Macro chapter 11 unemployment summary

Unemployment implies individual costs in the form of income losses that cannot be fully insured
as well as psychological stress. Unemployment implies a social cost as well. For an involuntarily
unemployed worker the real value of the goods and services needed to compensate for
the sacrifice of leisure (MRS) is smaller than the going real wage. When firms maximize profits,
the real wage equals or is smaller than the marginal product of labour (MPL). Hence involuntary
unemployment implies MPL >MRS. This means that a social gain could be achieved if
some unemployed workers got jobs, since the extra output generated by additional
employment would more than suffice to compensate the newly employed workers. Because
unemployment is a social waste, it is a main concern of economic policy makers.
2. The rate of unemployment is the fraction of unemployed in the total labour force, measured at
a given point in time. The annual rate of unemployment is the simple average of the rates of
unemployment in each day or month of the year. A large number of workers are affected by
unemployment in each year, typically around 20 per cent of the labour force in countries like
the USA and Denmark, but only some of the unemployed are out of work all of the year,
whereas the rest have unemployment spells of varying but shorter duration.
3. The long-term unemployed during a given year are those who were unemployed more than a
given fraction of the year, for example more than half of the year. Long-term unemployment is the part of overall unemployment carried by the long-terrr unemployed. It is mainly the
long-term part of unemployment that causes serious individual costs, but for the social cost
the overall (average) unemployment rate is also important.
4. Unemployment and vacancies can coexist because the labour market's match between 'people
wanting jobs' and 'jobs wanting people' is not perfect. The Beveridge curve is a plot over time
of the vacancy rate against the unemployment rate and gives an indication of the degree of mismatch
in the labour market. For given structural mismatch problems, the Beveridge curve should
be a stable decreasing relationship. If it shifts inwards or outwards, it can be an indication of
decreased or increased structural problems in the labour market, respectively.
5. The empirical evidence shows that (i) there is a clear negative relationship between the rate
of growth in GOP and the change in the rate of unemployment, (ii) there is no upward or
downward trend in the rate of unemployment in the very long run, (iii) there is a lot of variability
in the rate of unemployment in the short run, (iv) there is a lot of persistence in annual rates of
unemployment, and (v) long-term unemployment varies positively and more than proportionally
with overall unemployment.
6. When annual rates of unemployment are at their lowest, there is still a substantial amount
ot unemployment, seemingly around 4 per cent, and annual unemployment rates seem to
fluctuate around a natural unemployment rate of about 5 -7 per cent. The natural rate of
unemployment seems to shift over time and can be different in different regions of the world.
7. The presence of unemployment reflects that wage rigidities prevent the real wage from
adjusting to equalize supplies and demands for labour. Economists find it useful to distinguish
between short-run nominal wage rigidities, which are fundamental for explaining the cyclical
fluctuations in unemployment, and long-run real wage rigidities, which cause the positive and
constant trend level of structural unemployment. This part of the book is focused on the
natural rate of unemployment and long-run real wage rigidities.
8. This chapter briefly presented the following four causes of long-run real wage rigidity and
structural unemployment: (i) labour market frictions, (ii) job search, (iii) efficiency wages, and
(iv) market power of trade unions. The last two of these potential causes for structural
unemployment are dealt with in the following two chapters.
9. Studying a model of the flows in and out of unemployment, we derived a simple formula linking
the rate of unemployment to the separation rate (the fraction of employed who lose their jobs
in a month) and the job finding rate (the fraction of unemployed finding a job from one month
to the next). Assuming a stationary environment with constant separation and job finding
rates, and assuming realistic values for these rates, we found that only a minor part of structural
unemployment seems to be due to labour market frictions or search. This gives good
reason to study the explanation for structural unemployment offered by the theories of
efficiency wages and trade unions presented in Chapters 12 and 13.

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