Chapter 6,Labor Market
Analysis
Gang Gong
Copyright Notes:This electronic file is only
used as a lecture notes for the student in
this class,It is not allowed to be used for
presentation anywhere else without the
permission from the author.
Introduction
The objective of this chapter is to study how
employment is determined in the labor
market
We are considering the labor market in
which the following relation should always
hold:
L = N+U
Above,L is the labor force,N the level of
employment and U is the unemployed,
The Natural Rate of Employment
The Natural Rate of Unemployment is the
unemployment rate at which the economy is
at equilibrium.
Please note,the economy at equilibrium”,It
is not referred to single or few markets but
all the markets in the economy at
equilibrium,Therefore,it is quite possible
that the unemployment rate is not at its
natural level,even if the product and money
markets are at equilibrium,
Natural Rate of Unemployment
Associated with the natural rate of
unemployment is the natural level of
employment and the natural level of output.
The natural level of output is also called the
full-employment output
Natural Rate of Unemployment
The natural rate of unemployment has very
important policy implication,Generally,a
government will not consider
unemployment as being a problem if the
unemployment rate is equal to or beyond its
natural rate,Only if it is below its natural
rate,it is then concerned by the government,
Natural Rate of Unemployment
The determination of natural rate of
unemployment,There exist some models
that concern the determination of natural
rate of unemployment,Generally,it is the
institutional factors that are believed to
determine the natural rate,
Natural Rate of Unemployment
The determination of natural rate of
unemployment:
– the welfare policy of the government
– the structural of information transmission
– the industry concentration
– the power of labor union
– others?
The Determination of
Employment
In Keynesian analysis,the level of
employment is determined by the level of
output.
Note that this further implies that wage is
not an important factor in the determination
of employment
The Determination of
Employment
Specifically,assume there is a production
function
Y = F(N)
Then the employment should be given by
for the given output Y
)(1 YFN
The Determination of
Employment
Assume a linear production function
Y=AN
For a given output Y,the employment is
simply given by
N=Y/A
Evidence,Okun’s Law
If this way of employment determination is
correct,there must be a relation between
output growth and unemployment rate.
Okun (1962) discovers a relation between
the growth rate of output and the change in
unemployment.
See the graph in the class.
0),(1 gguu ttt
Evidence,Okun’s Law
If using U.S,Data,is close to the average
growth rate of GDP,which could be
regarded as the normal level of (natural)
growth rate;? is equal to -4,
Therefore,Okun’s law indicates that an 1%
increase in GDP growth beyond normal will
reduce unemployment rate by 0.4%.
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