If labor markets tend to equilibrium, why is
unemployment always present?
Some unemployment is compatible with equilibrium
Equilibrium level of unemployment
Natural rate of unemployment
Full employment level of unemployment
Labor Market as a Game of Musical Chairs
At equilibrium unemployment
job vacancies = job seekers
=
Frictional Unemployment
Even when seekers equal vacancies, it
takes time for the market to clear
“Between Jobs”
Periods of low unemployment
Magnitude of flows in May 1993
• In one month
– 5 million leave employment
– 5 million enter employment
– ~7.8% (10mil/128.1mil) of labor force change
employment status every month
– 3.5 million leave unemployment
– 3.5 million enter unemployment
– ~5.5% of labor force change unemployment status
every month
Expected unemployment duration
• Suppose probability p of leaving
unemployment in one month
• Random draw on job
– Probability you get a job in any month = p
–
you stay unemployed = (1-p)
– Expected duration = (1/p)
FIGURE 15.1 Labor Market Stocks and Flows: May 1993
p = (2/8.9) = .224
Duration = 1/p = 4.5 mo.
p = ([2=1.5]/8.9) = .393
Duration = 1/p = 2.5 mo.
Average = 3 months (14 weeks);
Peak = 4.7 months (21 weeks)
Periods of low unemployment
TABLE 15.2 Sources of Unemployment, United States, Various Years
Iowa Unemployment Rate: 1978-2003
12
10
Not Seasonally Adjusted
%
8
6
4
Seasonally Adjusted
2
0
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Year
Seasonal unemployment: unemployment that is fully
anticipated because of seasonal fluctuations in demand
2004
Unemployment that is not a problem
Frictional
Seasonal
Voluntary (quits, new entrants, reentrants)
Elements of equilibrium unemployment
Problem unemployment
Cyclical Unemployment—unemployment
associated with national business cycles
(recession)
Structural unemployment: localized shortfall
of demand (geographic (Appalachia);
industry (textiles); skill (dropouts, young)
Avg UR=9%
Avg UR=4.5%
Avg UR=7.1%
Avg UR=7.2%
Unemployment Rate for Population aged 25 and over,
by Education Level: 2000, 2002
Years of Schooling
UR: 2000
< 12
6.4
12
3.5
13-15
2.7
16+
1.7
Average UR for ages 25+
3
UR for ages 16+
4
Source: Current Population Survey
UR: 2001
7.3
4.2
3.3
2.3
3.7
4.8
Appendix 2: Unem ploym ent rates by education level, various countries, 2003
0.35
Australia
0.3
Austria
Unemployment rate
Belgium
0.25
Canada
France
0.2
Germany
Korea
0.15
New Zealnd
Spain
0.1
Sw eden
UK
0.05
US
0
0
0.5
1
1.5
2
2.5
Education level
3
3.5
4
4.5
TABLE 15.3 Unemployment Rates in 2000 by Demographic Group
Seasonally Adjusted Unemployment Rates, by occupation
Manager/Professional
Technical/Sales/Clerical
Crafts
Laborer/Operative
Manufacturing
Service
Government
Overall
Jan-83 Jul-92 Jul-'02
3.7
3.2
3.1
6.9
6.1
5.3
11.3
8.5
6.4
18.5 11.3
8.6
13
9
5.5
8.1
7.1
3.4
6.3
5.9
2.5
10.4
7.7
5.9
Unemployment Rate for Population aged 25+, by Education
TABLE 2.4 Unemployment and Long-Term Unemployment, Selected
European and North American Countries, 2003