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Economics: Theory Through Applications
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Chapter 23
Jobs in the Macroeconomy
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Learning Objectives
•
What is the unemployment rate and how is it measured?
•
What are the differences and the similarities in unemployment rates in
the United States and Europe?
•
If the labor market functions perfectly, what is the rate of unemployment?
•
How does unemployment arise?
•
What key features of labor markets does the static model of labor supply
and labor demand fail to capture?
•
What are some of the key facts about worker labor market flows?
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Learning Objectives
•
What is search theory and how is it useful for understanding labor market
outcomes?
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What are the efficiency gains from flexible labor markets?
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What are the facts about hours worked across countries?
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What are the explanations for these differences in hours worked?
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What are common forms of government intervention in labor markets?
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Why do governments intervene?
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Figure 23.1- Employment Transitions over Your
Lifetime
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Unemployment
civilian working age population  number employed  number unemployed  number out of the labor force
unemployment rate 
number unemployed
civilian labor force
employment rate 
number employed
civilianlaborforce
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Figure 23.2 - Unemployment Rates in France,
the United States, and the Euro Area, 1985-2011
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Figure 23.3- Labor Market
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Figure 23.4 - Unemployment in the Labor
Market
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Inflexible Real Wages
real wage 
nominal wage
price level
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Figure 23.5 - Worker Stocks in the U.S.
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Figure 23.6 - Worker Flows in the United
States
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Table 23.1 - Output Level per Day in
Different Jobs
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Table 23.2 - Revised Output Level per Hour
from Assigning Jobs
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Figure 23.7 - Hours in Europe Relative to the
United States
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Figure 23.8 - Annual Hours in Various
Countries
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Where Do Differences in Hours Worked Come
From?
Real wage after tax  Real wage  1  Tax rate 
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Figure 23.9 - Labor Supply
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Figure 23.10 - Differences in Hours Supplied
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Figure 23.11 - Responsive and Unresponsive
Labor Supply
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Key Terms
•
Discouraged worker: A discouraged worker is someone who would like a
job, but who has stopped searching and is therefore classified as out of
the labor force rather than unemployed
•
Civilian labor force: The civilian labor force is the sum of the employed
and the unemployed individuals
•
Unemployment rate: The unemployment rate equals the number of
unemployed divided by the civilian labor force
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Key Terms
•
Employment rate: The employment rate equals the number of employed
divided by the civilian labor force
•
Unemployment insurance: Unemployment insurance is a payment from
the government to unemployed individuals
•
Labor market: The labor market is the market which brings together
households who supply labor services and firms who demand labor as an
input into the production process
•
Real wage: The real wage is the nominal wage corrected for inflation
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Key Terms
•
Equilibrium: Equilibrium in a market refers to an equilibrium price and an
equilibrium quantity such that supply equals demand at the equilibrium
price
•
Nominal wage: The nominal wage is the wage in dollars paid to workers
per unit of time
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Price level: The price level is a measure of average prices in the economy
•
Cyclical unemployment: Cyclical unemployment is the component of
unemployment that depends on the business cycle
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Key Terms
•
Efficiency wages: Efficiency Wages are wages in excess of the equilibrium
real wage that are paid by firms in order to provide incentives for their
workers to perform their duties
•
Worker flows: Workers flows depict the movements of workers across the
state of employment, unemployment and out of the labor force
•
Unemployment duration: The duration of unemployment is the amount of
time a typical worker spends searching for a new job
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Key Terms
•
Search theory: Search theory is a framework for understanding the flows
of workers across periods of employment and unemployment along with
the creation of job vacancies by firms
•
Comparative advantage: A person has a comparative advantage in the
production of one good if the opportunity cost, measured by the lost
output of the other good, is lower for that person than for the other
•
Absolute advantage: A person has an absolute advantage in the
production of a good if that person can produce more of that good in a
unit of time than the other person
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Key Terms
•
Frictional unemployment: Frictional unemployment is the unemployment
that occurs when workers are moving between jobs
•
Discounted present value: Discounted present value is a device for
measuring flows that occur over time
– It tells you the value of something you will receive in the future, discounted
back to the present
•
Natural rate of unemployment: The natural rate of unemployment is
defined as the amount of unemployment we expect in an economy that is
operating at full employment
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Key Terms
•
Individual labor supply curve: The individual labor supply curve is drawn
on a diagram with the real wage on the vertical axis and the number of
hours supplied on the horizontal axis
– It tells us how many hours of labor an individual supplies at different values of
the real wage
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Consumption smoothing: Consumption smoothing is the idea that
households like to keep their flow of consumption relatively steady over
time, smoothing over income changes
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Key Takeaways
•
The unemployment rate is the fraction of the civilian labor force looking
for a job but currently not employed
– The BLS in the United States produces this number on a monthly basis
•
During the early apart of the 1980s, the unemployment experience in the
United States and Europe were very similar
– Up until 2008, the unemployment rate in Europe had been significantly higher
than the unemployment rate in the United States
– Very recently, however, the US unemployment rate climbed to European levels
•
In a perfectly functioning labor market, the unemployment rate would be
zero
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Key Takeaways
•
Possible explanations of unemployment include rigidities in wages, the
market power of unions, and incentive effects
•
The static model of labor supply and labor demand fails to capture the
dynamics nature of worker flows, the processes of creating and destroying
jobs and lacks a theory of unemployment
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In the United States, labor markets are very fluid. Each month, a
significant fraction of workers lose their jobs and each month a significant
fraction of unemployed workers find jobs
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Key Takeaways
•
Search theory provides a framework for understanding the matching of
workers and jobs and for wage determination through a bargaining process
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The economy is operating efficiently when workers are assigned to jobs
based upon comparative advantage
– Inflexible labor markets lead to inefficient allocations of workers to jobs and
thus to an economy operating below potential output
•
Average hours worked varies over countries
– In the United States, average hours worked are larger than in Europe
•
One way to explain differences in hours worked is through the higher
marginal labor income taxes paid in Europe
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Key Takeaways
•
Most governments provide workers with unemployment insurance
– In many countries, governments also impose costs on firms that fire workers
and also restrict hours worked
•
One rationale for intervention by governments is to provide insurance to
workers that is not available in private markets
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Governments also take action in an attempt to increase employment rates
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