Download Unemployment

Labor Force Concepts
Unemployment rate (UR) = unemployed / labor force
Graph by Harcourt, Inc.
The Beveridge Curve
Equal numbers
of vacancies
and unemployed
can mean either
frictional or
structural
unemployment.
Beveridge curve
will shift out with
higher natural
rate of unemp.
More unemployed than vacancies is demand deficient unemployment.
An overheated economy produces more vacancies than unemployed.
Graph by Harcourt, Inc.
Beveridge Curves for the US Over Time
Curve shifted out during 1970’s and 1980’s, back in during 1990’s.
Graph by Harcourt, Inc.
The Basic Search Theory Model
Given the potential wage distribution, there are some jobs with too
high of qualifications and some below the reservation wage. All
others are acceptable, so can determine the probability get a job.
Graph copyright © 2003 by Pearson Education, Inc.
Determination of Reservation Wage
Wage offer at hand
The reservation wage is set at the point where the MC and MB
of continuing to search are equal.
Graph by Harcourt, Inc.
Unemployment Insurance Benefits
Higher levels of UI benefits imply a lower MC of searching and will
increase the reservation wage. This is a typical UI benefit schedule.
Graph copyright © 2003 by Pearson Education, Inc.
Unemployment Due to Rigid Wages
When demand
shifts in, if the
wage falls to
W2, then
employment
declines to E2,
and there is no
unemployment.
If the wage
stays at W0,
unemployment
of E0 – E1
results.
Graph copyright © 2003 by Pearson Education, Inc.
Unemployment Due to Efficiency Wages
Intersection of
supply and
demand sets
the standard
equilibrium
wage and
employment
level, with no
unemployment
in equilibrium.
Intersection of No-Shirking curve and demand sets the efficiency
wage and employment level, with unemployment in equilibrium.
The “Wage Curve”
Note that if the
x-axis were the
inflation rate (i.e.
change in the
wage rate)
instead of wage
rate, this would
be a Phillips
curve instead of
a wage curve.
The negative relationship between wages and unemployment
implied by the efficiency wage model have been found empirically
and referred to as the “wage curve”.
Graph copyright © 2003 by Pearson Education, Inc.
Policy Application: UI Financing
Firm’s at the maximum rate can layoff employees at zero MC.
They can offer “UI holidays” that are subsidized by the other firms.
Graph copyright © 2003 by Pearson Education, Inc.