rating Suppose economic conditions worsen temporarily. The financing of the UI system implies that employers who lay off many workers do not pay the entire costs of the worker s salary during the unemployment spell. The firm can then lay off many workers and shift part of the payroll to other taxpayers during the period of economic hardship and then hire back when the economy recover Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

38 Unemployment Compensation: Imperfect Experience Rating Nearly 70 percent of laid-off workers return to their former employer at the end of the unemployment spell. workers do not want to look for alternative employment because they expect to be recalled to their jobs, firms do not want to look for other workers because the existing pool of workers is valuable to the firm. The evidence indicates that imperfect experience rating has a substantial impact on the layoff behavior of firms. Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

39 The Phillips Curve In 1958, A.W.H.Phillips published a famous study documenting a negative correlation between the rate of inflation and the rate of unemployment in the United Kingdom from 1861 to Figure: Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

40 The Phillips Curve Rongsheng Tang (Washington U. in St. Louis) Unemployment Figure: August, / 44

41 The Phillips Curve Because of the existence of natural rate of unemployment, others argued economic theory implies that the long-run Phillips curve must be vertical. Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

42 The Unemployment Gap between Europe and the United States Figure: Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

43 The Unemployment Gap between Europe and the United States It used to be the case that the European unemployment problem consisted mainly of persons who were in very long unemployment spells. Figure: Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44

44 The Unemployment Gap between Europe and the United States Unemployment insurance tends to be much more generous in western European countries than in the United States, in terms of both the level and the duration of benefits Many European countries also have enacted strict employment protection regulations that restrict the right of employers to fire workers at will or that require employers to pay sizable severance pay at the time of layoff. Payroll taxes are very high in many European countries. Wages in the US are more flexible. Rongsheng Tang (Washington U. in St. Louis) Unemployment August, / 44