Unemployment: Models and Policies

unemployment: Models and policies

author・Pascal Michaillat
date・March 2022
school・Brown University
permalink・https://www.pascalmichaillat.org/t1.html

course overview・This course covers research topics related to unemployment. It discusses the models used to describe unemployment, and the policies used to tackle unemployment. It tries to answer several questions: Why does unemployment exist? Why does unemployment vary across countries and over time? What is the socially optimal level of unemployment? And how should unemployment insurance, monetary policy, and fiscal policy respond to unemployment spikes during recessions?

matching function

section overview・This section reviews basic facts about the labor market and unemployment in the United States. It then introduces the matching function—the main tool that we will use to model the labor market and unemployment. The matching function summarizes the complex process through which workers searching for jobs and firms searching for employees meet each other.

lecture video 1・Why Do We Care About Unemployment? (9 mins)
lecture video 2・Absence of Unemployment in the Competitive Model (6 mins)
lecture video 3・Organization of the Labor Market (17 mins)
lecture video 4・Unemployment Rate (8 mins)
lecture video 5・Vacancy Rate (8 mins)
lecture video 6・Beveridge Curve (9 mins)
lecture video 7・Job-Finding Rate (10 mins)
lecture video 8・Vacancy-Filling Rate (5 mins)
lecture video 9・Job-Separation Rate (9 mins)
lecture video 10・Matching Function (12 mins)
lecture video 11・Labor Market Tightness (11 mins)

lecture notes 1・Matching Function

reading 1・The Beveridge Curve: A Survey
reading 2・Reassessing the Ins and Outs of Unemployment
reading 3・Looking into the Black Box: A Survey of the Matching Function

matching model of the labor market

section overview・This section introduces the matching model of the labor market. This is the model that we will use to study unemployment and unemployment policies in this course. The model was developed by Peter Diamond, Dale Mortensen, and Christopher Pissarides in the 1980s (for this they received a Nobel Prize in 2010). Unlike in the neoclassical model, in the matching model all trades are mediated by the matching function. The section shows how to construct the labor supply and labor demand in the matching model, and how to solve the model using supply and demand.

lecture video 12・Properties of a Good Model According to Kuhn (17 mins)

LABOR SUPPLY
lecture video 13・Notations (8 mins)
lecture video 14・Labor Market Flows (8 mins)
lecture video 15・Assumption of Balanced Flows (7 mins)
lecture video 16・Computing Labor Supply (13 mins)
lecture video 17・Properties of Labor Supply (8 mins)

LABOR DEMAND
lecture video 18・Organization of the Firm (8 mins)
lecture video 19・Computing the Recruiter-Producer Ratio (13 mins)
lecture video 20・Properties of the Recruiter-Producer Ratio (14 mins)
lecture video 21・Profits of the Firm (14 mins)
lecture video 22・Problem of the Firm (5 mins)
lecture video 23・Computing Labor Demand (5 mins)
lecture video 24・Properties of Labor Demand (17 mins)

SOLUTION OF THE MODEL
lecture video 25・Review of Labor Supply and Demand (4 mins)
lecture video 26・Irrelevance of Unemployment Dynamics (14 mins)
lecture video 27・Finding the Wage in a Competitive Model (17 mins)
lecture video 28・Finding Labor Market Tightness in a Matching Model (16 mins)
lecture video 29・Graphical Representation of the Solution (5 mins)
lecture video 30・Complete Description of the Solution (8 mins)

lecture notes 2・Matching Model of the Labor Market

reading 4・The Copernican Revolution
reading 5・Equilibrium Unemployment Theory
reading 6・Search-Theoretic Models of the Labor Market: A Survey

wages

section overview・This section presents empirical evidence on wages. It then discusses various wage functions that can be used in the matching model—such as fixed wages, rigid wages, and bargained wages.

EMPIRICAL EVIDENCE
lecture video 31・Unemployment over the Business Cycle (14 mins)
lecture video 32・Unemployment in the Matching Model (7 mins)
lecture video 33・Sources of Business Cycles (10 mins)
lecture video 34・Wages over the Business Cycle (6 mins)
lecture video 35・Wages in the Matching Model (10 mins)
lecture video 36・Unions (10 mins)
lecture video 37・Minimum Wage (8 mins)
lecture video 38・Efficiency Wages (11 mins)

WAGE FUNCTIONS
lecture video 39・Fixed Wages (11 mins)
lecture video 40・Rigid Wages (11 mins)
lecture video 41・Bargained Wages (17 mins)
lecture video 42・Surplus of the Firm (7 mins)
lecture video 43・Surplus of the Worker (11 mins)
lecture video 44・Surplus Sharing (11 mins)
lecture video 45・Properties of Bargained Wages (12 mins)

lecture notes 3・Wages

reading 7・Why Wages Don't Fall during a Recession
reading 8・Gift Exchange and Efficiency-Wage Theory: Four Views
reading 9・The Cyclical Behavior of Equilibrium Unemployment and Vacancies

unemployment fluctuations

section overview・This section discusses unemployment fluctuations in the matching model. It first shows that the model with rigid wages generates realistic unemployment fluctuations. It then shows that the model with bargained wages is unable to generate such fluctuations. The reason is that bargained wages are too flexible.

BARGAINED WAGES
lecture video 56・Matching Model with Bargained Wages (19 mins)
lecture video 57・Labor Supply Shocks with Bargained Wages (10 mins)
lecture video 58・Labor Demand Shocks with Bargained Wages (12 mins)
lecture video 59・Fluctuations in Labor Market Tightness with Bargained Wages (18 mins)
lecture video 60・Value from Unemployment (17 mins)
lecture video 61・Bargained Wages Cannot Generate Realistic Fluctuations (7 mins)

lecture notes 4・Unemployment fluctuations

reading 10・Employment Fluctuations with Equilibrium Wage Stickiness
reading 11・The Limited Influence of Unemployment on the Wage Bargain
reading 12・The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited

frictional & rationing unemployment

section overview・This section turns to the sources of unemployment over the business cycle. It first establishes that usual matching models do not have job rationing. That is, all unemployment would disappear in these models if workers searched sufficiently hard. It then proposes a matching model with job rationing. In this model, in recession, jobs are lacking, so some unemployment remains even if workers are desperate to find a job. As a result, unemployment can be divided into a rationing and a frictional component. The frictional component is larger in good times and smaller in bad times.

NO JOB RATIONING IN USUAL MODELS
lecture video 62・Introduction to Job Rationing (15 mins)
lecture video 63・Evolution of Matching Models: Standard Model (12 mins)
lecture video 64・Evolution of Matching Models: Rigid-Wage Model (14 mins)
lecture video 65・Evolution of Matching Models: Job-Rationing Model (8 mins)
lecture video 66・All Unemployment is Frictional in Standard & Rigid-Wage Models (6 mins)
lecture video 67・Standard Model with Zero Recruiting Cost (17 mins)
lecture video 68・Rigid-Wage Model with Zero Recruiting Cost (14 mins)
lecture video 69・The Case of Infinite Job-Search Effort (18 mins)
lecture video 70・Standard Model with Infinite Job-Search Effort (13 mins)
lecture video 71・Rigid-Wage Model with Infinite Job-Search Effort (9 mins)

A MODEL WITH JOB RATIONING
lecture video 72・Generating Job Rationing (6 mins)
lecture video 73・Unemployment with Zero Recruiting Cost (14 mins)
lecture video 74・Defining Rationing Unemployment (11 mins)
lecture video 75・When is Rationing Unemployment Positive? (13 mins)
lecture video 76・Unemployment with Infinite Job-Search Effort (14 mins)
lecture video 77・Measuring Frictional and Rationing Unemployment (8 mins)
lecture video 78・Frictional and Rationing Unemployment over the Business Cycle (12 mins)
lecture video 79・Frictional and Rationing Unemployment in a Calibrated Model (9 mins)

lecture notes 5・Frictional and Rationing Unemployment

reading 13・Do Matching Frictions Explain Unemployment? Not in Bad Times
reading 14・Aggregate Demand, Idle Time, and Unemployment
reading 15・An Economical Business-Cycle Model

efficient unemployment & unemployment gap

section overview・This section defines and computes the socially efficient level of unemployment in the matching model. It then extends the analysis to all models with a Beveridge curve—not only the matching model. It finally argues that in the United States unemployment is generally inefficient, and the unemployment gap is countercyclical.

MATCHING MODELS
lecture video 80・Why Do We Need to Know the Efficient Unemployment Rate? (6 mins)
lecture video 81・Natural Rate and NAIRU (15 mins)
lecture video 82・Defining the Efficient Unemployment Rate (16 mins)
lecture video 83・Problem of the Social Planner (8 mins)
lecture video 84・Solution to the Planner's Problem (15 mins)
lecture video 85・Computing Efficient Labor Market Tightness (9 mins)
lecture video 86・Graphical Representation of Matching Efficiency (14 mins)
lecture video 87・Why Is the Labor Market Generally Inefficient? (10 mins)

lecture notes 6・Efficient Unemployment and Unemployment Gap

reading 16・Theory Ahead of Language in the Economics of Unemployment
reading 17・Beveridgean Unemployment Gap
reading 18・On the Efficiency of Matching and Related Models of Search and Unemployment

government policies

section overview・Because unemployment fluctuations are inefficient, labor-market policies can be tailored to maintain the unemployment rate closer to its efficient level or at least reduce the cost of unemployment fluctuations. This section discusses how minimum wage, payroll tax, public employment, and unemployment insurance should respond to unemployment fluctuations over the business cycle.

WAGE POLICIES
lecture video 97・Active and Passive Labor Market Policies (7 mins)
lecture video 98・Modeling a Minimum Wage (7 mins)
lecture video 99・Labor Supply and Demand with a Minimum Wage (7 mins)
lecture video 100・Designing an Optimal Policy (4 mins)
lecture video 101・Optimal Minimum Wage (15 mins)
lecture video 102・Evidence on the Minimum Wage (12 mins)
lecture video 103・Other Possible Effects of a Minimum Wage (11 mins)
lecture video 104・Modeling a Payroll Tax (8 mins)
lecture video 105・Labor Supply and Demand with a Payroll Tax (6 mins)
lecture video 106・Optimal Payroll Tax (9 mins)

lecture notes 7・Government Policies

reading 19・A Theory of Countercyclical Government Multiplier
reading 20・A Macroeconomic Approach to Optimal Unemployment Insurance: Theory
reading 21・A Macroeconomic Approach to Optimal Unemployment Insurance: Applications