Please enable JavaScript.
Coggle requires JavaScript to display documents.
30.3 What Determines the NAIRU? - Coggle Diagram
30.3 What Determines the NAIRU?
Frictional Unemployment
WHAT IS IT? → turnover of labor
(workers moving b/w jobs); people entering labor force, looking for jobs AND people leaving their jobs;
people who are unemployed while searching for jobs are said to be frictional unemployed AND ALSO =
search unemployment
voluntary
→ if a person finds a job but refuses to take it in search for more appropriate trained job
involuntary
→ worker getting laid off and cannot find
any
job offer for period of weeks, even though they are actively searching
our focus → why the NAIRU changes over time and in the extent to which economic policy can affect it
Structural Unemployment
WHAT IS IT?
→
a mismatch b/w current structure of labor force
– in terms of skills, occupations, industries, or geographical locations –
and the current structure of firms' demand for labor
The Pace of Economic Change
to meet changing demands, the structure of labor force must change HOWEVER transition is often difficult in terms of how fast economy is changing → ex: improvement in technology → fresh skills in certain field WHERE BEFORE it wouldn't have been needed → finding such skills rapidly is sometimes difficult...
↑international competition can also cause structural unemployment
; geographical distribution of world production → Δ demand labor in one country → labor adapting to such shifts; until transition is complete, structural unemployment persists
↑structural unemployment → either increase or decrease in labor demand adapting to economic changes; WHY? B/C structural unemployment revolves around economic change; positive or negative shock creates change → structural unemployment
Policies that Inhibit Changes
gov. policies can influence speed with which labor markets adapt to kinds of changes in economy
; ex: some countries adopt policies to
discourage
movement among regions, industries and occupations → ↓rate at which unemployed workers are matched with vacant jobs → ↑structural unemployment
Employment-insurance (EI) contributes to structural unemployment for two reasons:
1) ties workers' benefits to regional. u-rate where unemployed workers can collect EI benefits for more weeks in regions where unemployment is high than low; therefore, unemployed workers remain in high unemployment regions rather than move to regions where employment is more favorable;
2) workers are eligible for employment insurance only if they have worked fo a given number of weeks in previous year – known as
entrance requirement
;
in some cases, entrance requirements are low so seasonal workers may be encouraged to work for a few months and collect employment insurance and wait for next season, rather than find other jobs during off season
**ALSO; labor-market policies that make it difficult or costly for firms to fire workers also make employers more reluctant to hire workers in the first place → very common in EU, reduce amount of turnover in labor market (b/c people won't leave/lose jobs as easily) and are believed to be an important contributor to amount of longe-term unemployment in EU countries
The Frictional-Structural Distinction
in a sense, structural unemployment can be considered really long-term frictional unemployment; when one sector is demanded more than the other → reallocation of resources in short-term is
frictional
whereas long-term would be
structural
structural and frictional unemployment cannot be separated;
BUT two of them taken TOGETHER
can
be separated from cyclical unemployment
**when real GDP is at potential Y →
only* unemployment is frictional and structural → u-rate = NAIRU
Why Does NAIRU Change?
1) anything that alters the
amount
of adjustment required b/w firms, occupations, sectors or regions will cause a Δ in NAIRU
2) anything that alters the
ability
of labor force to make these adjustments will cause a Δ in NAIRU
Demographic Shifts
during baby-boom generation
, young workers in labor force rising significantly (EVEN THOUGH generally, young workers have more labor-market turnover b/c are less experienced) → ↑NAIRU; baby-boom generation age → ↓labor force → ↓NAIRU
labor-force participation of women → women during 70s and 80s tended to have higher unemployment than men → the higher unemployment was higher frictional and structural unemployment; HOWEVER, as women in workforce increased, → so did NAIRU; if such unemployment falls (as it has today) → ↓NAIRU
Hysteresis
short-run Δ in real GDP sometimes cause Δ in level of Y
; one possible reason = NAIRU being influenced by current rate of unemployment → such models get name from
hysteresis* "lagged effect"
importance of experience and on-the-job training; a recession causes new workers being unfamiliar with skills at hand; once recession ends, this "unlucky" group would be behind compared to individuals with normal histories of experience; THIS RESULTS IN ↑u-rates that will be higher than average (b/c out of recession, prices are back to Y
at higher price); IN THIS CASE → ↑NAIRU (B/C NAIRU → structural and frictional unemployment AND → new workers is part of
frictional* unemployment
Seen in EU; in times of high unemployment, those currently employed (insider) may use their bargaining power to ensure own status is maintained and prevent new entrants to labor force (outsiders) from competing effectively; RESULTS IN high unemployment that will tend to become "locked in" SEEING → outsiders are denied access to labor market→ unemployment will rise (fail to exert downward pressure on wages) → ↑NAIRU
Globalization and Structural Change
globalization has ↑rate at which labor is being reallocated across regions and sectors in economy; downside to this is that economy's labor markets are increasingly affected by Δ in demand and supply conditions elsewhere in the world → NAIRU B/C labor markets requiring more frequent and larger adjustments to economic events worldwide =
↑structural unemployment occurring → ↑NAIRU
Policy and Labor-Market Flexibility
employment insurance (EI) and ↑NAIRU = ↓flexibility of labor market; such inflexibility is an important cause of unemployment
ex: if workers are unable or unwilling to move b/w regions or b/w industries → Δ structure of economy can cause unemployment; if it is costly for firms to hire workers, firms will find other ways of increasing output
the less flexible the labor market, the higher structural unemployment will be
mandated job security
for workers ALSO REDUCES LABOR-MARKET FLEXIBILITY; requirement several months' pay before laying off someone (show cause of firing process; if not, employers can be subjected to costly delays and even litigation on employers part leads them to be very hesitant about hiring workers in first place → ↑NAIRU