Steady-State Rate of Unemployment

Notations:

$L$ labor force
$E$ employed workers
$U$ unemployed workers
$l$ fraction of employed people who lose their jobs
$h$ fraction of unemployed people who get their jobs (short for hire)

当达到 Steady State 的时候，即 $lE = h U$ ，由 $L = E + U$ 推导可以得到 $\frac{U}{L} = \frac{l}{l + h}$ ，which is also unemployment rate.

Distinguishing Between Types of Unemployment

This should use the Beveridge Curve.

$\frac{U _{2} - U _{1}}{L}$ stands for Cyclical Unemployment

$\frac{U _{1}}{L}$ stands for Frictional Unemployment and Structural Unemployment

Causes of Unemployment

Job Search

Job search means higher Frictional Unemployment. Imperfect Information forces the job seekers to go from firm to firm in search of job openings and information regarding the rates to pay, working condition and so on.

Now, lets discuss about the job search model.

We define $M C_{A}$ is the $MC$ of the job search, it is upward sloping and indicating that additional search is subject to $↑ MC$

Search Cost has two components:

Direct Cost:
Opportunity Cost

When number of job contacts increases, the Opportunity Cost increases.

We then define $M B_{A}$ is the marginal benefit of the job search, which is subject to diminishing return.

For example, in $N_{1}$ , the $M C_{A} < M B_{A}$ so the worker should contact more firms for jobs. Only at $N_{2}$ the net benefit of the job searcher is maximized.

Implications of Stigler’s Model

Job search is a kind of human capital investment. That means you pay now but receive benefit later (the definition of Investment)
Length of job search varies among individuals.
Any factor that reduces $MC$ of job search decrease the length of job search.

Rigid Wages

中文：刚性工资

It is downwardly inflexible money wage rates in the labor market.

Suppose initial wage rate = $w_{1}$ , suppose now that the economy is declining so the labor demand reduces from $D_{1} \to D_{2}$

However, due to the minimum wage law, we set the wage to be $w_{1}$ so the total labor force will be in $e_{3}$ which is $L_{3}$ .

Why money wage rates are downwardly inflexible?

Union and Minimum Wage Laws
Implicit Contracts: all workers prefer a stable stream of income.
Transfer Program such as unemployment

Compensation program make wage rates inflexible as workers prefer a higher unemployment rate but higher wage rates.

Turnover and Training:

When economy is bad, boss will overpay you to keep you here to get the return of this investment. Training here means On Job Training

Efficiency Wage Theorem

Work effort depends on wage rates, and the cost of monitoring workers is very high. (Principal-Agent Model problem) So that the firm would overpay the workers (above the equilibrium case in the market). We define the lazy workers as shirking workers.

At point $F$ , the employment level is very low

At point $G$ , the employment level is very high, need to attract lots of non-shirking people.

In Equilibrium, $w = w_{NS}$ At $Q$ . Here, $S > D$ but no downward pressure forcing the $w_{NS}$ toward $w^{*}$ if $w < w_{NS}$ . That means, even there are more supply than the demand, the wage won’t get down to reach the market clear.

We define that the Involuntary Unemployment as $E - E_{NS}$ which is the unemployed workers who want to find a job.

Wage would be sticky over the business cycle.

From this graph we could easily figure out that the $Δ w^{*} < Δ w_{NS}$ . So it is downwardly sticky.

$e_{0}$ is the market clearing equilibrium. When the labour demand shift down, the long run equilibrium shift from $e_{0} \to e_{1}$ . $f_{1}$ is the current situation.

Higher Female Labour Participation Rate

Women have higher tendency to move frequently from job to job or in and out labour force. ⇒ Generate higher unemployment rate.

For the exercise, go this: Exercise for Unemployment

HZD's Digital Garden

Unemployment