Economics 2 Professor Christina Romer Spring 2016 Professor David - - PDF document

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Economics 2 Professor Christina Romer Spring 2016 Professor David - - PDF document

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Economics 2 Professor Christina Romer Spring 2016 Professor David Romer LECTURE 19 EMPLOYMENT AND UNEMPLOYMENT IN THE LONG RUN March 31, 2016 I. O VERVIEW II. H ISTORICAL E VIDENCE OF T ECHNOLOGICAL C HANGE A. New production techniques B.

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Economics 2 Professor Christina Romer Spring 2016 Professor David Romer LECTURE 19 EMPLOYMENT AND UNEMPLOYMENT IN THE LONG RUN March 31, 2016 I. OVERVIEW

  • II. HISTORICAL EVIDENCE OF TECHNOLOGICAL CHANGE
  • A. New production techniques
  • B. New goods
  • C. Better institutions
  • III. SOURCES OF TECHNOLOGICAL PROGRESS
  • A. Supply and demand diagram for invention
  • B. Factors that could shift the supply and demand curves
  • C. Policies to encourage technological progress
  • IV. EMPLOYMENT AND POTENTIAL OUTPUT
  • A. Effects of an increase in N*/ POP
  • B. Effects of an increase in POP

V. DETERMINANTS OF THE NORMAL EMPLOYMENT-TO-POPULATION RATIO AND THE NORMAL REAL WAGE

  • A. Review and modification of labor supply/ labor demand diagram
  • B. Change in workers’ tastes (Married women)
  • C. Change in labor demand (Low-skilled males)
  • D. The large rise in real wages over time
  • VI. THE NATURAL RATE OF UNEMPLOYMENT
  • A. Definition
  • B. Job rationing
  • C. Job search
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LECTURE 19

Employment and Unemployment in the Long Run

March 31, 2016

Economics 2 Christina Romer Spring 2016 David Romer

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Announcements

  • Midterm 2 Logistics:
  • Thursday, April 7, 3:30–5:00
  • Sections 109, 110, 111, 112 (GSIs Dounia

Saeme and Jeanette Ling) go to 245 Li Ka Shing Center (corner of Oxford and Berkeley Way).

  • Everyone else come to the usual room (2050

VLSB).

  • You do not need a blue book; just a pen.
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Announcements (continued)

  • Midterm Format:
  • Sample midterm.
  • Problems; true/false/uncertain questions;

multiple choice.

  • Midterm Coverage:
  • All of the material since the first midterm

(starting with monopoly) and up through lecture on April 5th (saving and investment).

  • Lecture, section, textbook, and additional

readings.

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SLIDE 5

Announcements (continued)

  • Places to Get Help:
  • Professor Office Hours: Monday, April 4th,

3:30-5:30. No office hours on Wednesday, April 6th.

  • GSI office hours.
  • Review session on Tuesday, April 5th, 5:15-

6:30 p.m. in 2050 VLSB.

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SLIDE 6
  • I. OVERVIEW
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SLIDE 7

Material for Today

  • Finish up discussion of technological change.
  • Move on to discussion of employment and

unemployment in the long run.

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SLIDE 8

Aggregate Production Function

(1) (2) (3)

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Technological change is a key determinant of economic growth.

  • Argument by elimination: If it is not N*/POP or

K*/N*, it must be T.

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SLIDE 10
  • II. HISTORICAL EVIDENCE OF TECHNOLOGICAL CHANGE
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New Production Techniques

  • New machines (electric motor)
  • New methods of organization and management

(assembly line, accounting).

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Early Textile Mill

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Modern Textile Factory

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New Products

  • Another way to create improvements in the

standard of living.

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SLIDE 15
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Better Institutions

  • Opening up to trade (U.S.)
  • More reliance on market forces (China)
  • More stable governments and more secure

property rights

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SLIDE 17
  • III. SOURCES OF TECHNOLOGICAL PROGRESS
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SLIDE 18

D1 Q P S1 P1 Q1

Market for Inventions

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SLIDE 19

Factors Increasing the Supply of Inventions

Q P D1

P1 Q1

S1 S2

  • 1. Luck
  • 2. Education
  • 3. Spillovers from

investment

  • 4. More secure

property rights

  • 5. Others?

P2 Q2

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Factors Increasing the Demand for Inventions

Q P D1

P1 Q1

S1

  • 1. More secure

property rights

  • 2. Increased

competition

  • 3. National

emergencies

  • 4. Others?

P2 Q2

D2

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SLIDE 21

Policies to Encourage Technological Progress

  • Increase education
  • Subsidize research and development, particularly

for basic science

  • Encourage investment
  • Make property rights more secure
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SLIDE 22
  • IV. EMPLOYMENT AND POTENTIAL OUTPUT
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Decomposition of Potential Output per Person

where:

  • Y* is potential output;
  • POP is population;
  • N* is normal employment.
  • is the normal employment-to-population ratio.
  • is normal average labor productivity.
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Employment-to-Population Ratio in the U.S.

Source: Frank, Bernanke, Antonovics, and Heffetz, Principles of Economics.

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Source: Charles Jones and Dietrich Vollrath, Economic Growth.

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Employment and Potential Output

  • Increases in will raise .
  • But, the effect is limited:
  • can’t vary very much.
  • There are countervailing effects on average

labor productivity: An increase in POP for a given lowers because it reduces .

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SLIDE 27
  • V. DETERMINANTS OF THE NORMAL

EMPLOYMENT-TO-POPULATION RATIO

AND THE NORMAL REAL WAGE

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SLIDE 28

The Labor Market

S D w N

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Long-Run Labor Market Diagram

S D (MRPL/P) Real Wage, w* w1

∗

N* N1

∗

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Labor Force Participation Rate for Women in the U.S.

Source: Bureau of Labor Statistics.

50 55 60 65 70 75 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011

Percent

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Source: Claudia Goldin, “Gender Gap,” The Concise Encyclopedia of Economics.

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An Increase in Labor Supply (Women in the U.S.)

S1 D (MRPL/P) Real Wage, w* w1

∗

w2

∗

N* N1

∗N2 ∗

S2

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SLIDE 33

Labor Force Participation Rate for Women in the U.S.

Source: Bureau of Labor Statistics.

50 55 60 65 70 75 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011

Percent

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Female Labor Force Participation Rate in the U.S., the U.K., and Japan

Source: Organisation for Economic Co-operation and Development (OECD).

50 55 60 65 70 75 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011

U.S. U.K. Japan

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Labor Force Participation Rate – High School Graduates, No College, 25 yrs. & over, Men

Source: Bureau of Labor Statistics.

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A Fall in Labor Demand (Less Educated Men)

S D1 Real Wage, w* N* w1

∗

w2

∗

N2

∗N1 ∗

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Real Wages in the U.K. over the Very Long Run

From: Clark, “The Condition of the Working Class in England, 1209-2004”

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Large Increases in Capital and Improvements in Technology

S D1 Real Wage, w* w1

∗

N* N1

∗ N2 ∗

D2 w2

∗

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  • VI. THE NATURAL RATE OF UNEMPLOYMENT
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The U.S. Unemployment Rate, 1948–2016

Source: FRED; data from Bureau of Labor Statistics.

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Unemployment in the U.S., Japan, and France

Source: FRED.

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The Natural Rate of Unemployment

  • The economy’s normal or usual unemployment

rate.

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Types and Sources of Unemployment

  • Cyclical unemployment
  • Caused by output being below potential
  • Structural unemployment
  • Caused by job rationing
  • Frictional unemployment
  • Caused by turnover and job search

Normal or natural unemployment consists of structural and frictional unemployment.

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Job Rationing

S D (MRPL/P) Real Wage, w* w1

∗

N* ND

∗ N1 ∗ NS ∗

w

  • Structural

unemployment

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Sources of Job Rationing

  • Minimum wage laws
  • Unions
  • Efficiency wages