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Applied Macroeconomics > Unemployment > Flashcards

Unemployment Flashcards

1
Q

Ball and Mankiw (2002)

A

NAIRU “is approximately a synonym for the natural rate of unemployment”.

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2
Q

Nickell et al. (2005)

A

NAIRU differences across countries and changes in employment can be explained by supply side factors. “shifts in labour market institutions”

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3
Q

What is the Philips Curve?

A

The Philips curve is the negative relationship found between unemployment and inflation.

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4
Q

Unemployment Definition

A

A person who is actively searching for employment and is unable to find work.

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5
Q

Outline the wage price signal.

A
  • Lower unemployment leads to a higher wage.
  • In response to higher wages firms increase their prices.
  • Workers then ask for higher wages, further increasing wages.
  • This cycle continues.
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6
Q

Blanchard: wage price signal

A

“Battle of the mark-ups”

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7
Q

What is Euro-sclerosis?

A

The theory that high unemployment and slow growth in Europe caused by labour market institutions resulted in unemployment over time.

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8
Q

What is labour market flexibility?

A

How far and quickly do wages adjust to clear labour markets.

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9
Q

What are the potential gains from labour market flexibility?

A
  1. Labour markets clear quickly.
  2. improved occupational mobility of labour. Moves from declining firms/industries to expanding ones.
  3. higher productivity growth in LR.
  4. Stronger employment creation during upturn.
  5. respond quicker to external economics shock.
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10
Q

Solow (2000) - US v European Labour Market Institutions

A

EPL is higher in Europe, increasing employment in the SR and opposite in LR.
Low minimum wage in US.
US allows greater wage differentiation, greater inequality.
Greater union density and power in Europe.
Higher social wages in Europe pushing some workers under margin of employ-ability.

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11
Q

Why are wages more rigid than prices?

A

Labour markets - human capital at risk, information asymmetrics and domination by one side.
Social imperatives - Job security and stable incomes.

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12
Q

Determinants of Unemployment

A
  • Economic downturn
  • Minimum wages
  • Employment Protection Legislation (EPL)
  • Unemployment benefits
  • Trade unions and collective bargaining
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13
Q

Trade union density trends (1985 to 2015)

OECD

A

Consistent downward trend between developed and developing countries

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14
Q

Collective bargaining coverage rate trends (OECD)

A
  • Consistent downward trend between countries.

- Consistently higher in Nordic countries.

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15
Q

Effects of higher unemployment benefits.

A

Increases reservation wage.
People are less have the inventive to work thus increasing voluntary unemployment.
Prolonged job search.

Evaluation refer to Lindert (2004)

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16
Q

Lindert (2004)

A

“welfare and unemployment
compensation [do not] offer young adults a lifetime of near-full pay”
Sometimes the poorest are taxed the most, MPT.

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17
Q

Trend in changes in employment benefits (UK)

A

Countries since post war period have reduced UB.

Increasing conditionality - strictness (UK 1985 had 73% of unemployed getting benefits. In 2005 had only 32%)

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18
Q

Effects of higher minimum wage.

A

Increase wages above current market clearing rates and raise unemployment.
Young workers most effected, lower marginal products through little experience.

19
Q

Trends of minimum wage increase UK and US.

A

1998 reintroduction of minimum wages.

Little / no negative effect on employment.

20
Q

Minimum wage trends.

A

Significant variation in minimum wage trends.
General trend downwards.
Countries with strong union bargaining do not have minimum wages.

21
Q

Effects of employment protection legislation (EPL).

A

Decreasing flow of workers in and out of jobs, increasing unemployment duration.
Employers face asymmetric information to estimate future marginal productivity of workers.
Decrease SR unemployment, increase LR employment.

22
Q

Strictness of EPL index - 2008 (OECD)

A

UK: 1.1
USA: 0.9
Germany: 2.6

23
Q

Beverage curve trends since 1960s.

A

Rightward shift, increasing labour market inefficiency.
60s-80s: right shift for most developed countries. Expection is Norway and Sweden.
90s: large EU economies. Left shift from Canada, UK and US.

24
Q

Layard and Nickell (1999)

A

“Encouraging product market
competition is a key policy to eliminate the negative effects of unions.”
Reform social labour market policies from welfare to work.
“Time spent worrying about strict labor market regulations,
employment protection and minimum wages is probably time largely
wasted.”

25
Q

OECD (2013) - EPL

A

Found negative impact, as well as generosity of unemployment benefits. However, OECD (2004) admits “evidence is somewhat fragile overall.”
Baker (2005) refutes

26
Q

Nickell et al. (2005) - Explaining Changes in Unemployment in Europe

A

Decline in European unemployment

from 1980s are due to labour market reforms.

27
Q

Ball (1999) - Explaining Changes in Unemployment

A

Improvements in unemployment
related to macroeconomic conditions rather than
changes in institutions

28
Q

Blanchard and Wolfers (2000)

A

Adverse shocks are party explain rise in unemployment, these shocks are common in the EU and cannot explain country variation.
Institutions play a key role in determining levels and persistence of unemployment.

29
Q

Financial Crisis 2008 Trends

A 
General falls in output.
Unemployment rose (exception Germany). Changes in unemployment rates has no systematic relationship with output.
30
Q

Change in unemployment in Financial Crisis.

A

3% for UK, USA
8% for Ireland, Spain
Slight negative for Germany.

31
Q

Change in output in Financial Crisis

A

UK - 6%
Germany - 7%
Ireland - 8%
Spain - 4%

32
Q

OECD (2017) Interpretation of Financial Crisis

A

Significant hysteresis effects on output.
Lower impact on unemployment.
Labour market institutions explain NAIRU and speed. of adjustment.
EPL prolongs/raises unemployment. Greece, Spain and Portugal high EPL, High unemployment.
Expansionary fiscal policy decrease unemployment.

33
Q

What is Okuns Law?

A

The negative relationship between the unemployment rate and the GDP.

34
Q

Possible explanations for Okuns Law.

A

Falls in productivity.
Varying responses of wage flexibility.
Changes to work times.
Differences in Okuns Law elasticities related to labour market institutions)

35
Q

Ball et al. (2013) - Okuns Law

A

Recent evidence does point to Okun’s Law relationships
holding.
Continued puzzle of lack of clear
relationship between elasticities and labour market institutions
across countries

36
Q

Strauss Khan (2010) - EPL

A

“labour market institutions tend to reward privileged insiders at the expense of excluded outsiders”.

37
Q

Trends in labour markets 2007 onward.

A

Employment growth recovering.

Expansionary fiscal policy at limits of zero conditional bound and public investment expenditure.

38
Q

Krugman: Hysteresis

A

High unemployment due to weak economic performance.
“because growth is weak —
period, full stop, end of story.”

39
Q

Outline the German Puzzle.

A

Unemployment fell since GFC despite fall in output.

Goes against Okun’s Law predictions.

40
Q

Outline potential causes of German Puzzle.

A

Institutional reform over 2000s.
Mid ranking in terms of EPL and union density making it hard to explain performance in terms of pre-exciting LMI.
Decrease employment hours, underemployment. Labour hording will lead to lower productivity.

41
Q

Burda and Hunt (2011)

A

German Puzzle:
Shorter working times and real wage moderation contributed.
Labour market reforms may have
helped - hard to evaluate.
Operated very cautious hiring policies in the
2000s

42
Q

Outline the UK Puzzle.

A

UK unemployment relatively good.
Low productivity.
Possible cause is wage moderation, wage inflexibility, impact of falling pound and falling productivity.

43
Q

Improved unemployment outcomes due to…

A

Coordinated wage bargaining (eg. Germany)

Expansionary fiscal policy, at limits of ZLB and public investment expenditure.

44
Q

Effect of Margret Thatcher on Unemployment

A

Contrary to post war consensus, against Keynesianism, welfare state and nationalism.
Reduced trade union power

Applied Macroeconomics (4 decks)

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