Labor Markets. Chris Edmond NYU Stern. Spring 2007

Transcription

1 Labor Markets Chris Edmond NYU Stern Spring

2 Today Labor market indicators employment, unemployment, participation Labor supply and demand Cross-country comparisons of labor market outcomes Labor market dynamics 2

3 Labor market status US Population (296 million) Working Age Population (16+) (226 million) Not Working Age (70 million) Labor Force (149 million) Not in Labor Force (77 million) Employed (141 million) Unemployed (8 million) Source: Bureau of Labor Statistics

4 Labor market indicators unemployment rate = unemployed labor force = = 0.05 participation rate = labor force working age population = = 0.66 inactivity rate = not in labor force working age population = =

5 US unemployment rate 12 percentage points Source: Bureau of Labor Statistics

6 US participation rate 68 percentage points Source: Bureau of Labor Statistics

7 Labor market transitions Average monthly transitions Employed (122 million) Unemployed (6.2 million) Not in Labor Force (59.3 million) Source: Davis, Faberman and Haltiwanger. 7

8 Labor market transitions Average monthly transitions Employed (122 million) Unemployed (6.2 million) Not in Labor Force (59.3 million) Source: Davis, Faberman and Haltiwanger. 8

9 Labor market transitions Average monthly transitions % of 122 million become unemployed each month 2.7% of 122 million leave the labor force each quarter Employed (122 million) Unemployed (6.2 million) Not in Labor Force (59.3 million) Source: Davis, Faberman and Haltiwanger. 9

10 Labor market transitions Average monthly transitions Employed (122 million) Job-to-job transitions Unemployed (6.2 million) Not in Labor Force (59.3 million) Source: Davis, Faberman and Haltiwanger. 10

11 First-pass theory Key simplification treat labor like any other commodity Supply and demand supply: households decide how much time to work at any prevailing wage demand: firms decide how much labor time to hire at any prevailing wage equilibrium: supply = demand Problems? 11

12 Demand for labor Firms demand labor Choose L to maximize profits given wage w Profits = Y wl Fixed Costs Production function Y = AF (K, L) = AK α L 1 α First order condition (1 α)ak α L α w = 0 solving for labor L = L d (w) = ( ) 1/α (1 α)a K w 12

13 Demand for labor Labor demand curve L = L d (w) = ( ) 1/α (1 α)a K w Intuitive properties at higher wage w, firms want to use less labor higher productivity A or capital K increase ( shift out ) labor demand curve 13

14 Supply of labor Households supply labor Choose L to maximize utility given wage w Cobb-Douglas utility function over consumption C and leisure 1 L u(c, L) = C θ (1 L) 1 θ, 0 < θ < 1 Budget constraint: consumption equals labor income wl + non-labor income T C = wl + T Eliminate C from utility function and take logs θ log(wl + T ) + (1 θ) log(1 L) First order condition w θ wl + T (1 θ) 1 1 L = 0 solve for labor to get L = L s (w) 14

15 Supply of labor Labor supply curve L = L s (w) = θ (1 θ) T w Intuitive properties at higher wage w, household wants to work more ( substitution effect ) higher non-labor income T decreases ( shifts in ) labor supply curve ( wealth effect ) 15

16 Equilibrium 16

17 Sources of unemployment Why are there unemployed workers, but no unemployed oranges? intrinsic search and matching frictions: it takes time and resources to match workers and jobs, especially at higher levels of skill and specialization extrinsic frictions, due to government policies and other social institutions Simple example minimum wage 17

18 Frictional labor market Minimum wage Unemployment 18

19 Labor market outcomes 14 Unemployment rate USA Source: Bureau of Labor Statistics

20 Labor market outcomes 14 Unemployment rate USA FRA Source: Bureau of Labor Statistics

21 Labor market outcomes 14 Unemployment rate USA FRA UK Source: Bureau of Labor Statistics

22 One answer labor market policies Why? employment laws (govern individual employment contracts) industrial relations laws (govern collective bargaining, organization of trade unions) social security laws (provide for disability, old age, maternity, unemployment) 22

23 Then why now? Problems with this explanation European labor markets were a big success s if labor market policies were so bad, why only problems now? 23

24 Problems with this explanation Then why now? European labor markets were a big success s if labor market policies were so bad, why only problems now? Possible resolution: turbulence more/bigger shocks in 1970s oil price shocks productivity slowdown, etc maybe flexible markets are better at responding to shocks? 24

25 What have we learned so far? Labor market indicators employed, unemployed, not in labor force Offsetting income and substitution effects on labor supply Unemployment is the result of frictions extrinsic: government policies, social institutions intrinsic: search and matching (more on this next class) Labor market outcomes differ widely across countries interactions of institutions and shocks 25

26 Rest of this class Labor market flows ( dynamics ) worker flows job flows Cyclical behavior of unemployment simple model of unemployment data on job finding and separation 26

27 Labor market states Average monthly transitions Employed (122 million) Unemployed (6.2 million) Not in Labor Force (59.3 million) Source: Davis, Faberman and Haltiwanger. 27

28 Labor market flows Average monthly transitions Employed (122 million) Job-to-job transitions Unemployed (6.2 million) Not in Labor Force (59.3 million) Source: Davis, Faberman and Haltiwanger. 28

29 Changes in status by workers Labor market flows accessions: number of workers taking new jobs, whether previous status was employed, unemployed, or not in labor force separations: number of workers leaving current jobs, whether they become employed, unemployed, or not in the labor force worker reallocation: accessions + separations Similarly for firms job creation: sum of all increases in number of employees by individual establishments job destruction: sum of all decreases in number of employees by individual establishments job reallocation: creation + destruction 29

30 Job and worker reallocation Annual % Firms Workers Creation Destruction Reallocation Accessions Separations Reallocation Denmark France Germany (W) (a) Italy Sweden (b) UK (a) USA Notes: (a) Large manufacturing firms (b) Manufacturing only Source: OECD Employment Outlook,

31 US manufacturing percent per quarter job destruction job creation Source: Davis, Haltiwanger and Schuh. 31

32 US private sector 9.0 percent per quarter job creation job destruction Source: Bureau of Labor Statistics,

33 US private sector 1.50 percent per quarter excess job reallocation net employment growth = job creation job destruction Source: Bureau of Labor Statistics,

34 Summary Job flows job destruction: highly countercyclical (falls in booms, rises in recessions) job creation: weakly procyclical so reallocation countercyclical Worker flows much larger than job flows French data: +1 job = +3 hired 2 separations US: mobility mostly E U E Europe: mobility mostly E E ( segmented or dual labor market, pool of unemployed) 34

35 Unemployment dynamics Simple model Workers either employed or unemployed u + e = 1 Constant job finding rate f Constant job separation rate s Unemployment dynamics u t+1 u t = se t fu t = s(1 u t ) fu t 35

36 Unemployment dynamics job finding fu t s job separations s(1 u t ) u 1 u t 36

37 Steady state Dynamics u t+1 u t = s(1 u t ) fu t To find steady state u, set u t+1 = 0, or 0 = s(1 u) fu so u = s s + f Higher job separation rate s, higher unemployment Higher job finding rate f, lower unemployment Key question: how do policies affect f and s? 37

38 Response to shocks Finding and separation rates also matter for response to shocks To see this, can write (with some algebra) (u t+1 u) = λ(u t u) where λ 1 (s + f) After shock u 0, unemployment follows (u t u) = λ t (u 0 u) Return to steady state faster if λ small faster if worker reallocation s + f is high! Fluid labor markets help economy return to normal following shock 38

39 Implications of theory Higher separation rate s raises steady state unemployment u, but increases speed of adjustment λ Higher finding rate f is unambiguously good lowers steady state unemployment increases speed of adjustment How would you describe the US? Europe? high s? low f? mix of the two? Again, key is how labor market policies affect s and f 39

40 Cyclical behavior of labor markets Simple model has u t+1 u t = s(1 u t ) fu t Better model has time-varying finding and separation rates u t+1 u t = s t (1 u t ) f t u t How do finding and separation rates vary over the business cycle? 40

41 Job finding rate finding rate f t unemployment rate u t correlation at business cycle frequencies = Source: Bureau of Labor Statistics,

42 Job separation rate separation rate s t unemployment rate u t correlation at business cycle frequencies = Source: Bureau of Labor Statistics,

43 Cyclical behavior of labor markets How do finding and separation rates vary over the business cycle? job finding rate is very procyclical, higher in booms job separation rate is not so sensitive to the cycle 43

44 Cyclical behavior of labor markets How do finding and separation rates vary over the business cycle? job finding rate is very procyclical, higher in booms job separation rate is not so sensitive to the cycle in booms, layoffs fall and quits rise in recessions, layoffs rise and quits fall 44

45 Actual and predicted unemployment unemployment rate u t Source: Bureau of Labor Statistics,

46 Actual and predicted unemployment unemployment rate u t constant f time-varying s t Source: Bureau of Labor Statistics,

47 Actual and predicted unemployment unemployment rate u t constant s time-varying f t constant f time-varying s t Source: Bureau of Labor Statistics,

48 Cyclical behavior of labor markets Fluctuations in job finding rate f t explain 79% of unemployment fluctuations explain 95% of unemployment fluctuations since 1985 What explains fluctuations in job finding rate? 48

49 Summary Job flows job destruction: highly countercyclical job creation: weakly procyclical so reallocation countercyclical Worker flows much larger than job flows job finding rate very procyclical layoffs and quits move in opposite directions (separations not as cyclical) so job finding rate drives unemployment fluctuations Fluid labor market may help economy respond to shocks 49