MGT. M259C: Analysis of Labor Markets --PP CM230 Labor Markets and Public Policy Daniel J.B. Mitchell Ho-su Wu Professor Anderson School and School of Public Affairs
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MACRO side of labor markets
Models Shortages Surpluses
(Unemployment) Aggregate Pay Determination
MACRO side of labor markets
MACRO side of labor markets
Layoff Proxy (underestimate)
MACRO side of labor markets
MACRO side of labor markets ECI-Private: Total Comp: 4th Qtr to 4th Qtr Percent Change 11 10 9 8 7 6 5 4 3 2 1
Employment Cost Index: % Change over same period prior year
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0
MACRO side of labor markets
Consumer Price Index: All Urban Consumers
Development of Macroeconomics Classical
(supply = demand) Keynesian Keynesians vs. monetarists Keynesians vs. monetarists vs. rational expectationists Real business cycle models New Keynesians Empirical forecasting tends to be Keynesian and ad hoc John Maynard Keynes
MACRO micro micro micro micro micro micro micro micro
MACRO micro micro micro micro micro micro micro micro micro micro
MACRO micro micro micro micro micro micro micro micro micro micro micro micro
MACRO micro micro micro micro micro micro micro micro micro micro micro micro
micro micro micro micro micro micro micro micro micro micro micro micro
Basic Problem: Explain lack of clearing in labor market especially during Great Depression wage
Supply
W
Demand 0
L
labor
Macro vs. Micro Perspective ď Ž
Response to Non-Clearing Apple Glut Everything Glut
ď Ž
Where is the Equilibrating Mechanism? Coordination Failure Can Someone Coordinate?
Macro vs. Micro Perspective
Response to Non-Clearing Apple Glut Everything Glut
Where is the Equilibrating Mechanism? Coordination Failure Can Someone Coordinate?
Training Example 90 Jobs 100 Job Seekers
Macro vs. Micro Training example
Perspective
Round 1
90 jobs 100 job seekers
– 10 disappointed job seekers
Interview tips for the disappointed ten provided by trainer before Round 2 – – – –
Go to job fairs Look interviewer in the eye Comb your hair Have attractive resume
Macro vs. Micro Training example
Perspective
Round 2 – The newly trained ten get jobs thanks to tips
Micro success! Macro result: failure – Ten (different) unsuccessful job seekers since problem is fewer jobs than job seekers
90 jobs 100 job seekers
Unemployment Concepts
Unemployment Concepts
Unemployment Concepts
Frictional Problem: information Policy: provide info and assistance in job matching
Structural Problem: mismatch of jobs and workers, barriers to employment, “hysteresis” in unemployment Diagnosis: Beveridge curve Policy: training, mobility subsidy, remove barriers
Demand Problem: recession Policy: monetary/fiscal, Weitzman share economy
Frictional
#
Job Search Models and Reservation Wages Frequency of wage offers
W
$ Worker’s reservation wage
Probability of receiving offer
Frictional
#
Similar Process for Employer Frequency of workers with reservation wage
W
$ Employer wage offer
Probability of worker accepting offer
Structural Unemployment
Example: Excess Supply of Unskilled
Economy Runs Into Skill Constraint
Economy Runs Into Skill Constraint
skilled
Economy’s expansion path
unskilled
Economy Runs Into Skill Constraint Leaving Surplus of Unskilled Workers Available skilled
Economy’s expansion path
Excess ` of supply unskilled
Available unskilled
So train unskilled to become skilled thereby eliminating structural unemployment skilled
Economy’s expansion path
unskilled
and permitting further economic expansion
skilled
Economy’s expansion path
unskilled
Investigating Structural Unemployment: Shifts in the Beveridge Curve Vacancy Rate
Problem in US is lack of vacancy data until 2000s
Shift up and to the right suggests increase in structural unemployment
Unemployment rate
Investigating Structural Unemployment: Shifts in the Beveridge Curve Vacancy Rate
Beveridge with a beverage!
Unemployment rate
Unemployment Insurance
Unemployment Insurance
Unemployment Insurance
Unemployment Insurance
Unemployment Insurance
Unemployment Insurance
Stylized Tax Schedule for Unemployment Insurance
tax rate
with imperfect experience rating
0
layoff record
Hysteresis in Unemployment Developed
mainly from European experience in 1980s with chronic unemployment Hypothesis: Long-term unemployed person becomes progressively unemployable Explanations offered: Loss of human capital (depreciation) Loss of work ethic Climate of dependence
Demand Unemployment ----------------
(business cycle) Real
GDP===>U
What is the connection? Real
Arthur Okun
GDP===>E===>U
Not all entrants to E come from U Real
GDP==>H==>E==>U
Some labor demand raises weekly hours of existing workers Productivity tends to be pro-cyclical Okun’s
“law”
Okun’s 3 loose links: Output Hours Hours Employment
Employment Unemployment
Tight Gearing
vs.
Slippage
Okun’s Law Percent Change in Real GDP (Left Scale) vs. Percentage Pt Change in Unemployment Rate (Right Scale) 10.0 8.0
4.0 %Ch Real GDP Pct Pt Ch U-Rate
3.0 2.0
4.0
1.0
2.0
0.0
0.0
-1.0
-2.0
-2.0
-4.0
-3.0 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
6.0
1% change in real GDP leads to -.37 percentage point change in unemployment rate
Okun’s Law % Change in Business Output vs. Percent Change in Hours 12.0 10.0 Hours
8.0
Output 6.0 4.0 2.0 0.0 -2.0 -4.0
1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
-6.0
1% change in business output leads to .68% change in hours
Okun’s Law
Percent Change in Business Hours vs. Percent Change in Employment 8.0 Employment Hours
6.0 4.0 2.0 0.0 -2.0 -4.0
1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
-6.0
1% change in hours leads to .81% change in employment
Okun’s Law Change in Employment vs. Change in Unemployment (000s) 5000 Employment
4000
Unemployment
3000 2000 1000 0 -1000 -2000
1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
-3000
Change in employment of one person leads to change in unemployment of .60 persons .68 x .81 x .60 = .33 (similar to direct calculation of .37)
Does a rising tide (of real GDP) raise all boats? “Yes” for unemployment reduction Not clear for wage or income inequality although 1990s reduction
Aggregate Nominal Wage Determination
W
Concern: Connection between wage inflation and price inflation
Concern: Connection between wage inflation and price inflation
Wages are a significant element of production costs Prices affect nominal labor demand (w = MRPL = MPL x Pi) Union “cost of living” (COLA) or “escalator” clauses linking wages to CPI (now covering few workers)
Evolution of the Discussion The Phillips Curve The “modified” Phillips Curve (adaptive expectations) Rational expectations critique The “NAIRU” concept
A.W. Phillips
Not to be confused with...
Nehru
The Phillips Curve
Wage
An Empirical (not theoretical) Concept
Inflation Rate
Unemployment rate
Ad Hoc Modification of the Phillips Curve in Empirical Investigations and Forecasting ď ° Original:
%DW = F(U) ď ° Modified:
%DW = F(U, past price inflation, other variables)
The Rational Expectations Critique
Wage
Long-run curve is in fact vertical at some unemployment rate
Inflation Rate Short run
Long run
Unemployment rate
NAIRU = non-accelerating inflation rate of unemployment
a.k.a. the
Natural Rate of unemployment
Milton Friedman
Edmund Phelps
Natural Rate of unemployment
6%
5%
6%
4%
Thanks!
When there is risk of inflation and Unemployment < NAIRU
Get a job!
When there is risk of recession and Unemployment > NAIRU