Labor Unions

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Labor Unions
Intermediate Macroeconomics
ZHANG, Guoxiong
[email protected]
Lecture 5 Unemployment
 Job Loss, Job Finding and the Natural Rate of
Unemployment
- what is natural rate of unemployment and how can we reduce
it
 Job Search and Frictional Unemployment
- what is frictional unemployment and how can we reduce it
 Real Wage Rigidity and Structural Unemployment
- why minimum wage, labor union, efficiency wage, etc. cause
structural unemployment
 Labor Market Experiences
- Labor market experiences from US, EU and China
Natural Rate of Unemployment
Natural Unemployment Rate (自然失业率): the average unemployment rate around
which the economy fluctuates. (long run trend given labor market imperfections)
• During recession, the actual unemployment rate is above the natural unemployment rate
• During boom, the actual unemployment rate is below the natural unemployment rate
A Simple Model
 E: # of employed worker U: # of unemployed worker L: the labor
force
L=E+U
 s : rate of job separation (离职率) f :rate of job finding (入职率)
at the steady state (稳定状态)
s*E=f*U
U
s
then the unemployment rate is
=
L
s+ f
Policy Implication
Example Each month, 1% of employed workers lose their jobs (s =
0.01), 19% of unemployed workers find jobs (f = 0.19), find the natural
rate of unemployment?
U
L
=
s
0.01
=
= 0.05, or 5%
s +f
0.01 + 0.19
Policy Implication: To reduce natural rate of unemployment, we should
either increase f or reduce s, i.e. making it easier for people to find a job and
to stay on that job. (job creation through economic growth! )
Question: then why there exists this natural rate of
unemployment? i.e. why people can not find a job
instantly?
Job Search
 There are two reasons why f < 1:
1. job search (工作搜寻)
2. wage rigidity (价格粘性)
 The equilibrium model for aggregate labor market overlooked the cost
of job search:
• workers have different abilities, preferences (劳动力异质)
• jobs have different skill requirement (工作异质)
• geographic mobility of workers not instantaneous (地理限
制)
• flow of information about vacancies and job candidates is
imperfect (信息不完备)
Frictional Unemployment
 The unemployment caused by the time it takes workers to find a
job is called frictional unemployment (摩擦性失业).
- occurs even when wages are flexible and there are enough jobs to go
around
 Sectoral Shifts (部门转移): changes in the composition of
demand among industries or regions
-e.g. Technological change increases demand for computer repair
persons, decreases demand for typewriter repair persons; workers shift
from inner area to coastal area during China’s open-up process.
- It takes time for workers to change sectors, so sectoral shifts cause
frictional unemployment.
Figure 1 Industrial Shares in the US, 1960
57.9%
Agriculture
Manufacturing
Other industry
Services
9.9%
4.2%
28.0%
Figure 2 Industrial Shares in the US, 1997
72.0%
Agriculture
Manufacturing
Other industry
Services
8.5%
17.8%
1.7%
Public Policy and Frictional Unemployment
 Public policies that reduces frictional unemployment:
- disseminate information about job vacancies
- provide job trainings to help workers shift to a new industry
 Unemployment Insurance (失业保险) pays part of a worker’s
former wages for a limited time after losing his/her job.
• This actually increases frictional unemployment as it reduces
workers’ incentive for finding a new job
• But it still makes some economic sense:
- reduces income uncertainty (mitigate unemployment’s effect on
consumption)
- induces better matches (workers can be more patient to find a
better match)
Wage Rigidity and Structural Unemployment
 Wage Rigidity(工资粘性): the failure of wage adjust to the level where
labor supply equals labor demand.
- the unemployment resulting from wage rigidity and job rationing (工作配给)
is called structural unemployment (结构性失业).
Minimum Wage
 Minimum wage (最低工资) law sets a legal minimum on the wages
that firms pay their employees.
• The minimum wage is well below the equilibrium wage for most workers
(therefore cannot explain the majority of natural rate unemployment).
• The minimum wage may exceed the equilibrium wage of unskilled workers,
especially teenagers.
• We would expect that increases in the minimum wage would increase
unemployment among unskilled workers.
Unemployment rates, before & after
3rd Q 1996
1st Q 1997
Teenagers
16.6%
17.0%
Single
8.5%
9.1%
mothers
All workers
5.3%
5.3%
Does Minimum Wage Help the Working Poor?
 The minimum wage is intended to help the working poor. Is it
effective?
• higher employment rate may generates more people living in poverty
• poorly targeted: many minimum wage earners do not live on the wage
• reduce long term income by “kicking away the ladder”
• cause inflation that hurts the poor even more than other people
 A better idea? Earned Income Tax Credit (个人所得税抵扣)
• Poor working family can subtract the tax from its earning
• This tax credit may succeed the tax for very low income families
• It will not reduce employment
• But it brings more fiscal pressure on the government
Unions and Collective Bargaining
 Labor Unions (工会) usually use collective bargaining (集体
议价) to secure their wage above the equilibrium level:
- Employed union workers are insiders whose interest is to keep wages
high.
- Unemployed non-union workers are outsiders and would prefer wages
to be lower (so that labor demand would be high enough for them to get
jobs).
Percentage of Workers Covered by Collective
Bargaining
100
90
80
70
60
50
40
30
20
10
0
Figure 3 Union Membership and Wage Ratios
by Industry, 2001
industry
# employed U % of
(1000s)
total
531
6,881
18,149
4,441
comm. and pub util
2,981
wholesale trade 4,540
20,505
retail trade
fin, insu, and real est 7,648
34,261
services
19,155
government
119,092
all
mining
construction
manufacturing
transportation
12.3%
18.4
14.6
24.1
22.6
5.5
4.5
2.1
5.9
37.4
13.6%
RBU % of wage
total
ratio
12.9%
19.0
15.5
25.4
23.7
5.9
5.0
2.8
6.8
41.8
15.0%
103.4
151.0
105.9
127.8
104.2
105.8
117.8
90.1
103.3
121.1
118.0
Exercise
Suppose that a country experiences a reduction in productivity – that is, an
adverse shock to the production function.
a). What happens to the labor demand curve?
b). How would this change in productivity affect the labor market – that is,
employment, unemployment, and real wages – if the labor market were
always in equilibrium?
c). How would this change in productivity affect the labor market if unions
prevented real wages from falling?
Answers:
a) The labor demand curve shifts to the left.
b) If the labor market were always in equilibrium, there would be no
effect on employment; whereas the real wage would fall.
c) If the unions prevented real wages from falling, there would be more
unemployment.
Efficiency Wage
Suppose that a country experiences a reduction in productivity – that is, an
adverse shock to the production function.
a). What happens to the labor demand curve?
b). How would this change in productivity affect the labor market – that is,
employment, unemployment, and real wages – if the labor market were
always in equilibrium?
c). How would this change in productivity affect the labor market if unions
prevented real wages from falling?
Answers:
a) The labor demand curve shifts to the left.
b) If the labor market were always in equilibrium, there would be no
effect on employment; whereas the real wage would fall.
c) If the unions prevented real wages from falling, there would be more
unemployment.

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