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Chapter 12
Unemployment
(Note: Chapter 12 will not be
covered in the final exam)
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• Seasonal unemployment.
- Usually predictable. Not seen as a major problem.
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• The steady-state
steady state rate of unemployment (also called the ‘natural
natural
rate of unemployment’) depends on the transition probabilities
between employment and unemployment (l & h).
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Job Losers (l × E)
Employed
(E workers) Unemployed
(U Workers)
Job Finders (h × U)
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1 8 million
1.8
Employed: Unemployed:
119.2 million 8.9 million
2.0 million
3.2 million
1.7 million
1.5 million
3 0 million
3.0
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Unemployment Duration
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Frequency
$5 $8 $22 $25 W
Wage
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• Asking wage.
- The asking wage makes the worker indifferent between
continuing his search activities and accepting the job offer at
hand.
- A worker’s
worker s asking wage responds to changes in the benefits and
costs of search activities.
• 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.
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Dollars
MC0
MC
MC1
MR0
MR1 MR
Wage Wage
w∼1 w∼0 w∼0 w∼1
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• Asking wage not constant over time. It falls the longer the
worker has been searching (liquidity constraint).
• Research so far indicates that use of the Internet for job search
does not seem to have increased the speed at which workers
find jobs.
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• US situation:
i i U
Unemployment
l iinsurance lengthens
l h the
h duration
d i
of unemployment spells and increases the probability that
workers are laid off temporarily.
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• Thi
This hypothesis
h th i tries
t i to
t explain
l i structural
t t l long-term
l t
unemployment in a competitive market.
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• The efficiency wage model can also explain why wages tend to
be sticky over the business cycle (Figure 12-14).
• The efficiency wage model also seems to be able to explain the
observed wage curve (Figure 12-15). The wage curve
contradicts competitive labour market theory.
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Dollars
A fall in output demand
S shifts the labour
demand curve from D0
to D1. The competitive
NS
wage falls from w0* to
w1*. If firms pay an
wNS
efficiency wage, the
0
contraction in demand
w*0
also reduces the
wNS D0
efficiency
ffi i wage but
b t by
b
a smaller amount. The
w1 efficiency wage is less
*
D1
responsive to demand
Employment fluctuations compared
E
E1 E0
to the competitive
wage.
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Wage
Geographic regions
(such as B) that offer
higher wage rates also
tend to have lower
unemployment rates.
When there is low
B unemployment, firms
A
h
have tto offer
ff high
hi h
efficiency wages to
Unemployment
Rate
prevent shirking (&
vice versa).
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End of Chapter
p 12
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