Unemployment in Recession Christopher A Pissarides London School of - PowerPoint PPT Presentation

Unemployment in Recession Christopher A Pissarides London School of Economics The Royal Economic Society Lecture 22 November 2012 1 C A Pissarides - London School of Economics 2012

Outline 1. Unemployment in the OCED 2. Supply and demand analysis 3. Search and matching 4. The Beveridge curve 5. Youth unemployment C A Pissarides - London School of Economics 2012 2

1. Unemployment in the OECD Country differences and responses to the Great Recession C A Pissarides - London School of Economics 2012 3

Country experiences with unemployment • Big differences in unemployment across countries, even in years of normal economic activity • Big differences between young and older workers • Big differences in the response of unemployment to recession C A Pissarides - London School of Economics 2012 4

Unemployment 2003-07 average ages 15-64 (normal times) 18 16 14 12 10 8 6 4 2 0 ICE KOR MEX NOR SWI NEZ JAP NET IRE DEN AUT UK AUS USA SLV OECD CAN HUN SWE CZE ITA EST POR FIN BEL EU EURO CHI TUR FRA ISR GRE SPA GER SLK POL LUX C A Pissarides - London School of Economics 2012 5

Unemployment 2003-07 average ages 15-24 40 35 30 25 20 15 10 5 0 NET MEX ICE SWI DEN JAP IRE AUT KOR NEZ NOR AUS USA CAN OECD UK GER SLV POR EST EURO TUR HUN EU CZE CHI SWE ISR FIN FRA SPA BEL ITA GRE SLK POL LUX C A Pissarides - London School of Economics 2012 6

Ratio of youth to all unemployed 2003-07 averages 4 3.5 3 2.5 2 1.5 1 0.5 0 GER NET DEN CAN SLK TUR AUT SWI MEX IRE JAP EURO EST OECD ISR POR AUS SPA EU POL USA FRA CZE SLV CHI FIN NEZ HUN BEL UK GRE NOR ICE KOR SWE ITA LUX C A Pissarides - London School of Economics 2012 7

Impact of Great Recession on unemployment: change 2007-09 12 10 Per cent of labour force 8 6 4 2 0 -2 POL GER NET ISR AUT KOR BEL NOR SWI SLK LUX FRA GRE JAP CZE POR ITA MEX EURO SWE NEZ OECD CHI ICE IRE EST SPA SLV AUS FIN EU DEN UK CAN HUN TUR USA C A Pissarides - London School of Economics 2012 8

Impact of debt crisis on unemployment: change 2009-12 16 14 12 10 8 Per cent 6 4 2 0 -2 -4 -6 CHI EST GER SWE ICE BEL AUT JAP MEX ISR OECD LUX KOR NOR SWI CZE FRA NEZ NET EURO SLK POL ITA IRE POR SPA GRE TUR USA CAN FIN AUS UK HUN EU DEN SLV C A Pissarides - London School of Economics 2012 9

Difference in unemployment rise, youths minus adults, 2007-2011 16 14 12 10 8 6 4 2 0 -2 -4 ISR GER TUR CHI JAP AUT BEL SWI NOR NET KOR MEX AUS CAN FRA OECD SWE SLV USA FIN DEN EURO ICE EU UK POL NEZ HUN EST CZE ITA POR SLK IRE GRE SPA LUX C A Pissarides - London School of Economics 2012 10

Summary of graphs I • Even excluding Eastern European countries, in normal times we get variations in unemployment from below 4% in Norway and Switzerland to nearly 10% in Spain, Greece and Germany (no longer true for Germany, see below) • Youth unemployment about 2.2 times as much as overall, but there are variations, 1.3 to 3 • Recession affected countries differently: on average about 2% rise, but Germany/Netherlands practically no effect, Spain/Ireland nearly 10% rise C A Pissarides - London School of Economics 2012 11

Summary of graphs II • Debt crisis affected rescue countries very badly: Greece up by 14%, Spain up by another 6% • Youth unemployment up by more than adult in virtually all countries • On average ratio of youth to adult maintained C A Pissarides - London School of Economics 2012 12

2. Supply and demand analysis Can conventional supply and demand analysis explain the country differences and the recession? C A Pissarides - London School of Economics 2012 13

Supply and demand • Traditional approach to market equilibrium is equality between supply and demand • When applied to the labour market econometricians find that the supply curve is steep • The demand curve is flatter and recession can be shown as a fall in demand for labour C A Pissarides - London School of Economics 2012 14

The supply and demand curves Labour supply Real wage rate Labour demand Hours of work C A Pissarides - London School of Economics 2012 15

What’s right and what’s wrong with this framework? • It is good for the study of some things • For example, technology, taxes, demographics, influence employment and wages • We can use supply and demand curves to study how they do it C A Pissarides - London School of Economics 2012 16

Failures • But it has no unemployment in market equilibrium! • It fails on two other important counts • First, it does very poorly predicting the impact of recessions • Second, it does not take account of many features of modern labour markets, e.g., their institutional structure C A Pissarides - London School of Economics 2012 17

Effect of recession on wages and hours of work Real wage rate Labour demand Labour supply boom recession Hours of work C A Pissarides - London School of Economics 2012 18

Responses of employment and wages • The economy fluctuates between the two intersection points • Supply and demand analysis says that in recession employment falls by a little and wages by a lot • But in the data the opposite happens: employment falls by a lot and wages by little • And we cannot tell why unemployment rates differ so much across countries C A Pissarides - London School of Economics 2012 19

Institutions • The labour market is influenced by the “institutional structure” that governs employment and wages • How wages are set, how employment is regulated and generally how flexible or rigid are the arrangements • Partly because of the institutional structure, partly because of preferences about work and leisure, the idea that each worker can choose her own hours of work and succeed in finding a job that will satisfy her is untenable C A Pissarides - London School of Economics 2012 20

3. Search and matching Description of the approach. Modelling frictions and imperfections. Unemployment and vacancies. C A Pissarides - London School of Economics 2012 21

Search and matching • The search and matching approach provides a framework that can handle most of these issues • It can be used to study many of the conventional issues in labour markets plus many more • The key departure from the conventional model is the realisation that there is a vast amount of information that needs to be digested in labour markets • In reality the information requirements in labour markets are such that the market never reaches the conventional equilibrium, as if information were perfect C A Pissarides - London School of Economics 2012 22

Sources of information deficiencies • Why are information requirements in labour markets more than in other markets? • Because of differences between persons and jobs that are much more than differences in other markets • Cars are broadly similar to each other; apples are similar; we understand what we get when we buy one of these • But workers? When we buy a worker’s time we get a very different product with each worker • We call these differences heterogeneities C A Pissarides - London School of Economics 2012 23

Other “imperfections” • Heterogeneities are only part of the problem in labour markets • There are also mobility costs: changing jobs often involves moving an entire family • Yet another is personal taste. A job may be liked differently by different people because of taste differences • We refer to all the factors that stop the market short of supply- and-demand equilibrium and cause slow adjustment from one equilibrium to another frictions C A Pissarides - London School of Economics 2012 24

Jobs and workers: modelling • We think in terms of single jobs • A job is a “match” between a worker and a firm • It is something that has value because of the product that it produces, but to produce it, it needs two contributors, a “firm” and a “worker” • Jobs are created and destroyed according to profit maximizing criteria • Firms and workers agree about the jobs that should be created and the jobs that should be destroyed, even if it requires bargaining beforehand • Aggregate employment is the sum of all active jobs C A Pissarides - London School of Economics 2012 25

Flows of workers and jobs • When a job is created a worker transits from another state (for example, unemployment) into employment • When the job is destroyed the worker leaves employment and moves to unemployment • So this approach is about flows between labour market states • For this reason search and matching is also known as the flows approach to labour markets. C A Pissarides - London School of Economics 2012 26