Unemployment
Unemployment Topics • Labour market measurement and patterns in the OECD • The efficiency wage model • A search model of unemployment
Reading
Labour Market Measurement and Patterns in the OECD • Working-age-population: P=L+NL • Labour force: L=E+U • Participation rate: L/P • Unemployment rate: u=U/L • Aren't employed but actively searching for work • Employment rate: E/P • Working part-time or full-time Diagram showing different parts of the labour market
Key Points • Labour market measurement • Sticky wages • Efficiency wage model • Why does effort increase with real wage • Wage optimization • Graphical wage optimization
• What does equilibrium wage depend on? • Effects of G increase on labour • Effects of TFP increase on labour • Search model of unemployment • Dynamics of unemployment rate • Steady state unemployment rate • Dynamics of unemployment rate with new entrants
• Steady state unemployment rate with new entrants • Value of being employed • Value of being unemployed
•
• Reservation wage • Effects of unemployment benefit increase • Effects of income tax increase • Job finding rate
• Wage offer • Graphs demonstrating US and international labour market • Explanation for unemployment in a competitive model ○ Given market wage rate = w* • Labour supply is higher than labour demand • Therefore positive unemployment Graph demonstrating positive unemployment
• Effects of unemployment benefit increase on job finding rate • Effects of increase in job finding rate Definitions • Reservation Wage = The lowest wage offer that an unemployed worker is willing to accept
• Sticky Wages = Where employers refuse to cut wages so have to cut labour instead Formulae
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• • • •
• • However, because the market wage is flexible it should fall to w** and clear the labour market • This will mean there is no unemployment • The theory prior to 1950's was that unemployment was due to sticky wages • Sticky Wages = Where employers refuse to cut wages so have to cut labour instead • The labour market was not clearing
• • • • •
The Efficiency Wage Model • Worker effort ↑ with real wage rate • Due to adverse selection and moral hazard • Produces a stickiness in real wage • Why Adverse Selection? • Higher wages attract better workers • Firm doesn't know which workers are good and which will apply • So higher wages to attract better applicants • Higher wages retain better workers • Better workers get headhunted • Higher wage stops them quitting and saves firm search/training costs • Why Moral Hazard? • Higher wages increase value that workers attach to their job • Workers will be more careful not to be lazy, be found out or fired
• The efficiency wage model lets us represent the idea that higher wages make workers more keen to do well • Assume that worker effort is a function of wage Graph showing effort of the worker as a function of wage
Course Notes Page 36
• Change in unemployment = Inflow - Outflow • Effective units of labour: • Employment rate: E/P • Job finding rate = • Labour force: L=E+U • Maximize: • Participation rate: L/P • Production function:
• Unemployment rate: u=U/L • Value of being employed at wage w = • We suppose • Working-age-population: P=L+NL
Reading
Labour Market Measurement and Patterns in the OECD • Working-age-population: P=L+NL • Labour force: L=E+U • Participation rate: L/P • Unemployment rate: u=U/L • Aren't employed but actively searching for work • Employment rate: E/P • Working part-time or full-time Diagram showing different parts of the labour market
Key Points • Labour market measurement • Sticky wages • Efficiency wage model • Why does effort increase with real wage • Wage optimization • Graphical wage optimization
• What does equilibrium wage depend on? • Effects of G increase on labour • Effects of TFP increase on labour • Search model of unemployment • Dynamics of unemployment rate • Steady state unemployment rate • Dynamics of unemployment rate with new entrants
• Steady state unemployment rate with new entrants • Value of being employed • Value of being unemployed
•
• Reservation wage • Effects of unemployment benefit increase • Effects of income tax increase • Job finding rate
• Wage offer • Graphs demonstrating US and international labour market • Explanation for unemployment in a competitive model ○ Given market wage rate = w* • Labour supply is higher than labour demand • Therefore positive unemployment Graph demonstrating positive unemployment
• Effects of unemployment benefit increase on job finding rate • Effects of increase in job finding rate Definitions • Reservation Wage = The lowest wage offer that an unemployed worker is willing to accept
• Sticky Wages = Where employers refuse to cut wages so have to cut labour instead Formulae
○
• • • •
• • However, because the market wage is flexible it should fall to w** and clear the labour market • This will mean there is no unemployment • The theory prior to 1950's was that unemployment was due to sticky wages • Sticky Wages = Where employers refuse to cut wages so have to cut labour instead • The labour market was not clearing
• • • • •
The Efficiency Wage Model • Worker effort ↑ with real wage rate • Due to adverse selection and moral hazard • Produces a stickiness in real wage • Why Adverse Selection? • Higher wages attract better workers • Firm doesn't know which workers are good and which will apply • So higher wages to attract better applicants • Higher wages retain better workers • Better workers get headhunted • Higher wage stops them quitting and saves firm search/training costs • Why Moral Hazard? • Higher wages increase value that workers attach to their job • Workers will be more careful not to be lazy, be found out or fired
• The efficiency wage model lets us represent the idea that higher wages make workers more keen to do well • Assume that worker effort is a function of wage Graph showing effort of the worker as a function of wage
Course Notes Page 36
• Change in unemployment = Inflow - Outflow • Effective units of labour: • Employment rate: E/P • Job finding rate = • Labour force: L=E+U • Maximize: • Participation rate: L/P • Production function:
• Unemployment rate: u=U/L • Value of being employed at wage w = • We suppose • Working-age-population: P=L+NL
