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Unemployment Notes

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Unemployment Revision

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UNEMPLOYMENT 'Macroeconomics' Carlin & Soskice 2006 (Ch. 4 and 18) CHAPTER 18


Reread introduction


Labour market outcomes o o o Unemployment rate, u:

o Employment rate, e:

o Participation rate:

o Definitions imply:


o Rise in employment rate only reflected in a fall in u/e rate to the extent that it is not offset by a rise in participation as the economically inactive are brought back into the labour force.
 During a recession, when u/e rises, participation rates tend to fall.
 Attempts to reduce u/e by lowering participation through retirement schemes or easy access to disability benefits. Can be counterproductive in reducing equilibrium employment:


If they raise the tax burden, then equilibrium employment goes down because PS curve shifts down.


Measures to remove people from the labour force may reduce competition for jobs, which shifts the WS curve up. o Read empirical stuff pg 749 to end. 'Unemployment and labour market rigidities' Nickell 1997


'Here is the received wisdom. The European job market is rigid and inflexible. Result: high unemployment. The North American job market is dynamic and flexible. Result: low unemployment.' - not totally wrong!


There are some rigidities in Europe that help sustain high levels of u/e but 'there are many other so-called rigidities that do not cause high unemployment and, indeed, may serve a useful purpose.'


'rather silly' to lump all Western European countries together o 'Different European countries are effectively different labour markets with the intercountry movement of labour being very small, mainly because of language and cultural barriers.' o So enormous diversity
 Britain known to have the most flexible labour market in Europe but has a higher average u/e rate than half of its European neighbours
 Many of the countries with low u/e in Europe are not noted for the flexibility of their labour markets
 'variation in short term unemployment is substantially smaller than that in long term unemployment.'


'while countries require some short term u/e, long term u/e appears to be an optional extra.'


'the long term unemployed are far enough away from the active labour marker that their presence has little influence on wages' o North American employment has risen much faster in recent years than has European employment.
 But no control for different rates of growth in the population of working age o 'Rates of job turnover are no higher in North America than in Europe and neither are overall wages any more flexible, but it does seem that US workers are more mobile than are many Europeans both geographically and between jobs.'

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