Part I Paper 2

Lecture 10
European
unemployment

Chryssi Giannitsarou
Outline
 Changing the natural rate
 European unemployment

Lecture 10 Unemployment II slide 1

Reminder
 The natural rate of unemployment

Lecture 10 Unemployment II slide 2

 Changing the natural rate
 A policy will reduce the natural rate of
unemployment only if it lowers s or increases f
 If job finding were instantaneous (f = 1),
then all spells of unemployment would be brief and
the natural rate would be near zero
 There are two reasons why f < 1
1. job search
DONE 
2. wage rigidity

Lecture 10 Unemployment II slide 3

Wage rigidity: Structural unemployment
 If real wages fail to adjust to equilibrium
where labour demand equals supply
 real wage rigidity  rate of job finding and
 natural rate of unemployment
 Unemployment from wage rigidity and job
rationing called structural unemployment

Lecture 10 Unemployment II slide 4

Real wage rigidity
Real Supply
If the real wage
wage is Unemployment
stuck above
the eq’m
Rigid
level, then
real
there aren’t
wage
enough jobs
to go Demand
around.
Labor
Amount of Amount of labour
labour hired willing to work

Lecture 10 Unemployment II slide 5

Real wage rigidity

If the real
wage is
Then, firms must ration the
stuck above
scarce jobs among workers.
the eq’m
level, then
there aren’t
Structural unemployment:
enough jobs
the unemployment resulting
to go
from real wage rigidity and
around.
job rationing.

Lecture 10 Unemployment II slide 6

Reasons for wage rigidity
1. Minimum wage laws

2. Labor unions

3. Efficiency wages

Lecture 10 Unemployment II slide 7

The minimum wage
 The minimum wage is well below the eq’m
wage for most workers, so it cannot explain
the majority of natural rate unemployment
 However, the minimum wage may exceed the
eq’m wage of unskilled workers, especially
teenagers
 If so, then we would expect that increases in
the minimum wage would increase
unemployment among these groups

Lecture 10 Unemployment II slide 8

Some numbers
 In Sept 1996, the minimum wage in US was raised from
$4.25 to $4.75. Here’s what happened:

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%
 Other studies: A 10% increase in the minimum wage
increases teenage unemployment by 1-3%

Lecture 10 Unemployment II slide 9

Minimum and living wages in UK
 Nov 2019:
 The National Living Wage (compulsory):
– over 25s: £8.21 an hour
– 21-24 year old rate: £7.70
– 18-20 year old rate: £6.15
– 16-17 year old rate: £4.35
 Real Living Wage (voluntary):
– £9.30 an hour (latest increase on Monday
11/11/2019)
– £10.75 an hour in London

Lecture 10 Unemployment II slide 10

Labour unions
 Unions exercise monopoly power to secure higher
wages for their members
 When the union wage exceeds the eq’m wage,
unemployment results
 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)
Lecture 10 Unemployment II slide 11
Some numbers
United States 12.0%
Percent of workers
United Kingdom 26.3%
covered by collective
bargaining Switzerland 49.2%
Spain 73.1%
Sweden 90.0%
Source: OECD, most recent
numbers available from 2014, Germany 56.0%
2015 and 2016
France 98.5%
Austria 98.0%
Canada 30.3%
Japan 16.7%

Lecture 10 Unemployment II slide 12

Efficiency wages
 Theories in which high wages increase
worker productivity:
– attract higher quality job applicants
– increase worker effort and reduce shirking
– reduce turnover, which is costly
– improve health of workers
(in developing countries)

 The increased productivity justifies the cost

of paying above-equilibrium wages
 The result: unemployment
Lecture 10 Unemployment II slide 13
 0
2
4
6
8
10
12
14
1998m04
1998m09
1999m02
1999m07
1999m12

Lecture 10
2000m05
2000m10
2001m03
2001m08
2002m01
2002m06
2002m11
2003m04
2003m09
2004m02
2004m07
2004m12
2005m05
2005m10
2006m03

Unemployment II
2006m08
2007m01
2007m06

Euro area (19 countries)

2007m11
2008m04
2008m09
2009m02
2009m07
2009m12
2010m05
United States

2010m10
Source: Eurostat 2011M03
European unemployment

2011M08
2012M01
2012M06
Japan

2012M11
2013M04
2013M09
2014M02
2014M07
2014M12
2015M05
2015M10
2016M03
2016M08
2017M01
2017M06
2017M11
2018M04
slide 14
 0
2
4
6
8
10
12
14
1998m04
1998m09
1999m02
1999m07
1999m12

Lecture 10
2000m05
2000m10
2001m03
2001m08
2002m01
2002m06
2002m11
2003m04
2003m09
2004m02
2004m07
2004m12
2005m05
2005m10
2006m03

Unemployment II
2006m08
2007m01
2007m06
2007m11
2008m04
2008m09
2009m02
2009m07
2009m12
Euro area (19 countries)

2010m05
2010m10
Source: Eurostat
2011M03
European unemployment

2011M08
Euro area (19 countries)

2012M01
2012M06
2012M11
2013M04
2013M09
2014M02
2014M07
2014M12
2015M05
2015M10
2016M03
2016M08
2017M01
2017M06
2017M11
2018M04
slide 15
 10
15
20
25
30

0
5
1998m01
1998m07
1999m01
1999m07
2000m01

Lecture 10
2000m07
2001m01
2001m07
2002m01
2002m07
2003m01
2003m07
2004m01
2004m07
2005m01
2005m07
2006m01
2006m07
2007m01

Unemployment II
2007m07
2008m01
2008m07
2009m01
2009m07
2010m01
2010m07
2011M01
2011M07
2012M01
Source: Eurostat 2012M07
European unemployment

2013M01
2013M07
2014M01
2014M07
2015M01
2015M07
2016M01
2016M07
2017M01
2017M07
2018M01
2018M07
Spain
France

Austria

Greece
Ireland

Sweden
Slovenia
Germany

Netherlands

slide 16
Eurosclerosis
The term is used to express that labour market
rigidities have had important negative effects on
EU economic performance

Why is EU’s
unemployment so much
higher than US’s?

Lecture 10 Unemployment II slide 17

Unemployment in the UK
 Pattern quite different from the rest of
continental Europe
 Similarities with US, e.g.
– Sectoral shifts in 70s/80s
– Decrease in Union membership after 80s
– Etc.

Lecture 10 Unemployment II slide 18

 0
2
4
6
8
10
12

1998m04
1998m11
1999m06

Lecture 10
2000m01
2000m08
2001m03
2001m10
2002m05
2002m12
2003m07
2004m02
2004m09
2005m04
2005m11
2006m06

Unemployment II
2007m01
2007m08

UK
2008m03
2008m10
2009m05
2009m12

USA
2010m07
2011m02

Source: Eurostat 2011m09

2012m04
2012m11
2013m06
2014m01
2014m08
2015m03
2015m10
2016m05
2016M12
US and UK unemployment rates

2017M07
2018M02
2018M09
2019M04
slide 19
Unemployment in the EU: Rigidities
EU has more labour market rigidities:
 EU more diverse than US (culture, language),
means less labour mobility
 EU countries have strong union traditions
 European welfare states (generous
unemployment benefits, etc.)
 Strong employment protection legislations

Lecture 10 Unemployment II slide 20

Unemployment in the EU: Hysteresis
 Refers to the view that an economy’s natural
rate of unemployment depends on its
history:
– If workers unemployed for long  lose
skills
– Less skills  worker becomes more
“unemployable”  becomes discouraged
– Unemployment becomes permanent

Lecture 10 Unemployment II slide 21

Unemployment in the EU: Technological change

 Shift in demand from unskilled to skilled

workers, due to technological change…

This demand shift occurred in the U.S., too.

But the U.S. has less wage rigidity,
so instead of causing higher unemployment,
the shift caused an increase in the gap
between skilled and unskilled wages.

Lecture 10 Unemployment II slide 22

Unemployment in the EU: Strong welfare states

 Generous social insurance programmes

 Large unemployment benefits
 Collective bargaining (unionisation)

Lecture 10 Unemployment II slide 23

Unemployment in the EU: The Peter Pan syndrome
Share of adults 18-34 years old, living with parents
80

70

60

50

40

30

20

10

0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Denmark Greece Spain Italy Netherlands Austria Finland United Kingdom

Source: Eurostat
Lecture 10 Unemployment II slide 24
Unemployment in the EU: Labour mobility

Source: OECD
Mobility rate: Ratio of the total number of persons who
changed region of residence to the total population over
one year
Lecture 10 Unemployment II slide 25
Unemployment in the EU: the black economy
 In south Europe, black economies have
significant size
 Many unskilled workers hired on the black
market – thus appearing as “unemployed”

Lecture 10 Unemployment II slide 26

Unemployment in the EU: More leisure less work

 Europeans work less per

year than Americans
 Theories for this:
– Higher taxes in Europe
– Illegal work (not recorded)
higher in Europe
– Europeans have more taste
for fun and games

“Labour versus leisure preferences and employment in Europe”

http://www.voxeu.org/article/labour-versus-leisure-preferences-and-employment-europe

Lecture 10 Unemployment II slide 27

Unemployment in the EU: Legislation
 Strict labour laws
 Hiring/firing, probation periods
 Tenure
 Etc…
 E.g. France, 2006 youth protests

Lecture 10 Unemployment II slide 28

Readings
 Mankiw: Chapters 7 and 10.1
 Jones: Chapter 7.1-7.5 (focuses more on US
labour market)

Lecture 10 Unemployment II slide 29