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1、CHAPTER 7UNEMPLOYMENTChapter Outline The Beveridge curve Okuns law and the sacrifice ratio Key characteristics of unemployment Variations in unemployment across groups Duration and frequency of unemployment Jobless recoveries The natural rate of unemployment Unemployment hysteresis International com
2、parisons The cost of unemploymentChanges from the Previous EditionThe material in Chapter 7 now deals exclusively with unemployment. The first two pages of old Chapter 7 (including old Table 7-1 and old Box 7-1) and former Section 7-9 have been moved to Chapter 6, while Sections 7-2, 7-6, 7-7, and 7
3、-8 (including old Boxes 7-5, 7-6 and old Table 7-5) have been moved to Chapter 8. All remaining figures, tables and boxes have been renumbered accordingly and those involving data have been updated. New Section 7-1 (including new Figure 7-1), which deals with the Beveridge curve, has been added and
4、What More Do We Know? Box 7-3 (old Box 7-4) has been substantially revised. Two paragraphs on long-term unemployment benefits have been added.Introduction to the MaterialThe inverse relationship between unemployment and output is well established and Okuns law provides a means of estimating the loss
5、 of output that occurs as unemployment increases. However, a rise in GDP does not always result in an immediate decrease in unemployment, as was very evident during the jobless recovery after the Great Recession of 2007-09.The costs of unemployment are borne disproportionately by those workers who a
6、ctually lose their jobs and the unemployment rates among different segments of the work force differ greatly. The overall rate of unemployment is calculated by the weighted average of the unemployment rates among different groups of workers. Therefore it is important to look at the characteristics o
7、f those who tend to be unemployed more often and for longer periods of time. As Figure 7-2 indicates, there are fairly large variations in the unemployment rates across different groups in the labor force. Teenagers, minorities, and those just entering the labor force are among those who are most li
8、kely to lose their jobs if the economy turns sour. But even when the economy does well, a proportion of the labor force will always be unemployed due to the mismatch4 .b. Those workers who had been working at jobs paying the existing minimum wage rate would lose from a decrease in the minimum wage.
9、With a lower minimum wage rate implemented only during the summer months, employers might lay off current workers and replace them with new entrants at a lower cost. Thus the number of displaced workers might increase.5 .c. Obviously, those who would gain from such a policy measure would support it,
10、 that is, teenagers and low skilled workers, but also some firms, particularly those who experience a seasonal increase in the product or service they provide.6 . It is possible to design a restrictive fiscal and monetary policy mix to bring the economy to a long-run equilibrium situation at the nat
11、ural rate of unemployment and at a zero rate of inflation. However, a sharp reduction in inflation cannot be achieved without an increase in the rate of unemployment in the short run. Therefore a choice has to be made among adjustment paths that differ in their inflation-unemployment mix.In consider
12、ing alternative adjustment paths, the benefits of permanently lower inflation have to be compared with the costs of increased short-term unemployment. The costs of unemployment are loss of output and the personal hardship encountered by those laid off. If inflation can be anticipated only imperfectl
13、y, then a redistribution of wealth and income will take place. Some output may be lost as resources are devoted to minimizing a potential loss in purchasing power rather than to actual production. However, the cost of perfectly anticipated inflation is minimal. Thus it probably makes little differen
14、ce whether we have a zero inflation rate or an inflation rate of 3%, as long as a specific long-run goal is established. A positive rate of inflation may actually help in wage and price adjustments, since it allows real wages to adjust more easily to supply shocks.Most policy makers tend to perceive
15、 the cost of inflation as lower than the cost of an increase in unemployment resulting from a tough anti-inflation policy. Therefore they tend to favor a gradual approach to reducing inflation. However, the U.S. experience of the early 1980s indicates that tough measures to bring the economy quickly
16、 to recovery may be acceptable if inflation reaches the double-digit range. One way to establish a clear inflation goal is for the central bank to follow a monetary growth rule. However, such a rule may not perform well in all situations (for example, in a supply shock). Another option is to maintai
17、n discretionary monetary policy along with an independent central bank that has a clear mandate to function as an inflation fighter.Technical ProblemsLa. The aggregate unemployment rate can be calculated by adding the unemployment rates of different groups weighted by their share of the labor force.
18、 The data in the problem indicate that teenagers constitute 10% of the labor force. The adult work force (the other 90%) is divided into 35% females and 65% males. Thus we can calculate the overall unemployment rate as:u = (0.1 )(0.19) + (0.9)(0.35)(0.06) + (0.65)(0.07) = 0.019 + (0.9)(0.021 + 0.045
19、5)=0.019 + 0.05985 = 0.07885 = 7.9%.l.b. If the labor force participation rate of teenagers increases to 15%, the overall unemployment rate changes to:ui = (0.15)(0.19) + (0.85)(0.35)(0.06) + (0.65)(0.07) = 0.0285 + (0.85)(0.021 + 0.0455)=0.0285 + 0.056525 = 0.085025 = 8.5%.Empirical ProblemsThe tab
20、le below uses the labor force shares as reported in the end-of-chapter problem and the rates of unemployment by demographic groups as well as the overall unemployment rate as reported in the The Economic Report of the President, Table B-42.YearLABOR FORCE SHARES in %UNEMPLOYMENT RATES in %OVERALL UN
21、EMPLOY- MENT RATE in%16-19 YEARS OLD20 YEARS & OVER16-19 YEARS OLD20 YEARS & OVERMaleFemaleMaleFemaleMaleFemaleMaleFemale20002.62.551.343.614.012.13.33.64.020052.72.650.943.918.614.54.44.65.120092.12.251.544.227.820.79.67.59.3Using the labor force shares for 2005 to calculate unemployment rates for
22、2005 and 2010, we would obtain:Uoo = 0.027*14.0 + 0.026*12.1 + 0.509*3.3 + 43.9*3.6 = 3.95U09 = 0.027*27.8 + 0.026*20.7 + 0.509*9.6 + 43.9*7.5 = 9.46These unemployment rates are very close to the reported unemployment rates, indicating that there havent been any significant changes in the compositio
23、n of the labor force.1. The table below presents the distribution of unemployment by duration in 2000 and 2009, downloaded from The Economic Report of the President, Table B-44.Number of unemployed in thousands% compositionNumber of unemployed in thousands% compositionTotal5,69210014,265100Less than
24、 5 weeks2,55844.93, 16522.25-14 weeks1,81531.93,82826.815 - 26 weeks66911.82,77519.427 weeks and over64911.44,49631.5Average duration (weeks)12.624.420002009As the table above indicates, the share of longer term unemployment increased dramatically from 2000 to 2009.2. The scatter diagram below shows
25、 the relationship between the change in the unemployment rate on the vertical axis and the growth of RGDP on the horizontal axis in Australia over the period 1970-2007. As the graph indicates, the decrease in unemployment is associated with a higher growth rate of RGDP. On average an increase of 1 p
26、ercent in the unemployment rate should lead to a decrease in the growth rate of output by about 2 to 3 percent. Seriesl SerieslAxis TitleRunning the regression in EXCEL produces the following coefficients (standard errors in parenthesis):RGDP growth = 3.76 -1.6 * change in unemployment rate(0.21)(0.
27、23)adjusted R2 = 0.53The estimated slope in the above equation is equal to -1.6, implying that a 1 percent increase in the unemployment rate reduces the growth rate of output on average by 1.6 percent. Since the absolute value of the t-statistics is quite high, the coefficient is statistically signi
28、ficantly different from zero. One can always use a t-test to test the null hypothesis that P = -2 .-1.62-(2)t =- 1.0 J0.23Since the number we obtained is lower than the critical value (the 5 percent critical value is about 2), we cannot reject the null hypothesis that the coefficient is equal to 2.A
29、dditional Problems1. Starting in the early 1990s many U.S. firms downsized their operations. In your opinion, how did this affect the duration of unemployment?Normally after a recession workers either return to their old jobs or find similar jobs. However, since many jobs were completely eliminated
30、in this particular downsizing, workers who lost their jobs in the recession of 1990/91 had a much tougher time finding new and comparable jobs. Therefore, the duration of unemployment increased.2. In the manufacturing sector many workers who have been laid off later return to their original jobs. Do
31、es this mean that the workers failed to look for other jobs while they were unemployed?No. The fact that these workers return to their original jobs simply means that they did not accept other permanent job offers. Very often, laid-off workers actively look for other jobs, but may not find comparabl
32、e jobs in their geographic area. Therefore, when the demand for the goods produced by their former firm increases again, they are called back and return to their old jobs.3. True or false? Why?Frictional unemployment does not exist when unemployment is at its natural rate.”False. The natural rate of
33、 unemployment is the rate that exists when the economy has reached the full-employment level of output. But even when the economy is at full employment there is always some unemployment due to new entrants into the labor force, people between jobs, and the like. This rate of unemployment is consider
34、ed normal, due to frictions in the labor market, and is often called frictional unemployment.4. Is it possible for the number of unemployed workers to increase at the same time as the overall unemployment rate falls? Explain.The unemployment rate is defined as the number of people unemployed but act
35、ively looking for work divided by the number of people in the labor force. If the labor force grows more than the number of unemployed, then the unemployment rate declines.5. True or false? Why?“When the economy enters a recession, wages tend to adjust only slowly to a market clearing level. The res
36、ulting unemployment is called frictional/9False. Frictional unemployment is the unemployment that exists even when the economy is at the full-employment level of output. Unemployment in excess of the natural unemployment rate occurs when the economy enters a recession and is called cyclical unemploy
37、ment.6. Restrictive monetary policy will help to decrease inflation; the resulting increase in the natural unemployment rate is a small price to pay.” Comment on this statement. In your answer, explain what policies the government should design to lower the natural rate of unemployment.Restrictive m
38、onetary policy will lower the rate of inflation at the cost of increasing the actual rate of unemployment, but in the long run the economy will adjust to the natural rate of unemployment. In other words, monetary policy does not affect the natural unemployment rate; only employment policies or chang
39、es in the composition of the labor force affect it. Employment policies involve educating workers or increasing their skills to make them more mobile, making information about job opportunities more readily available to them, or reducing discrimination to allow certain groups to find jobs faster.7.
40、What kinds of policies would you suggest to reduce the natural rate of unemployment?The answer to this question is student specific. Policies to reduce the natural unemployment rate must reduce the frequency or duration of unemployment and affect the composition or demographic make-up of the labor f
41、orce. Policies that make workers more mobile, make information regarding job vacancies more accessible to the public, or reduce the variability of the demand for labor across industries can also be considered. Other possibilities include a reduction in the minimum wage rate or a unemployment benefit
42、s, but these proposals are controversial due to their negative effects on individual workers.8. Structural unemployment is in excess of the natural rate of unemployment and can therefore be easily lowered by expansionary fiscal policy. Comment on this statement. In your answer, list the different ty
43、pes of unemploymentExpansionary fiscal policy will result in a temporary decrease in the actual unemployment rate, but in the long run the economy will adjust back to the natural unemployment rate. This natural rate can only be reduced through policies geared towards improving education, skills, inf
44、ormation about jobs, and job mobility. Structural unemployment (the mismatch between job openings and available skills) is part of the natural unemployment rate. Frictional unemployment always exists since labor markets dont work perfectly and some people are always between jobs. Search unemployment
45、 exists when people who are offered jobs decide not to take them in hopes of getting better jobs. Only cyclical unemployment is in excess of this natural rate and can be reduced through expansionary fiscal policy.9. Distinguish between frictional, structural, search, seasonal, and cyclical unemploym
46、ent.Frictional unemployment exists because labor markets do not work perfectly. At any given time, some workers are between jobs and therefore temporarily unemployed. Structural unemployment occurs since the economy constantly undergoes structural changes, resulting in a mismatch of available skills
47、 and available jobs. Search unemployment exists because some workers who are offered a job wait for a better opportunity; they can do this for some time because they receive unemployment insurance benefits. Seasonal unemployment occurs since workers are needed at different times in different areas.
48、(Ski instructors are only needed in winter; college students tend to enter the labor force temporarily during the summer, etc.) Cyclical unemployment refers to the unemployment that occurs as the economy enters a downturn.10. The natural rate of unemployment is a helpful guide for policy makers, since most inflation is driven by wage increases/9 Comment on this statement.While the natural rate of unemployment can be estimated, it cannot be accurately measured. If policy makers assume the rate to be lower than it actually is, they may try to stimulate the economy throu