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Unemployment
Unemployment rate
– The Current Population Survey is a joint project of the BLS and the Bureau of the Census
– Every month, 1,600 CPS interviewers survey 60,000 households to establish job market status
of each member of the household.
– Working-age population (WAP) = all people aged 16 years and over not jailed, hospitalized,
institutionalized nor in the U.S. Armed Forces. (WAP = L + those not in L )
– Labor force (L) is the number of people employed plus the number unemployed (L = E + U ).
– The CPS counts as employed (E ) all those in the WAP who, during the prior week, either
1. Worked at least 1 hour in a paid job or 15 hours unpaid in family business.
2. Were not working but who had jobs from which they were temporarily absent.
– The CPS counts as unemployed (U ) all those in the WAP who, during the prior week,
1. Weren’t working but were available for work,
2. Looked for work during the previous 4 weeks OR were waiting to be recalled to a job from
which they had been laid off.
– The unemployment rate:
u = U . x 100%
L
Unemployment
Year
Labor Force
2001
143,768,917
2002
Employed =
Unemployed
u
136,939,333
6,829,583
4.75
144,856,083
136,480,917
8,375,167
5.78
2003
146,499,500
137,729,250
8,770,250
5.99
2004
147,379,583
139,239,750
8,139,833
5.52
2005
149,291,750
141,713,500
7,578,250
5.08
2006
151,412,500
144,420,083
6,992,417
4.62
2007
153,126,333
146,049,500
7,076,833
4.62
2008
154,329,250
145,368,417
8,960,833
5.81
Types of unemployment
 Frictional (uf ): workers temporarily between jobs because of a move/career change.
uf + us = 5%
 Structural (us ): workers displaced by automation.
 Cyclical (uc ): workers who loose their jobs due to recession.
uc = 0.81%
u = uf + u s + u c

Natural rate of unemployment (un ≈ 5%): It’s the rate at which inflation remains constant.
Unemployment
1900 to 2010
Unemployment Rate
30
25
20
15
10
5
0
1890
1900
1910
1920
1930
1940
1950
1960
Year
2011 researchstlouisfedorg
UNRATE
1970
1980
1990
2000
2010
Alternate measures of unemployment
Unemployed workers who have actively looked for work for 4 weeks
Discouraged workers are unemployed and have stopped looking for work
because they think no work is available for them
Other marginally attached workers are unemployed, would like, and able
to work but have not looked for work recently
Underemployed are PT workers who want to work FT but cannot due to
economic reasons
u1 = % of LF unemployed 15 weeks or longer
u2 = % of LF who lost jobs or completed temporary work
u3 = official unemployment rate
u4 = u3 + discouraged workers
u5 = u4 + Other marginally attached workers
u6 = u5 + underemployed
Alternate measures of unemployment
1994-2010
u6
u5
UNRATE, U4RATE, U5RATE, U6RATE
u4
u3
Unemployment Rates by Race/Ethnicity
1973-2010
Black
Hispanic
White
Asian
LNS14000006, LNS14000003
LNU04032183, LNS14000009
Unemployment Rates by Gender
1960-2010
12
Male
10
Female
8
6
4
2
0
1960
1965
1970
1975
1980
1985
1990
1995
2011 researchstlouisfedorg
USALFFEMADSMEI, USAEMPFEMADSMEI,
USALFMALEADSMEI, USAEMPMALADSMEI
2000
2005
2010
Unemployment Rates by Education
1992-2010
HS dropout
HS no college
Some college or
Assoc Degree
Bachelor’s Degree
or higher
LNS14027662, LNS14027689
LNS14027660, LNS14027659
Unemployment Rates by Age
1970-2010
Teenagers
20-24 year olds
Adults
USAURANAA, USAUR24NAA, USAURTNAA
Unemployment rate and average duration
1948 to 2010
Avg Duration
of unemployment
Unemployment
UNRATE
UEMPMEAN
Unemployment Rates by Industry
2001-2011
Source: www.bls.gov
Unemployment Rates by Industry
2001-2011
Source: www.bls.gov
Unemployed Persons by Reason for Unemployment,
1967-2005
60
Job losers
50
Percent
40
Job leavers
30
20
Reentrants
10
New entrants
0
1965
1970
1975
1980
1985
1990
Year
1995
2000
2005
2010
Unemployed Persons by Duration of Unemployment,
1948-2002
70
60
Less than 5 w eeks
Percent
50
40
5-14 w eeks
30
More than 26 w eeks
20
10
15-26 w eeks
0
1940
1950
1960
1970
1980
1990
2000
2010
Year
• Although most spells of unemployment do not last very long, most weeks
of unemployment can be attributed to workers who are in very long spells
Flows Between Employment and Unemployment
Job Losers ( p  E )
Employed
(E workers)
Unemployed
(U Workers)
Job Finders ( q  U )
Suppose a person is either working or unemployed. At any point in
time, some workers lose their jobs and unemployed workers find
jobs.
If the probability of losing a job equals p, there are p  E job
losers.
If the probability of finding a job equals q, there are q  U job
finders.
Dynamic Flows in the US Labor Market, May 1993
1.8 million
Unemployed:
8.9 million
Employed:
119.2 million
2.0 million
3.2 million
1.7 million
1.5 million
3.0 million
Out of Labor Force:
65.2 million
Job Search
• The asking wage makes the worker indifferent between
continuing his search activities and accepting the job offer at
hand
• An increase in the benefits from search raises the asking wage
and lengthens the duration of the unemployment spell
• An increase in search costs reduces the asking wage and
shortens the duration of the unemployment spell
The Wage Offer Distribution
Frequency
$5
$8
$22
$25
Wage
The wage offer distribution gives the frequency distribution of potential job offers
A given worker can get a job paying anywhere from $5 to $25 per hour
What is the probability that the worker receives a wage offer between 5 and $8?
The Asking Wage
Dollars
MC
MR
MC$10
$20
MC$15 = MR$15
MC$20
MR
$10
MR
0
$10
$15
The marginal cost curve
gives the cost of an
additional search. It is
upward sloping because
the better the job offer at
hand, the greater the
The marginal revenue curve
opportunity cost of an
gives the gain from an
additional search.
additional search. It is
downward sloping because
the better the offer at hand,
the less there is to gain from
an additional search .
$20
Wage Offer at Hand
The asking wage equates the marginal revenue and the marginal cost of search
The Asking Wage
Dollars
MC0
MC
MC1
MR0
MR1
10
15
MR
Wage
People with higher discount rates are more worried
about the present than their futures
So they have little to gain from additional searches
10
15
Wage
UI benefits reduce the cost of searching for
the right job
So there is much to gain from additional
searches
The Asking Wage
Dollars
MC0
MC1
MR
10
15
Wage
• The internet can greatly reduce the costs associated with job search.
• Kuhn and Skuterud (2004):
• D-in-D estimates: people using the Internet found work 0.3 months faster
(perhaps because the Internet helps secure a high w offer quicker)
• This result vanishes in a regression that controls educational attainment, gender, and age.
Why? The Internet is ineffective, used to meet UI job search requirements, or used by people
who do not put in the time and effort to find work (selection bias).
The Relationship Between the Probability of Finding a New
Job and UI Benefits
US increased UI benefits from 26 to 99 weeks
.08
.06
.04
.02
.00
1
6
11
16
21 26
31
36 41 46 51 56 61 66
(Weeks of UI benefits)
71
76 81 86 91
96 101
• Before the 2008 recession, UI ended at 26 weeks.
• The probability of finding a new job spikes when UI benefits are exhausted
• The probability of finding a new job spikes again at 15 weeks after benefits
are exhausted
• Hence, UI benefits should lengthen the duration of unemployment spells
Funding the UI System: Imperfect Experience
Rating
Tax rate
5.4%
0.1%
0
l0
l1
Firm layoff Rate in the Past
UI is funded by payroll tax on employers—the more lay offs the higher the tax
The state determines up to what level to tax payrolls
In California, the first $7000 paid to employees is taxed at a rate of between 0.1% to 5.4%
Funding the UI System: Imperfect Experience
Rating
Tax rate
5.4%
0.1%
0
l
l0
l1
Firm layoff Rate in the Past
If the firm has a layoff rate less than l0, for each employee, the firm pays a tax to
the Federal UI fund equal to the lesser of
(0.1%)(wh)
or
(0.1%)($7000)
Funding the UI System: Imperfect Experience
Rating
Tax rate
5.4%
t
0.1%
0
l0
l
l1
Firm layoff Rate in the Past
If the firm has a layoff rate between l0 and l1, for each employee, the firm pays a
tax to the Federal UI fund equal to the lesser of
(t)(wh)
or
(t)($7000)
Funding the UI System: Imperfect Experience
Rating
Tax rate
5.4%
0.1%
0
l0
l1
l
Firm layoff Rate in the Past
If the firm has a layoff rate greater than l1, for each employee, the firm pays a tax
to the Federal UI fund equal to the lesser of
Hence, firms with high layoff rates are subject to perfect experience rating,
meaning firms with low layoff rates(5.4%)(wh)
subsidize firms with high layoff rates
or
(5.4%)($7000)
Efficiency Wages and Unemployment
The shirking model
•
•
•
If workers are equally productive in a perfectly competitive labor market, they get
paid w* whether they
– work productively (which is costly)
– goof off or make long distance phone calls at work (shirk)
Workers may shirk after they are hired because
– their incentives are not perfectly aligned with the owner’s (principal-agent)
– information about their performance is limited (asymmetric information)
– getting fired after being caught doesn’t prevent them from working for someone
else making w* (moral hazard)
Solutions:
– Increased monitoring (costly and not perfect)
– Bonding (e.g., employee don’t get student loans paid off if they quit early)
– Piece rate pay (brownnosers lobby supervisors for the ‘best’ working conditions)
– Paying wage wNS that exceeds w* (efficiency wage), which makes being fired
costly (Dw = wNS – w*)
The Determination of the Efficiency Wage
Dollars
S
w0
w*
D
E0
N
U
Employment
If shirking is not a problem, the market clears at wage w*.
Shirking may occur because fired workers can find work somewhere else making w*.
At high unemployment (N – E0), workers toe the line at a slightly higher wage w0
because high unemployment attracts workers who will not shirk at w0.
The Determination of the Efficiency Wage
Dollars
SNS
S
w1
w0
w*
D
E0
E1 N
Employment
U
At low unemployment (N – E1) firms have to pay much more to
inhibit shirking
Hence the no-shirking supply curve is upward sloping, and
asymptotically approaches S.
The Determination of the Efficiency Wage
Dollars
SNS
S
wNS
w*
D
ENS
N
Employment
The efficient wage model suggests that some unemployment is necessary to keep
employees in line (structural unemployment)
Efficiency wage wNS is given by the intersection of the no-shirking supply curve
and demand curve
The Determination of the Efficiency Wage
and Economic Contraction
Dollars
SNS
S
w0NS
w1NS w0*
D10
w1*
E1
E0
N
Employment
A fall in output demand reduces labor demand, reducing the competitive wage.
If firms pay an efficiency wage, the contraction also reduces the efficiency wage
Efficiency wage theory suggests that wages are sticky because the decline in wNS
is much smaller than the fall in w*.
The Determination of the Efficiency Wage
and UI Benefits
Dollars
SNS
S
wNS
D
w*
E
N
Employment
An increase in UI benefits decreases no-shirking labor supply and increases
• the wage needed to inhibit shirking (wNS)
• Unemployment (N – E)
• The cost of getting caught shirking (wNS – w*)
The Wage Curve: The Relation Between Wage Levels and
Unemployment Across Regions
Wage
w1NS
w0NS
u1
u0
Unemployment
Rate
Efficiency wages may play an important role in unemployment
Geographic regions that offer higher wage rates also tend to have lower
unemployment rates
Hence, the greater is the surplus of workers (u), the lower the wage???
Yes if shirking is problematic
The Phillips Curve
Recessionary Gap
A recessionary gap occurs when GDP is less than potential GDP.
Resources, capital, and workers are not being fully utilized, and so u is high.
As a result, there is downward pressure on wages…
….prices fall
AS
Note: Unemployment
insurance replaces a
portion of a newly
unemployed worker’s
income. Designed to
prevent the “next”
Great Depression.
PL
PL
AD
GDP
YFE
The Phillips Curve
Inflationary Gap
An inflationary gap occurs when GDP exceeds potential GDP.
Workers are working overtime and firms are competing for their labor, resulting in low u
As a result, there is upward pressure on wages…
….prices fall
AS
PL
PL
AD
YFE
GDP
The Phillips Curve
The business cycle

The figure shows recent cycles in real GDP.

Recessions began in mid-1990 and in first
quarter of 2001.

The longest expansion in U.S. history ran
from the March 1991 to March 2001.

When GDP decreases
The unemployment rate increases
And a little later, the inflation rate
decreases

As real GDP increases toward potential
GDP, unemployment falls toward its natural
rate, which leads to an eventual rise in
inflation.
The Phillips Curve
(1948-1969)
10
Inflation Rate
8
6
4
2
0
-2
-4
2
3
Source: http://wwwblsgov/
4
5
6
7
Unemployment Rate
The Phillips curve describes the negative correlation between the inflation rate and the
unemployment rate
The curve implies that an economy faces a trade-off between inflation and unemployment
The Phillips Curve
(1961-2005)
What happened?
Inflation expectations were changing
14
80
12
79
74
81
Rate of Inflation
10
75
8
78
73
6
82
69
77
90
76
70
68
4
67
00
99
66
2
01
89
05
63
64
0
3
4
94
96 95
65
5
85
87
72
98 97
84
91
71
88
93
92
83
03
02
62
6
86
61
7
Unemployment Rate
8
9
10
The Phillips Curve
Expected Inflation
• The yields on two different kinds of Treasury securities are used to
calculate a measure of inflation expectations:
– nominal treasury notes
– treasury inflation-protected securities (TIPS)
– Their difference is called the TIPS spread
• Because the market's expectations for inflation are priced TIPS, the
measure that is derived from the yields is a good estimate of the market's
estimate of future inflation
• The calculation involves correcting for some biases:
– inflation-risk premium
– liquidity premium
The Phillips Curve
Expected Inflation
• The liquidity premium (LP): difference between the yields on 10-year onthe-run and off-the-run treasury notes
• Spread (or bias) is equal to the difference between inflation expectations
from the Survey of Professional Forecasters (SPF) and the TIPS-derived
expected inflation (TIPS)
• Regressing spread (or bias) on LP and LP2 gives predicted bias:
bias = a + b1∙LP + b2∙LP2
picks up the bias
picks up the bias
due to inflation risk
due to liquidity
• Subtracting this from TIPS-derived expected inflation yields an unbiased
estimate of expected inflation:
pe = TIPS – bias (LP)
The Phillips Curve
Rate of
Inflation
Long Run
0
Short Run
5
Unemployment Rate
The economy is initially at the point where there is no inflation
and a 5 percent unemployment rate
The Phillips Curve
Rate of
Inflation
Long Run
7
0
Short Run
3
5
Unemployment Rate
If monetary policy increases the inflation rate to 7 percent, job searchers
will suddenly find many jobs that meet their reservation wage and the
unemployment rate falls in the short run
The Phillips Curve
Rate of
Inflation
Long Run
7
0
Short Run
3
5
Unemployment Rate
In
thetime,
long workers
run, the unemployment
rate is still
5 percent,
now
Over
realize that the inflation
rate
is higherbut
andthere
willisadjust
atheir
higher
rate of inflation
reservation
wage upward, returning the economy to having u = 5% and p = 7
In the long run, therefore, there is no trade-off between inflation and unemployment
The Augmented Phillips Curve
(1975-2005)
p t  p te    x  a ut
 is the markup of firm’s unit price over unit cost
Dpallt other
  xvariables
 aut affecting wage setting
x is
pt  pt 1    x  a uMore
 is positive
(but if legislation
 = 0, Phillips curve)
t
stringent
antitrust
Increasing UI benefits
decreases market power
4
D Inflation Rate
3
2
1
0
-1 4
5
6
7
8
9
-2
-3
-4
NAIRU
NAIRUor
Natural Rate of
unemployment
decreases
increases
Unemployment Rate
Source: http://wwwblsgov/
10
Unemployment and Interest Rates
1954-2011
The unemployment rate lags the
federal funds rate by
a couple of years
?
Unemployment and Interest Rates
1987-2011
12
10
8
u
6
4
2
0
0
2
4
6
8
10
12
Unemployment and Interest Rates
1989-2008
9
8
R² = 0.0893
7
6
u
5
4
3
2
1
0
0
2
4
6
Fed Funds Rate
8
10
12
Unemployment and Interest Rates
1989-2008
9
8
R² = 0.0003
7
6
u
5
4
3
2
1
0
0
2
4
6
Fed Funds Rate
(lagged one year)
8
10
12
Unemployment and Interest Rates
1989-2008
9
R² = 0.1679
8
7
6
u
5
4
3
2
1
0
0
2
4
6
Fed Funds Rate
(lagged two years)
8
10
12
Unemployment in Europe
Table 12-3. Percentage of Unemployed Workers
in Spells Lasting At Least 12 Months
Country
1990
2006
Belgium
68.7
56.6
Denmark
29.9
20.4
Germany
46.8
57.2
France
38.0
44.0
Ireland
66.0
34.3
Italy
69.8
52.9
Netherlands
49.3
45.2
Spain
54.0
29.5
United Kingdom
34.4
22.1
United States
5.5
10.0
Source: OECD Employment Outlook, Statistical Annex, Paris: OECD, 2007, Table G.
Unemployment in Europe
15
Unemployment Rate
12
9
US
France
Germany
Italy
UK
6
3
US increased UI benefits
from 26 to 99 weeks
0
1960
1970
1980
1990
2000
Year
•
Unemployment in Western Europe is a combination of…
– high unemployment insurance benefits
– employment protection restrictions
– wage rigidity
2010