Unemployment in Recession Christopher A Pissarides London School of - - PowerPoint PPT Presentation

C A Pissarides - London School of Economics 2012

Unemployment in Recession

Christopher A Pissarides London School of Economics

The Royal Economic Society Lecture 22 November 2012

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C A Pissarides - London School of Economics 2012

Outline

• 1. Unemployment in the OCED
• 2. Supply and demand analysis
• 3. Search and matching
• 4. The Beveridge curve
• 5. Youth unemployment

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C A Pissarides - London School of Economics 2012

• 1. Unemployment in the OECD

Country differences and responses to the Great Recession

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C A Pissarides - London School of Economics 2012

Country experiences with unemployment

• Big differences in unemployment across countries, even

in years of normal economic activity

• Big differences between young and older workers
• Big differences in the response of unemployment to

recession

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C A Pissarides - London School of Economics 2012

Unemployment 2003-07 average ages 15-64 (normal times)

2 4 6 8 10 12 14 16 18 ICE KOR MEX NOR SWI NEZ LUX JAP NET IRE DEN AUT UK AUS USA SLV OECD CAN HUN SWE CZE ITA EST POR FIN BEL EU EURO CHI TUR FRA ISR GRE SPA GER SLK POL

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C A Pissarides - London School of Economics 2012

Unemployment 2003-07 average ages 15-24

5 10 15 20 25 30 35 40 NET MEX ICE SWI DEN JAP IRE AUT KOR NEZ NOR AUS USA CAN OECD UK GER SLV LUX POR EST EURO TUR HUN EU CZE CHI SWE ISR FIN FRA SPA BEL ITA GRE SLK POL

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C A Pissarides - London School of Economics 2012

Ratio of youth to all unemployed 2003-07 averages

0.5 1 1.5 2 2.5 3 3.5 4 GER NET DEN CAN SLK TUR AUT SWI MEX IRE JAP EURO EST OECD ISR POR AUS SPA EU POL USA FRA CZE SLV CHI FIN NEZ HUN BEL UK GRE NOR ICE KOR SWE ITA LUX

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C A Pissarides - London School of Economics 2012

Impact of Great Recession on unemployment: change 2007-09

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• 2

2 4 6 8 10 12

POL GER NET ISR AUT KOR BEL NOR SWI SLK LUX SLV FRA AUS GRE JAP FIN CZE POR ITA MEX EU EURO SWE DEN UK CAN NEZ HUN OECD TUR CHI USA ICE IRE EST SPA

Per cent of labour force

C A Pissarides - London School of Economics 2012

Impact of debt crisis on unemployment: change 2009-12

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• 6
• 4
• 2

2 4 6 8 10 12 14 16

TUR CHI EST GER USA CAN SWE ICE BEL AUT FIN JAP AUS MEX ISR OECD LUX KOR NOR SWI CZE FRA UK NEZ HUN NET EU EURO SLK DEN POL SLV ITA IRE POR SPA GRE

Per cent

C A Pissarides - London School of Economics 2012

Difference in unemployment rise, youths minus adults, 2007-2011

• 4
• 2

2 4 6 8 10 12 14 16 ISR GER TUR CHI JAP AUT BEL SWI NOR NET KOR MEX AUS CAN FRA OECD SWE SLV USA FIN DEN EURO ICE EU UK POL NEZ HUN EST LUX CZE ITA POR SLK IRE GRE SPA

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C A Pissarides - London School of Economics 2012

Summary of graphs I

• Even excluding Eastern European countries, in normal times

we get variations in unemployment from below 4% in Norway and Switzerland to nearly 10% in Spain, Greece and Germany (no longer true for Germany, see below)

• Youth unemployment about 2.2 times as much as overall, but

there are variations, 1.3 to 3

• Recession affected countries differently: on average about 2%

rise, but Germany/Netherlands practically no effect, Spain/Ireland nearly 10% rise

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C A Pissarides - London School of Economics 2012

Summary of graphs II

• Debt crisis affected rescue countries very badly: Greece

up by 14%, Spain up by another 6%

• Youth unemployment up by more than adult in virtually

all countries

• On average ratio of youth to adult maintained

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C A Pissarides - London School of Economics 2012

• 2. Supply and demand analysis

Can conventional supply and demand analysis explain the country differences and the recession?

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C A Pissarides - London School of Economics 2012

Supply and demand

• Traditional approach to market equilibrium is equality

between supply and demand

• When applied to the labour market econometricians find

that the supply curve is steep

• The demand curve is flatter and recession can be shown

as a fall in demand for labour

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C A Pissarides - London School of Economics 2012

The supply and demand curves

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Hours of work Real wage rate Labour supply Labour demand

C A Pissarides - London School of Economics 2012

What’s right and what’s wrong with this framework?

• It is good for the study of some things
• For example, technology, taxes, demographics,

influence employment and wages

• We can use supply and demand curves to study how

they do it

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C A Pissarides - London School of Economics 2012

Failures

• But it has no unemployment in market equilibrium!
• It fails on two other important counts
• First, it does very poorly predicting the impact of

recessions

• Second, it does not take account of many features of

modern labour markets, e.g., their institutional structure

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Effect of recession on wages and hours of work

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Hours of work Real wage rate Labour supply Labour demand boom recession

C A Pissarides - London School of Economics 2012

Responses of employment and wages

• The economy fluctuates between the two intersection

points

• Supply and demand analysis says that in recession

employment falls by a little and wages by a lot

• But in the data the opposite happens: employment falls

by a lot and wages by little

• And we cannot tell why unemployment rates differ so

much across countries

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C A Pissarides - London School of Economics 2012

Institutions

• The labour market is influenced by the “institutional

structure” that governs employment and wages

• How wages are set, how employment is regulated and

generally how flexible or rigid are the arrangements

• Partly because of the institutional structure, partly

because of preferences about work and leisure, the idea that each worker can choose her own hours of work and succeed in finding a job that will satisfy her is untenable

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C A Pissarides - London School of Economics 2012

• 3. Search and matching

Description of the approach. Modelling frictions and

• imperfections. Unemployment and vacancies.

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C A Pissarides - London School of Economics 2012

Search and matching

• The search and matching approach provides a framework that

can handle most of these issues

• It can be used to study many of the conventional issues in

labour markets plus many more

• The key departure from the conventional model is the

realisation that there is a vast amount of information that needs to be digested in labour markets

• In reality the information requirements in labour markets are

such that the market never reaches the conventional equilibrium, as if information were perfect

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Sources of information deficiencies

• Why are information requirements in labour markets more

than in other markets?

• Because of differences between persons and jobs that are

much more than differences in other markets

• Cars are broadly similar to each other; apples are similar; we

understand what we get when we buy one of these

• But workers? When we buy a worker’s time we get a very

different product with each worker

• We call these differences heterogeneities

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C A Pissarides - London School of Economics 2012

Other “imperfections”

• Heterogeneities are only part of the problem in labour markets
• There are also mobility costs: changing jobs often involves

moving an entire family

• Yet another is personal taste. A job may be liked differently by

different people because of taste differences

• We refer to all the factors that stop the market short of supply-

and-demand equilibrium and cause slow adjustment from one equilibrium to another frictions

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C A Pissarides - London School of Economics 2012

Jobs and workers: modelling

• We think in terms of single jobs
• A job is a “match” between a worker and a firm
• It is something that has value because of the product that it produces,

but to produce it, it needs two contributors, a “firm” and a “worker”

• Jobs are created and destroyed according to profit maximizing criteria
• Firms and workers agree about the jobs that should be created and the

jobs that should be destroyed, even if it requires bargaining beforehand

• Aggregate employment is the sum of all active jobs

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C A Pissarides - London School of Economics 2012

Flows of workers and jobs

• When a job is created a worker transits from another

state (for example, unemployment) into employment

• When the job is destroyed the worker leaves

employment and moves to unemployment

• So this approach is about flows between labour market

states

• For this reason search and matching is also known as

the flows approach to labour markets.

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C A Pissarides - London School of Economics 2012

Search

• Because of heterogeneity and imperfect information, the

productivity of job matches varies across the labour market

• Think of talents: workers with the same education might be

good at different tasks

• For this reason workers want to “check out” individual jobs

and job owners want to “check out” potential workers before agreeing to work together

• This is what we mean by “search”: it is the process by which

firms and workers learn about each other and get together for productive employment

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C A Pissarides - London School of Economics 2012

Unemployment and job vacancies

• Unemployment is a natural outcome. If a worker loses

her job she may not want to go immediately into another job, waiting for a good match to come along

• She is unemployed during this time
• A new worker, like young entrants, may not want to take

the first job that comes along

• Job vacancies have a symmetric place on the side of

firms

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C A Pissarides - London School of Economics 2012

Labour market flows

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Employment 1-u Unemployment u Job vacancies v Job matches (job creation) Job destruction (redundancy) Job destruction (job closure) Job matches (job creation) New entry (demand for labour) New entry (young workers) Retirements (older workers)

C A Pissarides - London School of Economics 2012

• 4. The Beveridge Curve

The key diagnostic tool of the search and matching approach.

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Bringing everything together

• Equilibrium unemployment and vacancies are given by

the equality of the flow out and the flow into each pool

• This equilibrium is usually represented by the

Beveridge curve, an equilibrium relation between unemployment and vacancies

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C A Pissarides - London School of Economics 2012

The Beveridge curve

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unemployment vacancies

Higher vacancies imply more job matches and so more exit from

• unemployment. The

unemployment pool goes

• down. This explains the

negative slope of the curve

C A Pissarides - London School of Economics 2012

Recession and the Beveridge curve

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unemployment vacancies

In recession the number of jobs coming on to the market goes down. We slide down the curve from A to B and unemployment

• rises. New equilibrium with

fewer job vacancies and more unemployed workers

A B

C A Pissarides - London School of Economics 2012

Britain in recession: The British Beveridge Curve, 2001-2012

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1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.00 4.00 5.00 6.00 7.00 8.00 9.00 vacancies unemployment 2001M1

2009M4 2012M6

A B

2008M5

C A Pissarides - London School of Economics 2012

The position of the Beveridge curve

• We now know the Beveridge curve slopes down, but

how far out is it?

• Think of two countries. They have the same number of

job vacancies but one has a Beveridge curve that is further away from the axes

• It means that the second country has smaller exit from

unemployment with the same job vacancies: the unemployed don’t meet good vacancies fast enough

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C A Pissarides - London School of Economics 2012

The Beveridge curve of two countries

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unemployment vacancies Country with fewer frictions Country with more frictions (more structural unemployment) u u’>u v A C B

If we see two countries, or the same country in two different periods, located at A and C, it is indication of differences in structural unemployment

C A Pissarides - London School of Economics 2012

What determines matching speed?

• This could be because jobs and workers are located in different

industries or regions: there is more mismatch in this economy

• It could be because workers do not have the incentive to take the

jobs quickly: generous unemployment benefit could imply this effect

• It could be because employers are careful about recruitment: strict

employment protection legislation could make them do this

• It could be that labour market policy does not give workers and firms

incentives to match: countries with active labour market policies have Beveridge curves closer to the axes

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C A Pissarides - London School of Economics 2012

The two US Beveridge curves, 2001-

• 12. Deterioration after 2010

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1 1.5 2 2.5 3 3.5 4 3.0 5.0 7.0 9.0 11.0 Vacancies %employment Unemployment %labour force

2009M4 2012M8

A B C

2008M1 2001M1

C A Pissarides - London School of Economics 2012

The two German Beveridge curves, 2005-2010: improvements after 2007

0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80 6.00 8.00 10.00 12.00 14.00

vacancies unemployment 2007M1 2005M1 2010M6 2008M9

C B A

• Recovery 2005-2006,

following reforms (Hartz reforms)

• Fast recovery 2007-2008M9

(up to Lehman collapse)

• Recession 2008M9-2010

but response of unemployment small

• Example of economy

becoming more flexible in 2007

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C A Pissarides - London School of Economics 2012

Three major economies

• Britain in long recession, with nothing much happening –

not worse, not better than start of crisis

• US slow recovery but now with higher structural
• unemployment. Due to slowing down of labour mobility

and extensions of unemployment insurance (now discontinued) (?... Still researched)

• German rapid improvement after 2007. Result of

extensive reforms and active labour market policy in 2003-05 (under Chancellor Schroeder)

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C A Pissarides - London School of Economics 2012

• 5. Youth unemployment

Why do young workers experience more unemployment than adults?

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C A Pissarides - London School of Economics 2012

Youths vs. adults

• Young workers have a handicap compared with adults: they

start unemployed; most adults are employed

• They don’t know enough about their talents, they need to

experiment and learn

• Young workers should be given the chance to go job

shopping until they discover what they are good at

• Just like they are not expected to marry their first boyfriend or

girlfriend, they should not be expected to take their first job and stick to it forever

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C A Pissarides - London School of Economics 2012

Job shopping

• A good labour market is one that gives young workers

the chance to try out many different jobs until they find the one they are best at

• They should go shopping in markets with a lot of choice
• A natural outcome of this process is unemployment: it is

normal to become unemployed for brief periods during this shopping period

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C A Pissarides - London School of Economics 2012

Youth unemployment in normal times

• Job shopping explains why youth unemployment is more than

adult unemployment in normal times

• The best kind of market that provides this experience is a

flexible market with a lot of job turnover

• In this market employers are able to take advantage of new

job opportunities and create many jobs for youths to try out

• The youth Beveridge curve is further out than the adult one

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C A Pissarides - London School of Economics 2012

Youth unemployment in recession

• But in rigid markets, or in recession, young workers stay

unemployed for too long

• Urgent to take action to avoid long term unemployment

because it destroys talents and creates social problems

• Such action is active labour market policy for youths

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C A Pissarides - London School of Economics 2012

Active labour market policy

• Extend education places, either at universities or

colleges offering more applied and shorter courses

• Teach how to look and learn about jobs
• Give some specially designed training
• Subsidise self employment or recruitment of unemployed

youths by companies

• Welfare to work programme designed for this purpose

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C A Pissarides - London School of Economics 2012

Country examples

• Germany is most successful of major countries in the ratio of

youth to adult unemployment: it has a very elaborate subsidised apprentice system for youths

• US moderately successful: it has flexible labour markets

without significant extra help. UK along similar lines but less flexibility

• Italy, Greece worst: they have rigid labour markets with a lot
• f job protection for adults and low levels of job turnover.

Spain poor for both adults and youths for similar reason

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C A Pissarides - London School of Economics 2012

Conclusions

• Unemployment increased everywhere in recession but by

different amounts

• Youth unemployment is always higher than adult, because

young workers are new entrants and need to learn about the labour market

• Search and matching approach uses the Beveridge curve to

study country responses

• Britain, US and Germany had different experiences that can

be studied within the Beveridge curve framework

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