Chapter 7: Unemployment and the labor market

Prof. Dr. Georg Stadtmann

stadtmann@europa-uni.de

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Chapter 7: LAbor MArket

1 Introduction
Some remarks

2 7.1 Job loss, job finding, and the natural rate of unemployment

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 Introduction Some remarks

Introduction

Open economies
There is always some unemployment: What determines its level?
In this chapter we do NOT study year-to-year fluctuations of the
unemployment rate.
We examine the determinants of the natural rate of unemployment.

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 Introduction Some remarks

Unemployment rate and natural rate in the US

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 Introduction Some remarks

Unemployment rate and natural rate in the US

Notes:
The natural rate for any particular moth is estimated here by
averaging all the unemployment rates from ten years earlier to the
years later.
The first data point in Jan. 1950: Average between Jan. 1940 – Dec.
1959!?!
The last data point in Dec. 2019: Average between Dec. 2009 – Nov.
2029 !?!
Future employment rates are set at 5.5 %.
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 Introduction Some remarks

Unemployment rate and natural rate in the Denmark

Notes:
Federal Reserve Economic Data https://fred.stlouisfed.org
Registered Unemployment Rate for Denmark, Percent, Monthly, Seasonally Adjusted (LMUNRRTTDKM156S)
Jan. 1970 – Jun. 2017
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 7.1 Job loss – job finding

The transition between employment and unemployment

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 7.1 Job loss – job finding

Labor force and unemployment rate

L=E +U (1)

L: Labor force (Important assumption: Labor force is fixed)

E: Number of employed workers
U: Number of unemployed workers

Unemployment rate:

U U
= (2)
L E +U

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 7.1 Job loss – job finding

Rate of job separation

The fraction of employed individuals who lose or leave their jobs each
month (rate of job separation):

s ·E (3)

When s = 0.01 = 1%
1% of the employed loose their jobs each month.
The average spell of employment last 1/0.01 = 100 months ≈ 8 years.

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 7.1 Job loss – job finding

Rate of job finding

The fraction of unemployed individuals who find a job each month

(rate of job finding):
f ·U (4)
When f = 0.2 = 20%
20% of the unemployed find a job each month.
The average spell of unemployment last 1/0.2 = 5 months.

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 7.1 Job loss – job finding

Steady state

When the unemployment rate is neither rising or falling, the labo

market has reached its steady state.
The number of people finding a job each month (f · U) must equal
the losing jobs (s · E ).

f ·U =s ·E (5)

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 7.1 Job loss – job finding

Steady state unemployment rate

f ·U =s ·E
under consideration of L = E + U → E = L − U, we get:

f · U = s · (L − U) (6)
Dividing both sides by L, yields:
 
U U
f · =s · 1− (7)
L L
Solve for U/L!

U U
f · +s =s (8)
L L

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 7.1 Job loss – job finding

Steady state unemployment rate

 
U U
f · =s · 1−
L L
Solve for U/L!

U U
f ·
+s =s (9)
L L
U
(s + f ) · = s (10)
L
U s
= (11)
L s +f
Equation (11) could also be written as:
1
U s s U 1
= · 1
⇒ = f
(12)
L s +f s
L 1+ s

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 7.1 Job loss – job finding

Steady state unemployment rate

We work with equation (11)!

U s 0.01
= = = 0.04762 (13)
L s +f 0.01 + 0.2
The steady state unemployment rate is 4.762 % which is about 5%.

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 7.1 Job loss – job finding

Steady state unemployment rate

U s 0.01
= = = 0.04762
L s +f 0.01 + 0.2
Any policy aimed at lowering the natural rate of unemployment must
either
reduce the rate of job separation or
increase the rate f job finding.
Any policy that affects
rate of job separation or
the rate of job finding
also changes the natural rate of unemployment.
But why is there unemployment in the first place?

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