曼昆第10版讲义mankiw10e-irm-ch07

|CHAPTER7 UnemploymentandtheLaborMarket

LectureNotes|

CHAPTER7

UnemploymentandtheLaborMarket

NotestotheInstructor

ChapterSummary

Thisisarelativelyeasychapterthatexaminesthedeterminationofthenaturalrateofunemployment.Itdiscusseswhyallfree-marketeconomieshavesomeunemploymentandwhatdeterminestheunemploymentrateinthelongrun.Inkeepingwiththelong-runfocusofPartIIofthebook,thischapterabstractsfromcyclicalunemploymentcompletely.

Thechapterhasfourprimarygoals:

1. Toshowthatunemploymentisthenaturalconsequenceoflaborforcedynamicsandthattherateofunemploymentisdeterminedbytheratesofjobseparationandjobfinding.

2. Todiscusshowtheprocessofjobsearchleadstofrictionalunemploymentandhowgovernmentpoliciessuchasunemploymentinsuranceinfluencetheamountoffrictionalunemployment.

3. Todiscussthevariouscausesofwagerigidity(minimumwages,unions,andefficiencywages)andalsohowwagerigidityleadstostructuralunemployment.

4. ToteachsomeoftheimportantfactsaboutpatternsofunemploymentintheUnitedStatesandinEurope.

Comments

Itshouldbepossibletopresentthematerialinthischapterinonelecture.Whenpresentingthismaterial,Istressthereasonswhywecareaboutunemployment;thelecturenotesreflectthis.Ialsoliketodiscussefficiency-wagetheoriesinmoredetail;thereareanumberofsupplementsonthistopic.

UseoftheEWebsite

UsetheEwebsitetodownloadannualdatafortheunemploymentrateintheUnitedStates,Germany,Japan,Canada,andtheUnitedKingdomoverthepast40years.Assesswhethertheserateshavegenerallymovedtogetherornot.

ChapterSupplements

Thischapterincludesthefollowingsupplements:

7-1 SocialCostsofUnemployment

7-2 JobFindingandJobSeparation

7-3 AMoreGeneralTheoryoftheNaturalRateofUnemployment

7-4 DutchMaleUnemploymentandUnemploymentBenefits(CaseStudy)

7-5 RobertLucasand$500Bills

7-6 MoreontheMinimumWage

7-7 MinimumWagesandEfficiencyWages

7-8 ImplicitContracts

7-9 TheTwoViewsofUnions

7-10 EfficiencyWagesI:TheSolowCondition

7-11 EfficiencyWagesII:TheShapiro–StiglitzModel

7-12 EfficiencyWagesandWageDifferentials

7-13 MoreonHenryFord(CaseStudy)

7-14 MoreontheDurationofUnemployment(CaseStudy)

7-15 TrendsinUnemployment

7-16 TheSecretstoHappiness

7-17 AdditionalReadings

LectureNotes

Introduction

Thelong-runmodeloftheeconomyhasthusfarassumedfullemployment.OurdiscussionofthelabormarketinChapter3ignoredtherealitythatnoteveryoneinthelaborforcehasajob.Wenowturntooneofthemostcloselywatchedmacroeconomicvariables—unemployment.Weretainourlong-runfocus:ourconcernisnotfluctuationsinunemploymentbutthelong-runlevelofunemployment.Fluctuationsinunemployment,likefluctuationsinincome,areaproblemthatwedeferuntilweanalyzetheshort-runbehavioroftheeconomy.Thelong-runoraveragelevelofunemploymentissometimesknownasthenaturalrateofunemployment.

Inouranalysisoftheclassicalmodel,wetookthesuppliesofcapitalandlaborasgivenandassumedthateachwasfullyutilized.Here,wecontinuetoassumeaconstantsupplyoffullyutilizedcapitalbutallowforthesupplyoflabortodifferfromtheamountemployedintheproductionofgoodsandservices.Wealsodiscusshowlaborsupplyandpopulationarerelated.

Supplement7-1,“SocialCostsofUnemployment”

Whydoeconomistscareaboutunemployment?Perhapsthemainreasonthataneconomistwouldgiveisnottheonethatwouldimmediatelyspringtothemindofanoneconomist.Sincelaborisaninputintotheproductionofgoodsandservicesthatpeoplewanttoconsume,unemploymentmaysignalawasteofascarceresource.Otherreasonsincludethesignificanthumanandsocialcostsofunemploymentandthefactthattheprospectofunemploymentconfrontsindividualswithundesirableuncertaintyaboutfutureincome.Finally,theburdenofthecostofunemploymentisbornelargelybythosewhoareunemployed;itisnotdistributedevenlyacrosssociety.

Figure7-1

Whydoweexpectanyunemploymentatallinthelongrun?Itmightseemthatawell-functioningeconomywouldbeonewithoutanyunemployment.Butthisisalmostcertainlynotthecase.Mostbasically,inawell-functioningeconomy,peoplewillbemovingintoandoutofthelaborforceandwillbeswitchingbetweenjobs.Often,thisprocessmeansthatpeoplewillspendsometimeunemployedbeforeorbetweenjobs.Thus,wealwaysobservesomeunemploymentinamarketeconomy.

7-1 JobLoss,JobFinding,andtheNaturalRateofUnemployment

Toobtaininsightintotheworkingsofthelabormarket,considerasimplemodelofflowsintoandoutofemployment.Weassumethatthelaborforceisfixed(=L);thatis,wetakeasgiventhepopulationandthelaborforceparticipationrate.RecallfromChapter2thatthelaborforceequalsthesumofemployedandunemployedworkers:

U+E=L.

Supplement7-2,“JobFindingandJobSeparation”

Supposethataconstantfractionofunemployedworkersfindnewjobseverymonth.Wewilldenotethisfractionbyf,thejob-findingrate.Then,fUworkersmovefromunemployedtoemployedstatuseverymonth.Similarly,supposethataconstantfractionsofemployedworkersmoveintounemployment,eitherbecausetheyquitorbecausetheyarefired;wecallstheseparationrate.(Notethatthisdoesn’tprecludethepossibilityofpeopleswitchingjobswithouteverbeingunemployed;suchchangesaresimplynotcounted.)Hence,sEworkersmovefromemployedstatustounemployedstatus.Welookforasituationwherethelevelsofemploymentandunemployment(andhencealsotheemploymentandunemploymentrates)areconstant.Forthistobetrue,flowsintoemploymentmustexactlymatchflowsoutofemployment:

fU=sE.

Figure7-2

Wecanusethisequationandthedefinitionofthelaborforcetosolvefortheemploymentandunemploymentrates.Since

L=E+U,

itfollowsthat

1=E/L+U/L.

Also,

E/L=(f/s)(U/L).

So

Similarly,wehave

Fromthissimplemodel,wecandrawanequallysimplebutimportantconclusion:policiestoaffectthenaturalrateofunemploymentmustchangeeitherthejob-findingrateortheseparationrate.Inparticular,ifpolicymakerswishtoreducetheunemploymentrate,theymustincreasethejob-findingrateand/ordecreasethejob-separationrate.

Supplement7-3,“AMoreGeneralTheoryoftheNaturalRateofUnemployment”

Thedeeperquestionsofunemployment,however,arenotaddresseddirectlybythismodel.First,wewanttoknowwhyweobserveunemploymentinsociety—or,intermsofthismodel,whytheseparationrateisnotverysmallorthejob-findingrateisnotverylarge.Second,wemightwonderwhetherornotpolicymakerswouldwanttochangethenaturalrateofunemployment(and,relatedtothis,wewouldliketoknowwhatsortsofpolicieswillaffectthenaturalrate).

Therearetwomainreasonswhytheunemploymentrateisnotzero.Wehavealludedtothefirstalready:workersmayspendsometimeunemployedintheprocessofmovingbetweenjobs.Thesecondisthat,foravarietyofreasons,thelabormarketmightnotbeinequilibriumatthepointwheresupplyequalsdemand.Weconsidertheseinturn.

7-2 JobSearchandFrictionalUnemployment

Workersandfirmsspendtimesearchingforeachother.Ourmodelssofarhaveassumedthatallworkersandallfirmsareidenticalbut,obviously,therearemanydifferenttypesofjobsandmanydifferenttypesofworkers.Aneconomythatisfunctioningwellisonethatmatchesupjobsandskills;inacomplexeconomy,wecannotexpectsuchmatchestooccurinstantaneously.Moreover,firmsandworkerssometimesneedtimetolearnaboutoneanother;itmaybenecessary,forexample,foraworkertotryafewjobsbeforefindingtheonemostsuitable.

Thus,weshouldexpect,andindeedweshouldregardasdesirable,thatunemployedworkersdonottakethefirstjobthatbecomesavailableandthatfirmsdonothirethefirstapplicantforaposition.Instead,timeandeffortarespentintheprocessofsearching,intheattempttofindagoodmatchbetweenworkersandfirms.Theresultingunemploymentistermedfrictionalunemployment.Frictionalunemploymentmeansthatthejob-findingrateislessthanone,anditalsohelpstoexplainwhytheseparationrateispositive.Notethatprivateinstitutions—employmentagenciesandheadhunters—havedevelopedinanattempttoimprovethematchingofworkersandfirms.

CausesofFrictionalUnemployment

Thetypesofgoodsthathouseholdsandfirmspurchasechangeovertime.Whenspendingshiftsfromcertaintypesofgoodstoothers,thedemandforlaborthatproducesthosegoodsalsoshifts.Thischangeincompositionofdemandamongindustriesorregionsisknownasasectoralshift.Inadynamiceconomy,sectoralshiftsarealwaysoccurring,andbecauseittakestimeforworkerstomovefromcontractingsectorstoexpandingones,theeconomywillexperiencefrictionalunemployment.Othercausesofjobseparationandfrictionalunemploymentincludechangesinthedemandforcertaintypesoflaborskills,firmfailures,joblossduetopoorperformance,andquittingajobtostartanewcareerormovetoanewregion.

PublicPolicyandFrictionalUnemployment

Recognizingthatsomefrictionalunemploymentisdesirableinamarketeconomyistheeasypart.ItismuchhardertoknowwhethertheU.S.economyexhibitstoomuch,toolittle,ortherightamountoffrictionalunemployment.Toputthisanotherway,itisunclearwhetherfirmsandworkersspendtoomuchortoolittleeffortinthebusinessofsearchingforeachother.Themainreasonwhythisisunclearisthatfirms’andworkers’searchdecisionsgenerateexternalities.Whenafirmandaworkeraresuccessfullymatched,theybothderivesomebenefit.Aworkerwhochoosestosearchharderismorelikelytogetagoodmatch.Butagoodmatchbenefitsthefirmaswell;thereisanexternalbenefittothefirm.Sincetheworkerdoesnotgetallthebenefitfromhiseffort,heislikelytoworktoolittlefromasocialperspective.Exactlythesameargumentappliestothefirm.Thus,wemightactuallyfindpeoplesearchingtoolittle,acceptingjobstooreadily,andfindingjobsataratetoohighfromasocialpointofview.Thiswouldmean,perhapssurprisingly,thatwewouldhavetoolittleunemployment.

Wecannotdrawsuchaconclusionwithconfidence,however,becausetherearemanydifferentsortsofexternalitiesassociatedwithworkers’andfirms’searchingdecisions.Itis,thus,notpossibletoconcludeunequivocallythatwehavetoomuchortoolittlesearchunemployment.Thisisanimportantareaofcurrentresearchinlaboreconomics.

Manygovernmentpoliciesinfluencetheamountoffrictionalunemploymentthatweseeintheeconomy.Perhapsmostimportantly,unemploymentinsuranceinfluencesindividuals’incentivestosearch.Unemploymentinsuranceallowsunemployedworkerstocollectsomepaymentsfromthegovernmentwhiletheyareunemployed.Thisreducestheimmediatenecessityforworkerstoacceptthefirstjobthatcomesalongandsomayincreasethenaturalrateofunemployment.Thepresenceofunemploymentinsurancemayalsomakefirmsmorewillingtolayoffworkers.

Ofcourse,themainpurposeofunemploymentinsuranceisnottoaffectthenaturalrateofunemployment;thisisperhapsbetterthoughtofasasideeffect.Unemploymentinsuranceisdesignedtomitigatesomeofthehardshipassociatedwithbeingunemployed;itthushasdistributionalgoals.Italsoreducesuncertaintyaboutworkers’incomes.

CaseStudy:UnemploymentInsuranceandtheRateofJobFinding

Supplement7-4,“DutchMaleUnemploymentandUnemploymentBenefits”

Anotherpieceofevidencesuggestingalinkbetweenunemploymentinsuranceandthelevelofunemploymentisthefactthattheprobabilityoffindingajobincreasesmarkedlywhentheworkerceasestobeeligibleforunemploymentinsurance.

7-3 Real-WageRigidityandStructuralUnemployment

Anotherreasonwhywemayobservesomeunemploymenteveninthelongrunisreal-wagerigidity.Theclassicalmodelassumedthattherealwageadjuststobringaboutequilibriuminthe

Figure7-3

Supplement7-5,“RobertLucasand$500Bills”

labormarket.Thisisinkeepingwiththestandardeconomists’approachtomarkets:pricesadjusttobringaboutequalitybetweensupplyanddemand.Nevertheless,therearereasonswhythelabormarketmayberatherdifferentfrom,say,themarketforsoybeans;theremaybereasonswhytherealwagemightgetpermanentlystuckatalevelabovethatconsistentwithequilibrium.Weconsiderthreereasons:minimum-wagelaws,unions,andefficiencywages.Allprovideexplanationsofwhytherealwagemaybe“toohigh,”implyingthatsomeworkersmaybeunemployed.Theresultingunemploymentisoftenreferredtoasstructuralunemployment.Workersareunemployednotbecausetheyaresearchingforagoodmatch,butbecausethesupplyoflaborexceedsthedemandforlabor.Workersarewaitingforjobstobecomeavailableatthecurrentwage.

Minimum-WageLaws

Minimum-wagelawsareanobviousreasonwhytherealwagemightnotclearthemarket.Iftheequilibriumwageisbelowthegovernment-mandatedwage,thenweimmediatelyhavewagerigidity.Inpractice,ofcourse,minimum-wagelawsareirrelevantformanyworkerssincetheyarepaidmuchmorethantheminimumwage.Butforsomeworkers—primarilyyoungand/orunskilledworkers—thisconstraintmayberelevant.

Supplement7-6,“MoreontheMinimumWage”

Economistsareoftenopposedtominimum-wagelaws,notnecessarilybecausetheyareopposedtoimprovingthelotofthepoorbutbecausetheydon’tthinkthattheminimumwageisaveryefficientorfairmeansofdoingso.Ifouranalysisisright,theminimumwagewillmakethosewhohavejobsbetteroff(becausetheywillearnmorethantheequilibriumwage),butitwillalsomeanthatsomepeoplewhowouldhavehadjobsarenowunemployed,andhence,worseoffthanwithoutminimum-wagelaws.Moreover,itisnotclearthattheminimumwagereallyhelpstheworkingpoor:headsofhouseholdsrepresentlessthanone-quarterofthoseearningtheminimumwage,whileteenagersmakeupmorethanone-third.Abetterpolicyoptionmightbetheearnedincometaxcredit,whichgivespoorfamiliesanincometaxbreak.

UnionsandCollectiveBargaining

Table7-1

Unionsprovideanotherexplanationofreal-wagerigidityofdifferingimportanceindifferentcountries.Wageagreementsbetweenunionsandfirmsusuallysetwagesandletthefirmchoosethelevelofemployment.Thebargainingprocessbetweenthefirmanditsworkersmightwellleadtoawageabovethatconsistentwithsupplyequaltodemand.Inessence,thisisbecausethelabormarketlosesthefeaturesofacompetitivemarket;instead,workershavesomemonopolypower,whichallowsthemtosetawageabovethemarket-clearinglevel.

Supplement7-7,“MinimumWagesandEfficiencyWages”

Justaswithminimum-wagelaws,theresultisthatthosewhoareemployedarebetteroff,andthosewhoareunemployedareworseoff.Economistssometimescharacterizethissituationasaninsider/outsiderproblem.Theunionizedworkersareinsiders;theunemployedareoutsiders.Iftheinsidershaveenoughpower,theoutsidersmaynotbeabletopersuadethefirmtoemploythem,evenatalowerwage.

Supplement7-8,“ImplicitContracts”

Supplement7-9,“TheTwoViewsofUnions”

Itdoesnotnecessarilyfollowthatunionsarebadfortheeconomy.Unionshavehadmanydifferenteffectsonthepayandworkingconditionsofworkers,andlaboreconomistscontinuetoanalyzetheseeffects.Thelong-termrelationshipbetweenaunionandafirmmayhavemanydesirableconsequences.

EfficiencyWages

Anotherclassoftheoriesthathasrecentlybeendevelopedtoexplainreal-wagerigidityisefficiency-wagemodels.Thestartingpointofthesemodelsistheideathatworkers’productivitymightbepositivelyrelatedtothewagestheyarepaid.Inthiscase,itisnolongerobviousthatfirmsalwayspreferthewagetobelower.Thus,insuchasetting,afirmmightnotwanttoemployaworkerwillingtoworkforlessthanthegoingwagebecausethefirmmightalsothinkthatworker’sproductivitywouldbelower.

Supplement7-10,“EfficiencyWagesI:TheSolowCondition”

Supplement7-11,“EfficiencyWagesII:TheShapiro–StiglitzModel”

Supplement7-12,“EfficiencyWagesandWageDifferentials”

Thesetheorieshadtheiroriginindevelopmenteconomics,wheretheideawasthat,atverylowlevelsofincome,higherwageswouldmeanbetternutritionand,hence,higherproductivity.Morerecenttheorieshavedrawnoutlinksbetweenwagesandproductivitythataremoreplausiblefordevelopedeconomies.Onesuchlinkisthatfirmspayinghighwagesmaybeabletoattractbetterworkersandreduceturnover.Anotheristhathighwagesmayimproveworkers’effortanddiscourageshirking.

CaseStudy:HenryFord’s$5Workday

Supplement7-13,“MoreonHenryFord”

Onefamousexperiment,datingfrom1914,seemstosupporttheideaofefficiency-wagetheory.Fordintroducedadailywageof$5,whichwasapproximatelytwicetheprevailingwageatthetime.Theevidencesuggeststhatthispolicydidindeedpayoffintermsofgreatereffort,lowerabsenteeism,andotherbenefits.

7-4 Labor-MarketExperience:TheUnitedStates

TheDurationofUnemployment

Supplement7-14,“MoreontheDurationofUnemployment”

Evidenceonthedurationofunemploymentcanhelpusascertaintherelativeimportanceoffrictionalandstructuralunemployment.Whileshortunemploymentspellsmaywellbeduetofrictionalunemployment,long-termunemploymentismorelikelytoindicatestructuralunemployment.Itturnsoutthat,whilemostspellsofunemploymentareshort,totalunemploymentisprincipallyaccountedforbythefewerspellsoflong-termunemployment.Policiesdesignedtoreducethenaturalrateofunemployment,therefore,needtobetargetedattherelativelyfewlong-termunemployed.

CaseStudy:TheIncreaseinU.S.Long-TermUnemploymentandtheDebateoverUnemploymentInsurance

Figure7-4

Duringthesevererecessionof2008–2009,thedurationofunemploymentrosesignificantlymorethaninpreviousrecessions.SomeeconomistsbelievethesharpincreaseindurationresultedfromexpandedunemploymentinsurancebenefitsthatCongresspassedinearly2009.Othereconomistsarguethattheeffectofextendingthetimepeoplecouldcollectbenefits(fromtheusual26weeksto99weeks)reducedtheincentivetoseekworkonlyslightly.Theseeconomistspointtotheabsenceofjobsduringthedeeprecession,notalackofdesiretofindwork,asthereasonfortheprolongeddurationofunemployment.

VariationintheUnemploymentRateAcrossDemographicGroups

Table7-2

Supplement7-15,“TrendsinUnemployment”

Theunemploymentratevariesacrossdemographicgroups.Youngerworkershavenotablyhigherunemploymentratesthanolderworkers,andblackshavenotablyhigherunemploymentratesthanwhites.Differencesinunemploymentratestendtobeduemoretodifferencesinjob-separationratesthantodifferencesinjob-findingrates.Higheryouthunemploymentmay,therefore,reflecttheprocessofyoungworkersseekingagoodjobmatch.Thehigherunemploymentratesforblacksarelesseasilyexplicableineconomicterms.

TransitionsintoandoutoftheLaborForce

Thesimplemodelpresentedatthestartofthischapterconsideredonlyflowsintoemploymentandunemploymentandheldthelaborforcefixed.Manyoftheunemployedatanytimeareneworrecententrantsintothelaborforceandperhapsarenotsearchingactivelyforajob.Bycontrast,unemployedworkersoftenwithdrawfromthelaborforce,perhapsbecausetheycannotobtainajob.Suchdiscouragedworkersdonotshowupasunemployedintheofficialunemploymentdata.

Table7-3

Inaddition,someworkersmayonlybeabletofindpart-timejobs,eventhoughtheywouldprefertoworkfulltime.Theseworkersareofficiallycountedasemployed,butamoreappropriatedescriptionmightbe“underemployed.”TheBureauofLaborStatisticsprovidesseveralalternativemeasuresoflaborunderutilization—somebroaderandsomenarrowerthantheofficialunemploymentrate—tohelpgaugetherelativeimportanceoftheseissues(seeSupplement2-11,“AlternativeMeasuresofUnemployment”).

CaseStudy:TheDeclineinLabor-ForceParticipation:2007to2017

Thelabor-forceparticipationratefellfrom66.1percentin2007to63.0percentin2014.Thisdeclinefollowedanearlytwo-decadeperiodduringwhichtheratehadfluctuatednarrowlybetweenabout66percentand67percent.ArecentstudyattheFederalReserveBankofPhiladelphialooksatindividualsnotinthelaborforcetoassesswhytheyarenotworkingorlookingforwork.Abouttwo-thirdsoftheincreaseinnonparticipationisaccountedforbyanincreaseinretirement,primarilyreflectingtheagingofthebaby-boomgeneration.Thisdropinlabor-forceparticipationisnotnecessarilyanadversedevelopment:retirementmayrepresentabeneficialchangeafteralifetimeofwork,andstayinginschoollongermeansmoreinvestmentinproductivity-enhancingeducation.Butasmallerlaborforcethanwouldotherwisebethecasealsoimpliesasmalleroutputofgoodsandservicesand,thus,lowerGDP.

Figure7-5

Table7-4

Butanagingpopulationisnottheonlyreason.Laborforceparticipationforthoseintheirprimeworkingyears(ages25to54)hasdeclined,thoughnotassharplyasfortheoverallpopulation.Possiblereasonsincludeincreaseduseofgovernmentdisabilityprograms,lessdemandforunskilledworkersresultingfromglobalizationandtechnologicalchange,increasedopioiddrugaddiction,andexpandedleisureopportunitiesduetonewandbettervideogames.

7-5 Labor-MarketExperience:Europe

TheRiseinEuropeanUnemployment

Europe’sexperienceofunemploymenthasbeenratherdifferentfromthatoftheUnitedStates.InmostEuropeancountries,unemploymentrosesubstantiallyintheearly1980sandhassinceremainedstubbornlyhigh.Thetwomainreasonsthathavebeenadvancedtoexplainthisunemploymentaregenerousunemploymentbenefitsandadecreaseindemandforunskilledlabor.

Figure7-6

UnemploymentbenefitsarehigherinEuropethanintheUnitedStates,andworkersaregenerallyeligibleforsuchbenefitsforalongerperiodoftime.Asthediscussionearlierinthechaptershowed,thiswilltendtoincreasetheequilibriumunemploymentrate.ThedemandforunskilledlaborhasfalleninEuropeandintheUnitedStates,buttheconsequenceshavebeendifferent:intheUnitedStates,realwagesofunskilledworkershavefallen;inEurope,employmentofunskilledworkershasgonedown.

UnemploymentVariationWithinEurope

Labor-marketconditionsvarysignificantlyacrossEuropeancountries.Theunemploymentrate,whichforEuropeasawholehasaveragedwellabovetheunemploymentrateintheUnitedStates,hasactuallybeenbelowtheU.S.rateinnationsrepresentingroughlyone-thirdofthepopulationofEurope.MuchofthevariationintheunemploymentrateacrossEuropecanbeattributedtovariationintheextentoflong-termunemployment.Finally,variationsinnationalunemploymentratesinEuropearecorrelatedwithvariationsinlabor-marketpoliciesandtheroleoflaborunionsinwaysthatareconsistentwithhoweconomistswouldexpectpoliciesandunionstoaffectunemployment.

TheRiseofEuropeanLeisure

Supplement7-16,“TheSecretstoHappiness”

Intheearly1970s,AmericansandEuropeansworkedroughlythesamenumberofhours.Sincethen,hoursworkedhavedeclinedforEuropeans,whilehoursworkedhaveremainedaboutthesameforAmericans.Today,Americansworkonaverageabout30percentmorehoursthandoresidentsofwesternEurope.ThegreaternumberofhoursreflectsbothmorehoursworkedonaveragebyAmericanswhoareemployedandahigherlevelofoverallemploymentintheUnitedStatesrelativetothepopulation.OnehypothesisforthisdifferenceisthathighertaxratesinEuropecomparedtotheUnitedStatesreducetheincentivetowork.AnotherhypothesisemphasizesthegreaterimportanceoflaborunionsinEurope,whichbargainforashorterworkweekandmoreholidays.AfinalhypothesisfocusesondifferencesinpreferencesbetweenEuropeans,whoprefermoreconsumptionofleisure,andAmericans,whoprefermoreconsumptionofgoodsandservices.

7-6 Conclusion

Figure7-7

Whileourmodelsgiveussomeinsightintothecausesofunemployment,theydonottellusunequivocallywhetherthenaturalrateofunemploymentistoohighortoolow,nordotheyindicateeasyremediesforunemployment.Theydoindicate,however,thatanumberofgovernmentpolicies,suchasunemploymentinsurance,job-trainingprograms,andminimum-wagelaws,haveeffectsontheunemploymentrate.

ADDITIONALCASESTUDY

7-1 SocialCostsofUnemployment

Analystshaveidentifiedanumberofcostsofunemploymentnotdiscussedinthetextbook.First,thereissomeevidencethatunemploymentadverselyaffectsproductivity.Asurveyofunemployedprofessionalworkersindicatedthatfeelingsofloyaltyandcommitmenttothejobthatexistedpriortounemploymentwerereplacedbycynicismandlowcommitmentduringunemployment;moreover,thesefeelingspersistedaftertheworkerswerereemployed.S.Fineman,WhiteCollarUnemployment:ImpactandStress(NewYork:JohnWiley,1983).ThissurveyisdiscussedinJohnNaylorandBarbaraSenior,IncompressibleUnemployment(Aldershot,England:AveburyPress,1988).Thesurveyfoundthatworkers’attitudestowardtheirjobchangedafterunemployment,butitdidnotattemptanydirectmeasuresofproductivityeffects.

Ifsuchresponsestounemploymentarewidespread,thenevenshort-termunemploymentmighthavelong-termconsequences.Theideathatshort-rununemploymentmightimplyreducedproductivityandhencehavelong-runeffectsontheunemploymentrateliesbehindtheoriesofhysteresis,whicharediscussedinChapter14ofthetextbook.

Otherstudiesfocusedontheimpactofunemploymentonpsychologicalhealthandsuicide.Theevidenceonlinksbetweenunemploymentandphysicalhealthisapparentlyinconclusive.StephenWatkins,inareviewoftheliterature,statesthatit“isalmostcertainthatunemploymentdamagesmentalhealthandprobablethatitdamagesphysicalhealth.”S.Watk