Economics 2 Professor Christina Romer Spring 2018 Professor David - - PDF document

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Economics 2 Professor Christina Romer Spring 2018 Professor David Romer LECTURE 19 EMPLOYMENT AND UNEMPLOYMENT IN THE LONG RUN April 3, 2018 I. O VERVIEW II. E MPLOYMENT AND P OTENTIAL O UTPUT A. Effects of an increase in N*/ POP B. Effects

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Economics 2 Professor Christina Romer Spring 2018 Professor David Romer LECTURE 19 EMPLOYMENT AND UNEMPLOYMENT IN THE LONG RUN April 3, 2018 I. OVERVIEW

  • II. EMPLOYMENT AND POTENTIAL OUTPUT
  • A. Effects of an increase in N*/ POP
  • B. Effects of an increase in POP
  • III. DETERMINANTS OF THE NORMAL EMPLOYMENT-TO-POPULATION RATIO AND THE

NORMAL REAL WAGE

  • A. Review and modification of labor supply/ labor demand diagram
  • B. Application #1: Change in workers’ tastes (Married women)
  • C. Application #2: Change in labor demand (Low-skilled males)
  • D. Application # 3: Incentives (Marginal tax rates)
  • E. Application # 4: The large rise in real wages over time
  • IV. THE NATURAL RATE OF UNEMPLOYMENT
  • A. Definition and measurement of unemployment
  • B. Types of unemployment and the natural rate
  • C. Job rationing
  • D. Job search

V. APPLICATION: EUROPEAN UNEMPLOYMENT

  • A. Facts
  • B. Some candidate explanations
  • C. Analysis
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LECTURE 19

Employment and Unemployment in the Long Run

April 3, 2018

Economics 2 Christina Romer Spring 2018 David Romer

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SLIDE 3
  • I. OVERVIEW
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SLIDE 4

Aggregate Production Function

(1) (2) (3)

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SLIDE 5
  • II. 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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SLIDE 7

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 N* tends to lower .

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SLIDE 10
  • III. DETERMINANTS OF THE NORMAL

EMPLOYMENT-TO-POPULATION RATIO

AND THE NORMAL REAL WAGE

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SLIDE 11

The Labor Market

S D N w (real wage)

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SLIDE 12

Long-Run Labor Market Diagram

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

∗

N* N1

∗

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SLIDE 13

Application #1: Labor Force Participation Rate, Women Ages 16+, U.S., 1962–2018

Source: FRED.

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SLIDE 14

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 D1 (MRPL/P) Real Wage, w* w1

∗

w2

∗

N* N1

∗N2 ∗

S2

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SLIDE 16

Labor Force Participation Rate, Women Ages 16+, U.S., 1962–2018

Source: FRED.

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Labor Force Participation Rate, Women Ages 15–64, U.S., U.K., and Japan, 1971–2016

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

Japan U.K. U.S.

48.0 53.0 58.0 63.0 68.0 73.0 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015

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SLIDE 18

Application #2: Labor Force Participation Rate – High School Graduates, No College, Men Ages 25+, 1992–2018

Source: FRED.

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SLIDE 19

A Fall in Labor Demand (Less Educated Men)

S1 D1 Real Wage, w* N* w1

∗

w2

∗

N2

∗ N1 ∗

D2

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Application #3: Incentives and Average versus Marginal Income Tax Rates

  • Average tax rate: Total income tax/total income.
  • Marginal tax rate: The tax paid on an additional

dollar of income.

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Example

  • Consider a family earning $50,000.
  • Initially: $25,000 of income is tax-exempt because of

various deductions, the rest is taxed at 40%.

  • Average tax rate: 40%•($50,000 −

$25,000)/$50,000 = $10,000/$50,000 = 20%.

  • Marginal tax rate: 40%.
  • Now suppose there’s tax reform: Eliminates $15,000 of

deductions, lowers tax rate on rest of income to 25%.

  • Average tax rate: 25%•($50,000 −

$10,000)/$50,000 = $10,000/$50,000 = 20%.

  • Marginal tax rate: 25%.
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Labor Supply When There Are Taxes

  • Think of a household choosing between leisure

and everything else that it likes.

  • Recall: Condition for utility maximization:

MULeisure MUEverything Else PLeisure PEverything Else

  • What is PLeisure? That is, what is the opportunity

cost to the household of consuming 1 more unit of leisure?

  • PLeisure = (1 − t)•wage, where t is the marginal tax

rate. =

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SLIDE 23

A Reduction in the Marginal Tax Rate

S1 D1 (MRPL/P) Real Wage, w* w1

∗

w2

∗

N* N1

∗N2 ∗

S2

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SLIDE 24

Application #4: Real Wages over the Very Long Run

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

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SLIDE 25

Large Increases in Capital and Improvements in Technology

S1 D1 Real Wage, w* w1

∗

N* N1

∗ N2 ∗

D2 w2

∗

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SLIDE 26
  • IV. THE NATURAL RATE OF UNEMPLOYMENT
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Definitions

  • Unemployed: The number of people who are not

working and who are actively looking for work.

  • Employed: The number of people who are

working.

  • Labor force: Employed + unemployed.
  • Unemployment rate:

u = Unemployed Labor force • 100.

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The Natural Rate of Unemployment

  • The economy’s normal or usual unemployment

rate.

  • The natural rate of unemployment is more than

zero.

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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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The U.S. Unemployment Rate, 1948–2018

Source: FRED; data from Bureau of Labor Statistics.

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

Source: FRED; data from the OECD.

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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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SLIDE 33

Sources of Job Rationing

  • Minimum wage laws
  • Unions
  • Efficiency wages
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Frictional Unemployment

  • It takes time to match workers and jobs.
  • At the micro level, the economy is constantly

changing.

  • As a result, at any time there are both

unemployed workers and job vacancies.

  • This process is sometimes described as “churn.”
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SLIDE 35
  • V. APPLICATION OF OUR LONG-RUN LABOR MARKET

FRAMEWORK: EUROPEAN UNEMPLOYMENT

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Unemployment in the Euro Area, Germany, and Italy

Source: FRED; data from the OECD..

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SLIDE 37
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SLIDE 38

Some Candidate Sources of High Natural Rates

  • f Unemployment in Europe
  • Measurement issues
  • High minimum wages and strong unions
  • High payroll taxes
  • High firing costs
  • …
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SLIDE 39
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SLIDE 40

A Wage Floor

S D Real Wage, w* N* ND

∗ NS ∗

w

  • Unemployment
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SLIDE 41

Payroll Taxes, Selected Countries

Source: Wall Street Journal.

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High Payroll Taxes in the Presence of Job Rationing

S1 D1 Real Wage, w* N* ND2

∗ ND1 ∗ NS ∗

w

  • Unemployment2

D2

Unemployment1

Tax

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Firing Costs: The Example of France (until recently)

“In France it is not possible to hire employees ‘at will.’ In other words, once you have taken on an employee you may only dismiss him or her for a specific reason. “The reason or ground must be one which is recognised by French Statute …. “The dismissal procedure on disciplinary grounds is very formalised and failure to follow the procedural steps, even where the dismissal is manifestly justified on the merits, may result in the Courts overturning the dismissal and ordering the reinstatement

  • f the employee.

“Virtually all disciplinary measures are required to be in writing and generally need to be brought to the employee's attention by a registered letter sent to his or her home address ….”

Source: http://www.frenchlaw.com/employment_law.htm.

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Excerpt from France’s Code du Travail

“If, in the case of the definitive and total closing of the company, the judge cannot, without being unaware of the autonomy of this reason for the firing, deduce the fault or the blameworthy frivolity from the sole absence of economic difficulties, or, in the contrary case, deduce the absence of fault from the existence of such difficulties, it is not forbidden to him to take into account the economic situation of the company in

  • rder to evaluate the conduct of the employer.”

Source: “Macron Takes On France’s Labor Code, 100 Years in the Making,” NYT, 8/4/2017.

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Firing Costs (in the Presence of Job Rationing)

D1 Real Wage, w* N* ND2

∗ ND1 ∗ NS ∗

w

  • Unemployment2

D2

Unemployment1

S1

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SLIDE 46

Source: OECD.

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Problems with the High Marginal Tax Rate Explanation of High European Unemployment

  • A better candidate explanation for low

employment than for high unemployment.

  • Marginal tax rates are not dramatically higher in

Europe than in the U.S.

  • The evidence indicates that labor supply responds

to marginal rates, but that the responsiveness is small.