(BQ) Part 1 book Macroeconomics has contents: The long and short of macroeconomics; measuring the macroeconomy, the financial system, determining aggregate production, Long-Run economic growth, money and inflation, the labor market.
Find more at www.downloadslide.com Find more at www.downloadslide.com Find more at www.downloadslide.com Macroeconomics R GLENN HUBBARD COLUMBIA UNIVERSITY ANTHONY PATRICK O’BRIEN LEHIGH UNIVERSITY MATTHEW RAFFERTY QUINNIPIAC UNIVERSITY Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo Find more at www.downloadslide.com Dedication For Constance, Raph, and Will —R Glenn Hubbard For Lucy —Anthony Patrick O’Brien For Sacha —Matthew Rafferty Editorial Director: Sally Yagan Editor in Chief: Donna Battista Executive Editor: David Alexander Executive Development Editor: Lena Buonanno VP/Director of Development: Stephen Deitmer Editorial Project Manager: Lindsey Sloan Director of Marketing: Patrice Jones Executive Marketing Manager: Lori DeShazo Market Development Manager: Kathleen McLellan Senior Managing Editor: Nancy Fenton Production Project Manager: Carla Thompson Manufacturing Director: Evelyn Beaton Senior Manufacturing Buyer: Carol Melville Creative Director: Christy Mahon Senior Art Director: Jonathan Boylan Cover Art: Shutterstock/cobalt88 Manager, Rights and Permissions: Michael Joyce Text Permissions Editor: Jill Dougan Media Producer: Melissa Honig Associate Production Project Manager: Alison Eusden Full-Service Project Management: PreMediaGlobal Composition: PreMediaGlobal Printer/Binder: R.R Donnelley/Willard Cover Printer: Lehigh-Phoenix Color/Hagerstown Text Font: Minion Credits and acknowledgments of material borrowed from other sources and reproduced, with permission, in this textbook appear on the pages with the respective material Copyright © 2012 by Pearson Education, Inc., publishing as Prentice Hall All rights reserved Manufactured in the United States of America This publication is protected by Copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Permissions Department, One Lake Street, Upper Saddle River, New Jersey 07458, or you may fax your request to 201-236-3290 Many of the designations by manufacturers and sellers to distinguish their products are claimed as trademarks Where those designations appear in this book, and the publisher was aware of a trademark claim, the designations have been printed in initial caps or all caps Cataloging-in-Publication Data is on file at the Library of Congress 10 ISBN 10: 0-13-608988-7 ISBN 13: 978-0-13-608988-9 Find more at www.downloadslide.com About the Authors Glenn Hubbard, Professor, Researcher, and Policymaker R Glenn Hubbard is the dean and Russell L Carson Professor of Finance and Economics in the Graduate School of Business at Columbia University and professor of economics in Columbia’s Faculty of Arts and Sciences He is also a research associate of the National Bureau of Economic Research and a director of Automatic Data Processing, Black Rock ClosedEnd Funds, KKR Financial Corporation, and MetLife Professor Hubbard received his Ph.D in economics from Harvard University in 1983 From 2001 to 2003, he served as chairman of the White House Council of Economic Advisers and chairman of the OECD Economy Policy Committee, and from 1991 to 1993, he was deputy assistant secretary of the U.S Treasury Department He currently serves as co-chair of the nonpartisan Committee on Capital Markets Regulation and the Corporate Boards Study Group Professor Hubbard is the author of more than 100 articles in leading journals, including American Economic Review; Brookings Papers on Economic Activity; Journal of Finance; Journal of Financial Economics; Journal of Money, Credit, and Banking; Journal of Political Economy; Journal of Public Economics; Quarterly Journal of Economics; RAND Journal of Economics; and Review of Economics and Statistics Tony O’Brien, Award-Winning Professor and Researcher Anthony Patrick O’Brien is a professor of economics at Lehigh University He received a Ph.D from the University of California, Berkeley, in 1987 He has taught principles of economics, money and banking, and intermediate macroeconomics for more than 20 years, in both large sections and small honors classes He received the Lehigh University Award for Distinguished Teaching He was formerly the director of the Diamond Center for Economic Education and was named a Dana Foundation Faculty Fellow and Lehigh Class of 1961 Professor of Economics He has been a visiting professor at the University of California, Santa Barbara, and Carnegie Mellon University Professor O’Brien’s research has dealt with such issues as the evolution of the U.S automobile industry, sources of U.S economic competitiveness, the development of U.S trade policy, the causes of the Great Depression, and the causes of black–white income differences His research has been published in leading journals, including American Economic Review; Quarterly Journal of Economics; Journal of Money, Credit, and Banking; Industrial Relations; Journal of Economic History; Explorations in Economic History; and Journal of Policy History Matthew Rafferty, Professor and Researcher Matthew Christopher Rafferty is a professor of economics and department chairperson at Quinnipiac University He has also been a visiting professor at Union College He received a Ph.D from the University of California, Davis, in 1997 and has taught intermediate macroeconomics for 15 years, in both large and small sections Professor Rafferty’s research has focused on university and firm-financed research and development activities In particular, he is interested in understanding how corporate governance and equity compensation influence firm research and development His research has been published in leading journals, including the Journal of Financial and Quantitative Analysis, Journal of Corporate Finance, Research Policy, and the Southern Economic Journal He has worked as a consultant for the Connecticut Petroleum Council on issues before the Connecticut state legislature He has also written op-ed pieces that have appeared in several newspapers, including the New York Times iii Find more at www.downloadslide.com Brief Contents Part 1: Introduction Chapter The Long and Short of Macroeconomics Chapter Measuring the Macroeconomy 23 Chapter The Financial System 59 Part 2: Macroeconomics in the Long Run: Economic Growth Chapter Determining Aggregate Production 105 Chapter Long-Run Economic Growth 143 Chapter Money and Inflation 188 Chapter The Labor Market 231 Part 3: Macroeconomics in the Short Run: Theory and Policy Chapter Business Cycles 271 Chapter IS–MP: A Short-Run Macroeconomic Model 302 Chapter 10 Monetary Policy in the Short Run 363 Chapter 11 Fiscal Policy in the Short Run 407 Chapter 12 Aggregate Demand, Aggregate Supply, and Monetary Policy 448 Part 4: Extensions Chapter 13 Fiscal Policy and the Government Budget in the Long Run 486 Chapter 14 Consumption and Investment 521 Chapter 15 The Balance of Payments, Exchange Rates, and Macroeconomic Policy 559 Glossary G-1 Index iv I-1 Find more at www.downloadslide.com Contents Chapter The Long and Short of Macroeconomics WHEN YOU ENTER THE JOB MARKET CAN MATTER A LOT 1.1 What Macroeconomics Is About Macroeconomics in the Short Run and in the Long Run Long-Run Growth in the United States Some Countries Have Not Experienced Significant Long-Run Growth Aging Populations Pose a Challenge to Governments Around the World Unemployment in the United States How Unemployment Rates Differ Across Developed Countries Inflation Rates Fluctuate Over Time and Across Countries Economic Policy Can Help Stabilize the Economy International Factors Have Become Increasingly Important in Explaining Macroeconomic Events 1.2 How Economists Think About Macroeconomics 11 What Is the Best Way to Analyze Macroeconomic Issues? 11 Macroeconomic Models 12 Solved Problem 1.2: Do Rising Imports Lead to a Permanent Reduction in U.S Employment? 12 Assumptions, Endogenous Variables, and Exogenous Variables in Economic Models 13 Forming and Testing Hypotheses in Economic Models 14 Making the Connection: What Do People Know About Macroeconomics and How Do They Know It? 15 1.3 Key Issues and Questions of Macroeconomics 16 An Inside Look: Will Consumer Spending Nudge Employers to Hire? 18 *Chapter Summary and Problems 20 Key Terms and Concepts, Review Questions, Problems and Applications, Data Exercise *These end-of-chapter resource materials repeat in all chapters Chapter Measuring the Macroeconomy 23 HOW DO WE KNOW WHEN WE ARE IN A RECESSION? 23 Key Issue and Question 23 2.1 GDP: Measuring Total Production and Total Income 25 How the Government Calculates GDP 25 Production and Income 26 The Circular Flow of Income 27 An Example of Measuring GDP 29 National Income Identities and the Components of GDP 29 v Find more at www.downloadslide.com vi CONTENTS Making the Connection: Will Public Employee Pensions Wreck State and Local Government Budgets? 31 The Relationship Between GDP and GNP 33 2.2 Real GDP, Nominal GDP, and the GDP Deflator 33 Solved Problem 2.2a: Calculating Real GDP 34 Price Indexes and the GDP Deflator 35 Solved Problem 2.2b: Calculating the Inflation Rate 36 The Chain-Weighted Measure of Real GDP 37 Making the Connection: Trying to Hit a Moving Target: Forecasting with “Real-Time Data” 37 Comparing GDP Across Countries 38 Making the Connection: The Incredible Shrinking Chinese Economy 39 GDP and National Income 40 2.3 Inflation Rates and Interest Rates 41 The Consumer Price Index 42 Making the Connection: Does Indexing Preserve the Purchasing Power of Social Security Payments? 43 How Accurate Is the CPI? 44 The Way the Federal Reserve Measures Inflation 44 Interest Rates 45 2.4 Measuring Employment and Unemployment 47 Answering the Key Question 49 An Inside Look: Weak Construction Market Persists 50 Chapter The Financial System 59 THE WONDERFUL WORLD OF CREDIT 59 Key Issue and Question 59 3.1 Overview of the Financial System 60 Financial Markets and Financial Intermediaries 61 Making the Connection: Is General Motors Making Cars or Making Loans? 62 Making the Connection: Investing in the Worldwide Stock Market 64 Banking and Securitization 67 The Mortgage Market and the Subprime Lending Disaster 67 Asymmetric Information and Principal–Agent Problems in Financial Markets 68 3.2 The Role of the Central Bank in the Financial System 69 Central Banks as Lenders of Last Resort 69 Bank Runs, Contagion, and Asset Deflation 70 Making the Connection: Panics Then and Now: The Collapse of the Bank of United States in 1930 and the Collapse of Lehman Brothers in 2008 71 3.3 Determining Interest Rates: The Market for Loanable Funds and the Market for Money 76 Saving and Supply in the Loanable Funds Market 76 Investment and the Demand for Loanable Funds 77 Explaining Movements in Saving, Investment, and the Real Interest Rate 78 Find more at www.downloadslide.com CONTENTS Solved Problem 3.3: Using the Loanable Funds Model to Analyze the U.S Economy in 2010 81 The Market for Money Model 82 Shifts in the Money Demand Curve 82 Equilibrium in the Market for Money 84 3.4 Calculating Interest Rates 85 The Concept of Present Value 85 Present Value and the Prices of Stocks and Bonds 87 Solved Problem 3.4: Interest Rates and Treasury Bond Prices 89 The Economy’s Many Interest Rates 89 Answering the Key Question 93 An Inside Look: Credit Market Easing for Small Businesses 94 Appendix: More on the Term Structure of Interest Rates 103 Chapter Determining Aggregate Production 105 THE SURPRISING ECONOMIC RISE OF INDIA 105 Key Issue and Question 105 4.1 The Aggregate Production Function 106 The Cobb–Douglas Production Function 107 The Marginal Products of Capital and Labor 109 Solved Problem 4.1: Calculating the Marginal Product of Labor and the Marginal Product of Capital 111 Calculating Total Factor Productivity 113 Changes in Capital, Labor, and Total Factor Productivity 114 Making the Connection: Foreign Direct Investment Increases Real GDP Growth in China 114 4.2 A Model of Real GDP in the Long Run 116 The Markets for Capital and Labor 116 Combining the Factor Markets with the Aggregate Production Function 118 What Has Happened to the Real Wage and the Real Rental Cost of Capital Over Time? 119 Aggregation 119 4.3 Accounting for Growth in Real GDP 120 Accounting for Real GDP Growth 121 Accounting for Labor Productivity Growth 122 Solved Problem 4.3: Accounting for Labor Productivity Growth 123 Making the Connection: What Explains Recent Economic Growth in India? 124 Total Factor Productivity as the Ultimate Source of Growth 125 4.4 GDP per Hour Worked Among Countries 127 Making the Connection: Will Indian Workers Become More Productive Than U.S Workers? 129 A Numerical Example 130 Macro Data: How Well Do International Capital Markets Allocate Capital? 131 vii Find more at www.downloadslide.com viii CONTENTS Answering the Key Question 131 An Inside Look: GM Expanding Production in India 132 Appendix: The Cobb–Douglas Production Function and Constant Returns to Scale 140 Deriving the Marginal Product of Capital 140 Deriving the Marginal Product of Labor 140 Deriving the Growth Accounting Equation for the Aggregate Production Function 141 Deriving the Real GDP per Hour Worked Form of the Production Function 141 Deriving the Growth Accounting Equation for the Real GDP per Hour Worked Form of the Production Function 141 Showing That the Rate of Return to Capital Is Equal to the Marginal Product of the Capital–Labor Ratio 142 Chapter Long-Run Economic Growth 143 WHO IS NUMBER ONE? 143 Key Issue and Question 143 5.1 Labor Productivity and the Standard of Living 144 The Two Components of Real GDP per Capita 145 Solved Problem 5.1: Explaining Increases in Real GDP per Capita 146 Challenges with Using Real GDP per Capita as a Measure of the Standard of Living 147 5.2 The Solow Growth Model 151 Capital Accumulation 153 Equilibrium and the Steady State 154 The Saving Rate and Real GDP per Hour Worked 157 Macro Data: What Are the Long-Run Effects of Government Budget Deficits? 158 Depreciation, the Labor Force Growth Rate, and Real GDP per Hour Worked 159 Solved Problem 5.2: A Decrease in the Labor Force Growth Rate and Real GDP per Hour Worked 160 5.3 Total Factor Productivity and Labor Productivity 162 Total Factor Productivity and Real GDP per Hour Worked 162 What Explains Total Factor Productivity? 164 Making the Connection: Research and Development Expenditures and Labor Productivity Differences Between China and the United States 164 Making the Connection: How Important Were the Chinese Economic Reforms of 1978? 167 5.4 The Balanced Growth Path, Convergence, and Long-Run Equilibrium 168 Convergence to the Balanced Growth Path 168 Making the Connection: Will China’s Standard of Living Ever Exceed that of the United States? 170 Do All Countries Converge to the Same Balanced Growth Path? 172 Answering the Key Question 173 An Inside Look: Will India Catch Up With China? 174 Appendix A: Capital Accumulation and Endogenous Growth 182 The Evidence on Endogenous Growth Theory .183 Appendix B: Steady-State Capital–Labor Ratio and Real GDP per Hour Worked 185 Find more at www.downloadslide.com 256 CHAPTER • The Labor Market but it has been declining on average since then Initially, the real minimum wage was $3.87 per hour in 2010 dollars It rose to $10.02 per hour in 1968, before declining to $7.25 per hour in 2010, as the average price level rose more than did the nominal minimum wage How much does the federal minimum wage increase unemployment? Relatively few workers earn the federal minimum wage In 2009, fewer than 5% of workers received the federal minimum wage By itself, this low fraction suggests that the federal minimum wage may not have an important effect on the overall unemployment rate However, the minimum wage may significantly increase the unemployment rate for certain groups of lowskilled workers For example, education level is an important determinant of whether a worker earns the minimum wage During 2009, 10.2% of workers without a high school degree earned the minimum wage, while just 2.5% of workers with a bachelor’s degree or higher earned the minimum wage Minimum wage workers are also primarily young workers For workers under age 25, 12.1% earned the minimum wage, but just 3.2% of workers age 25 and older earned the minimum wage So, the minimum wage law may have important effects on young, less educated workers But because teenagers and other workers receiving the minimum wage are a relatively small part of the labor force, most economists believe that, at its present level, the effect of the minimum wage on the unemployment rate in the United States is fairly small Classical dichotomy The assertion that in the long run, nominal variables, such as the money supply or the price level, not affect real variables, such as the levels of employment or real GDP Monetary Policy, Unemployment, and the Classical Dichotomy In the long run, the inflation rate is determined by the growth rate of the money supply Therefore, in the long run, the Federal Reserve can use monetary policy to control the inflation rate Can the Federal Reserve also use monetary policy to affect the unemployment rate in the long run? The classical dichotomy is the assertion that in the long run, nominal variables, such as the money supply or the price level, not affect real variables, such as the levels of employment or real GDP If the classical dichotomy is correct, then monetary policy will not affect the unemployment rate in the long run.13 We can use our labor market model to understand when the classical dichotomy should apply Figure 7.11 on page 254 shows that there is typically unemployment in labor markets for a variety of reasons, including the existence of efficiency wages and labor unions Although it is the real wage that determines employment in the labor market, workers and firms typically negotiate over the nominal wage Because monetary policy can affect the price level, in the short run it can also affect the real wage and the level of employment Figure 7.13 is similar to Figure 7.11 in showing a labor market with unemployment If there is always some unemployment due to frictional and structural reasons, then the real wage will be above the equilibrium real wage, w *, even during expansions We can think of point A in Figure 7.13 as typical for the labor market Suppose the Fed increases the money supply From our discussion of the quantity theory of money in Chapter 6, we know that the price level will eventually increase from P1 to P2 If the nominal wage remained at its initial level of W1, then the real wage will decrease to w2 The decrease in the real wage will lead firms to hire more workers, so employment increases The labor market is at point B The key point is that if the nominal wage is fixed at its initial level, then an increase in the money supply can decrease the real wage and increase employment However, the real wage does not stay at w2 forever For example, firms that were paying efficiency wages will find that the real wage of w2 is not high enough to achieve the efficiency gains that they want These firms will increase the nominal wage to W2 , which 13In macroeconomics, “classical” is generally used to apply to theories that were first widely discussed before the 1930s Economists first discussed the classical dichotomy during that period Find more at www.downloadslide.com Real wage, w Comparisons of Unemployment Rates in Western Europe and the United States 257 ( )( ) w1ϭ W1 W2 ϭ P2 P1 A ( ) w2ϭ Figure 7.13 … firms increase the nominal wage until the real wage returns to its initial value, so … An increase in the money supply increases the price level, causing the real wage to fall and employment to rise, but … Labor Markets and Monetary Policy S • B W1 P2 An increase in the money supply temporarily reduces the real wage and increases employment However, in the long run the nominal wage increases so the real wage and employment return to their initial levels w* … the increase in employment is temporary L1 L2 D Quantity of labor, L will cause the real wage to increase back towards its initial value The labor market is back at the original point A Therefore, after nominal wages adjust to the higher price level, the increase in the money supply does not affect the real wage and employment An increase in the money supply increases nominal variables But in the long run, the price level and the nominal wage both increase so as to leave the real wage unchanged Because the real wage does not change, the level of employment remains unchanged With employment constant, holding other factors constant, the level of real GDP will not change The real wage, employment, and real GDP are all real variables because they represent quantities Therefore, we can conclude that an increase in the money supply does not increase real variables Our labor market model shows that the classical dichotomy applies in the long run when prices have sufficient time to adjust to the increase in the money supply, but that the dichotomy does not apply in the short run when prices not have enough time to fully adjust to the increase in the money supply We discuss the flexibility of nominal wages and prices in greater detail in Chapter Comparisons of Unemployment Rates in Western Europe and the United States In this chapter, we have developed models of the labor market and of the determinants of the natural rate of unemployment We have also seen that average unemployment rates and the average duration of unemployment are higher in Western Europe than in the United States Households in Western Europe consume more leisure than households in the United States, but this development is relatively recent There appear to be significant differences between the Western European and U.S labor markets Economists have examined three potential explanations for the differences: Preferences of workers Income tax rates Strength of labor unions 7.5 Learning Objective Describe how economic policy explains differences in unemployment rates between Europe and the United States Find more at www.downloadslide.com 258 CHAPTER • The Labor Market Preferences of Workers Olivier Blanchard, chief economist at the International Monetary Fund, argues that differences in cultural preferences explain why Western Europeans work less than individuals in the United States.14 In both the United States and Europe, real GDP per person and the real wage have increased over the decades due to the accumulation of capital goods and increases in productivity As a result, incomes and wealth are higher today than they were in the past In Section 7.1, we saw that an increase in the real wage has both a substitution effect, leading to an increase in the quantity of labor supplied, and an income effect, leading to a decrease in the quantity of labor supplied How strong each of these effects is depends on the preferences of workers in a country Blanchard argues that as real GDP per person has increased, Western Europeans have simply used the increase in income to “purchase” more leisure than have Americans However, for Blanchard’s explanation to be correct, the difference in preferences must be a recent development, because as recently as the 1960s, Western Europeans worked as many hours as, or even more hours than, Americans Income Tax Rates Nobel Laureate Edward Prescott of Arizona State University believes that higher income tax rates in Western Europe can explain why Western Europeans work fewer hours than Americans.15 If the substitution effect is stronger than the income effect, then our model of the labor market in Section 7.1 indicates that an increase in income tax rates will reduce the incentive to work and lead to a reduction in the amount of labor supplied Prescott points out that the differences in income tax rates between Western Europe and the United States were smaller in the 1960s and early 1970s, when the amount of leisure time was similar in both areas During the 1970s, income tax rates rose much more rapidly in Western Europe at the same time as the amount of leisure in Europe was increasing This finding supports Prescott’s emphasis on income tax rates However, for Prescott’s explanation to be correct, declines in the after-tax wage resulting from tax increases should have resulted in the quantity of labor supplied declining significantly In other words, the elasticity of labor supply with respect to the after-tax wage would have to be large Many estimates of the elasticity of labor supply with respect to the after-tax wage indicate that it is very low As a result, the observed increases in income tax rates in Western Europe not appear to be large enough by themselves to explain the large increases in leisure taken by workers in those countries Strength of Labor Unions Figure 7.14 shows that the extent of unionization is greater in the United Kingdom, Germany, Canada, and Japan than in the United States and South Korea Economists Alberto Alesina and Edward Glaeser of Harvard University and Bruce Sacerdote of Dartmouth College argue that this difference in unionization rates can explain much of the difference between U.S and European labor markets.16 Strong labor unions in Europe negotiate for a large number of mandatory holidays, long vacations, and short workweeks Strong labor unions may push the wage above the equilibrium real wage and cause unemployment Unions are also politically powerful and can use that influence to pressure 14Olivier Blanchard, “The Economic Future of Europe,” Journal of Economic Perspectives, Vol 18, No 4, Fall 2004, pp 3–26 15Edward Prescott, “Why Do Americans Work So Much More Than Europeans?” Federal Reserve Bank of Minneapolis Quarterly Review, Vol 28, No 1, July 2004, pp 2–13 16Alberto Alesina, Edward Glaeser, and Bruce Sacerdote, “Work and Leisure in the U.S and Europe: Why So Different?” NBER Macroeconomic Annual 2005, Vol 20, 2006, pp 1–64 Find more at www.downloadslide.com Wage and salary workers in unions Comparisons of Unemployment Rates in Western Europe and the United States 259 60% Figure 7.14 Unionization Rates Around the World, 1960–2008 United Kingdom 50 A larger percentage of the workforce in Europe belongs to unions than in the United States, although the relative strength of unions has declined dramatically in recent years for most countries 40 Japan 30 United States Canada Germany 20 • 10 South Korea 1960 Source: Organization for Economic Co-operation and Development 1965 1970 1975 1980 1985 1990 1995 2000 2005 politicians for regulations that make it difficult for firms to fire workers Equation (7.2) from page 248 tells us that U = + (f /s) You might think that a decrease in the separation rate, s, would reduce the natural rate of unemployment, U However, this is not necessarily the case because firms will respond to the regulation in ways that reduce the rate of job finding, f Firms may adopt more capital-intensive technology that reduces the need to hire workers, or they may be reluctant to expand operations Both of these actions may decrease the rate of job finding and therefore increase the natural rate of unemployment In addition, labor unions have pushed for generous unemployment insurance, which reduces the incentive for workers to accept job offers, further reducing the job finding rate Making the Connection Job Security and Job Hiring at France Télécom SA In 2006, France Télécom SA was the world’s fifth-largest telecommunications company Because it was a formerly state-owned company, two-thirds of its employees were covered by civil service contracts, which meant the workers were guaranteed jobs for life Not surprisingly, France Télécom found it very difficult to adapt to changes in the telecommunications industry To encourage workers to quit, the company provided employees with funds to start up their own businesses and provided help writing business plans and obtaining loans If these new businesses did not work out within the first three years, the employees could return to work for French Télécom The French government also makes it difficult to fire workers even if they not have civil service contracts Unless employees steal or are extremely negligent, it is difficult for any firm in France to fire workers While an extreme case, the experience of France Télécom demonstrates how difficult it can be for European firms to fire workers Economist Elie Cohen, a former board member of France Télécom said, “In France, you can’t fire Find more at www.downloadslide.com 260 CHAPTER • The Labor Market people just because your industry or technology is changing.” Not surprisingly, many firms are reluctant to hire in the first place This can reduce the rate of job finding and increase the natural rate of unemployment This chapter examines some of the reasons economists have offered for the differences between unemployment rates in Western Europe and the United States, including different preferences among workers, differences in tax rates, and the influences of labor unions The table below confirms that the unemployment rate in the United States was lower than the unemployment rate in France, Germany, and Italy from 2005 to 2008 In 2009, however, the unemployment rate was higher in the United States than in any of these Western European countries The financial crisis of 2007–2009 hit the United States very hard, and even though the recession ended in the summer of 2009, the unemployment rate remained in excess of 9% through 2010 Could it be that the high unemployment rate in the United States reflected an increase in structural unemployment—an increase in the mismatch between available workers and job openings—and an increase in the natural rate of unemployment? As we saw in the Making the Connection on page 244, this remains a point of debate among economists Unemployment Rates for the United States and Selected European Countries Year United States France Germany Italy 2005 5.1% 9.0% 11.2% 7.8% 2006 4.6 8.9 10.3 6.9 2007 2008 2009 2010 4.6 5.8 9.3 9.6 8.1 7.5 9.2 9.4 8.7 7.6 7.8 7.2 6.2 6.8 7.9 8.6 Sources: Lelia Abboud “At France Télécom, Battle to Cut Jobs Breeds Odd Tactics,” Wall Street Journal, August 14, 2006; U.S Bureau of Labor Statistics, International Comparisons of Annual Labor Force Statistics, Adjusted to U.S Concepts, 10 Countries, 1970–2010, www.bls.gov/fls/flscomparelf/ unemployment.htm; and Rob Valletta and Katherine Kuang, “Is Structural Unemployment on the Rise?” Economic Letter, Federal Reserve Bank of San Francisco, November 8, 2010 Test your understanding by doing related problem 5.4 on page 269 at the end of this chapter Find more at www.downloadslide.com Comparisons of Unemployment Rates in Western Europe and the United States 261 Answering the Key Question Continued from page 231 At the beginning of the chapter, we asked the question: ”Should policymakers aim for an unemployment rate of zero?” There are three categories of unemployment: cyclical, frictional, and structural Cyclical unemployment occurs when workers lose their jobs due to a recession, and structural unemployment occurs when workers lack the skills necessary to find new jobs Reducing these categories of unemployment will increase the level of well-being in the economy Frictional unemployment occurs as workers and firms look for better job matches Eliminating all frictional unemployment would clearly reduce the efficiency of the economy Better job matches make workers more productive and increase the efficiency of the economy Therefore, policymakers should not aim for an unemployment rate of zero Before moving on to Chapter 8, read An Inside Look on the next page for a discussion of the U.S jobless rate in December 2010 and the challenges facing the long-term unemployed Find more at www.downloadslide.com AN INSIDE LOOK Unemployment Rate Falls, yet Remains Significantly Lower than Underemployment Rate WALL STREET JOURNAL Why Did the Unemployment Rate Drop? The U.S jobless rate dropped substantially to 9.4% in December, but the government’s broader measure of unemployment dropped at a more modest pace to 16.7%, highlighting the problem of the longterm unemployed The comprehensive gauge of labor underutilization, known as the “U-6” for its data classification by the Labor Department, accounts for people who have stopped looking for work or who can’t find fulltime jobs a The key to the discrepancy between the two numbers was an increase in the number of workers considered marginally attached to the labor force The figure increased in December The number of workers part-time for economic reasons fell slightly The increase in the number of discouraged workers highlights the problem of the long-term unemployed Some four million people have been without a job for 262 52 weeks or longer in December, according to the Labor Department That’s a decline from November, but there are indications that those people are dropping out of the labor force b The big drop in the overall unemployment rate and the U-6 measure was primarily due to a decline in the number of unemployed, which fell by 556,000 in December That’s good news since the number of people who are employed increased by nearly 300,000 But that still leaves over 250,000 workers leaving the labor force altogether That likely means a substantial part of the drop was due to workers giving up Anyone unemployed over 99 weeks has no access to unemployment benefits and many lose access even earlier Once those benefits expire, the unemployed may stop considering themselves part of the labor force To be sure, declines in the labor force also come from workers who decide to go back to school, go on disability, leave to raise children or retire The overall unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things The rate is calculated by dividing that number by the total number of people in the labor force c The U-6 figure includes everyone in the official rate plus “marginally attached workers” — those who are neither working nor looking for work, but say they want a job and have looked for work recently; and people who are employed part-time for economic reasons, meaning they want fulltime work but took a part-time schedule instead because that’s all they could find People who drop out of the labor force completely aren’t included in this tally Source: Phil Izzo, “Why Did the Unemployment Rate Drop?,” Wall Street Journal, January 7, 2011 The Wall Street Journal by Dow Jones & Co Copyright 2011 Reproduced with permission of Dow Jones & Company, Inc via Copyright Clearance Center Find more at www.downloadslide.com Key Points in the Article This article discusses unemployment and underemployment in the United States in December, 2010 The U.S Department of Labor reported that the U.S jobless rate dropped to 9.4% in December, but the broader measure of unemployment, a comprehensive gauge of underemployment known as the U-6, only declined to 16.7% The decreases in these two figures can be explained by an increase in available jobs and a decrease in the size of the labor force Analyzing the News Although the jobless rate declined to 9.4% in December 2010, a wide gap remained between this figure and the Labor Department’s broader measure of unemployment, known as the U-6 The U-6 measurement includes not only those workers who are unemployed, but also those who are working part time because they cannot find fulltime employment and those who are considered marginally attached workers The graph shows both measurements of unemployment from 2006 through 2010 Throughout 2006 and 2007, the gap remained relatively constant at approximately 4%, but since the recession began in December 2007, the gap between these two figures has grown significantly, widening to more than 7% by the end of 2010 One reason for this growing disparity is the extended length of time many workers have gone without employment As of December 2010, approximately million people had been without work for a year or longer, and this seems to have resulted in an increase in the total number of discouraged workers who had dropped out of the labor force The number of unemployed b workers fell by 556,000 in December 2010, but of this total, only 300,000 a found employment The remaining 256,000 workers dropped out of the labor force The lingering effects of the recession, including long-term unemployment, are likely responsible for a large portion of this exodus from the labor force After 99 weeks of unemployment, workers are no longer eligible for unemployment benefits, and many of these workers drop out of the labor force As a result, the unemployment rate falls even though the number of employed workers does not increase Discouraged workers who have c been out of the labor force for more than one year are not included in the labor force and are therefore not included in either the jobless rate or the U-6 measure of unemployment An alternative unemployment measurement, called the SGS Alternate, includes these long-term discouraged workers In December 2010, this measure of the unemployment rate was greater than 22%, further highlighting the economic challenges of the long-term unemployed THINKING CRITICALLY According to the article, the number of people employed increased by nearly 300,000 and over 250,000 left the labor force in December 2010 Using a labor market graph, illustrate these changes and explain how these changes will affect the real wage and the quantity of labor According to the figure showing the unemployment rate below and the article, the unemployment rate increased from approximately 5% at the beginning of 2008 to 9.4% in December 2010 Was the increase in the unemployment rate due to frictional, structural, or cyclical reasons? Did the natural rate of unemployment increase? 20% Underemployment rate, (U-6) Recession 15 Unemployment rate 10 2006 2007 2008 2009 2010 2011 Unemployment Rate and Underemployed (U-6) Rate, 2006–2010 Source: Reprinted with permission of The Wall Street Journal, Copyright © 2011 Dow Jones & Company, Inc All Rights Reserved Worldwide • An Inside Look 263 Find more at www.downloadslide.com 264 CHAPTER • The Labor Market CHAPTER SUMMARY AND PROBLEMS KEY TERMS Classical dichotomy, p 256 Cyclical unemployment, p 243 Efficiency wage, p 254 Frictional unemployment, p 240 7.1 Marginal product of labor (MPL), p 233 Natural rate of unemployment, p 243 The Labor Market Use the model of demand and supply to explain how wages and employment are determined scenarios In each case, show the effect on the market and explain what will happen to the real wage and the equilibrium quantity of labor a A technological change occurs that increases the productivity of all workers SUMMARY We can use the model of demand and supply to explain the real wage and the quantity of labor The labor demand curve shows the relationship between the real wage and the quantity of labor that firms want to hire The labor demand curve is the marginal product of labor curve and is downward sloping because of diminishing marginal returns The labor demand curve shifts when any variable affecting the willingness of firms to hire workers—other than the real wage—changes The labor supply curve shows the relationship between the real wage and the quantity of labor that individuals want to supply The real wage is what individuals could earn if they chose to work rather than to engage in leisure, so the real wage is the opportunity cost of leisure As the real wage increases, the opportunity cost of leisure increases, and individuals reduce leisure and increase labor The labor supply curve shifts when any variable affecting the willingness of households to supply labor—other than the real wage—changes b The government increases income tax rates c Worker preferences change so that they prefer consumption of market goods to consumption of leisure d The government reduces payroll taxes firms pay when they hire workers 1.6 Review Questions 1.1 1.2 1.3 1.4 Explain the difference between a real wage and a nominal wage Why is the demand curve for labor downward sloping? How the income and the substitution effects determine the slope of the labor supply curve? When the labor market is in equilibrium, are all workers employed? Problems and Applications 1.5 Structural unemployment, p 241 Unemployment insurance, p 241 [Related to Solved Problem 7.1 on page 238] Draw a graph of the aggregate labor market in equilibrium Then consider each of the following According to Claudia Goldin of Harvard University, in the United States prior to 1940, most married women who worked had limited education and came from lower-income families She argues that: “Their decisions were made as secondary workers and their market work evaporated when family incomes rose sufficiently.” a Discuss the likely relative sizes of the income and substitution effects for women during these years b Given your answer to part a., discuss the shape of the labor supply curve for women during these years Source: Claudia Goldin, “The Quiet Revolution That Transformed Women’s Employment, Education, and Family,” American Economic Review, Papers and Proceedings, Vol 96, No 2, May 2006, pp 1–21 1.7 Suppose that workers become concerned about the future and therefore wish to increase their hours of work relative to leisure At the same time, there is an increase in the capital stock, making workers more productive Visit www.myeconlab.com to complete these exercises online and get instant feedback Find more at www.downloadslide.com Chapter Summary and Problems 265 b Can you predict the effect on equilibrium employment? On the real wage? 1.8 1.9 In countries with declining populations, governments have begun to offer income subsidies for families with children What impact is this subsidy likely to have on the labor market, all other things being equal? Support your answer with a graph Discussing job openings during the recession, Cheryl Peterson, a director of the American Nurses Association, was quoted as saying: “Until the downturn, it was easy for [nurses] to find employment Now it is a little more difficult because the number of job openings has fallen and we have more retired nurses coming back.” a Why might retired nurses reenter the job market during a recession? b Use a graph to explain what is happening in the labor market reducing overall employment.” Do you agree with this statement? Briefly explain 1.11 The graph below shows the labor market The initial equilibrium is at point A The new equilibrium is at point B Real wage, w a Draw a graph of the labor market, showing the effect of these changes S1 B A w1* D2 D1 L1* Quantity of labor, L a What factors could have caused the shifts shown on the graph? b Show the new equilibrium real wage and quantity of labor on the graph Have wages and employment increased or decreased? c How would your answer to part b change if the size of the labor demand shift had been greater than the size of the labor supply shift? Source: Louis Uchitelle, “Despite Recession, High Demand for Skilled Labor,” New York Times, June 23, 2009 1.10 Consider the following statement: “Increases in the capital stock are harmful to workers because they allow firms to substitute capital for labor, thus 7.2 S2 Categories of Unemployment Define unemployment and explain the three categories of unemployment SUMMARY Review Questions There are three categories of unemployment: cyclical, frictional, and structural You are cyclically unemployed if you are unemployed due to current economic conditions, such as a recession You are frictionally unemployed if you are unemployed for a short period of time while looking for a better job match You are structurally unemployed if you lack the skills necessary to find a job Full employment occurs when cyclical unemployment is zero The natural rate of unemployment is the normal rate of unemployment that exists when cyclical unemployment is zero Unemployment insurance, a government program that allows workers to receive benefits for a period of time after losing their jobs, can increase the efficiency of labor markets and the economy 2.1 2.2 2.3 2.4 2.5 What is frictional unemployment? What is structural unemployment? What is cyclical unemployment? When the economy is at full employment, are all workers employed? Briefly explain Compare the average duration of unemployment in the United States and Europe Problems and Applications 2.6 [Related to the Making the Connection on page 244] Increases in structural unemployment can result from a recession but are more commonly associated with other changes, such as the Visit www.myeconlab.com to complete these exercises online and get instant feedback Find more at www.downloadslide.com 266 CHAPTER • The Labor Market 2.7 2.8 7.3 development of new products that replace old products A classic example of this is typewriters and computers a How might technological change cause structural unemployment? b Would you expect a similar effect on unemployment when new types of cereal or styles of clothing are developed? For each of the following examples, identify the type of unemployment a Marty has been laid off from her job at an aircraft plant but expects to be recalled when the economy picks up b Scott has just graduated from college and hasn’t found a job yet c Kishore works as a lobsterman in Maine in the summer, but the industry shuts down in the winter d Doug worked in an automobile plant in Michigan, but the plant was shut down permanently Suppose that the government wished to reduce the rate of frictional unemployment a What types of measures might target frictional unemployment? b There is some evidence that frictional unemployment has decreased over the past two decades What would explain that? 2.9 Suppose that the government wants to reduce the rate of structural unemployment a What types of measures might target structural unemployment? b Do measures such as the extension of unemployment insurance in industries affected by technological change tend to increase or decrease structural unemployment? 2.10 Consider the following statement: “Because there will always be frictional and structural unemployment, there is no reason for government policymakers to be concerned about them They should target cyclical unemployment instead.” Do you agree with this statement? Briefly explain 2.11 [Related to the Chapter Opener on page 231] In February 2010, the average duration of unemployment increased to 30.5 weeks, a record high According to CNN Money, “It’s no wonder unemployed workers are getting discouraged: It’s never taken longer to find a new job.” a What type of unemployment is the quote referring to? b What may happen if workers become discouraged? Source: Jessica Dickler, “Countdown to a New Job 211 Days,” CNN Money, money.cnn.com/2010/02/05/news/ economy/unemployment_duration/index.htm The Natural Rate of Unemployment Explain the natural rate of unemployment SUMMARY Review Questions There is a significant amount of job turnover every quarter in the economy, with millions of workers finding employment and millions of workers leaving employment When the rate of job finding increases, the natural rate of unemployment decreases, and when the rate of job separation increases, the natural rate of unemployment increases Demographic, institutional, and economic factors cause the natural rate of unemployment to rise and fall Technological change can increase unemployment in the short run as new technology eliminates the demand for some products and the workers who make those products However, technological change also creates the demand for new products In the long run, by increasing the real wage, technological change ultimately increases employment 3.1 3.2 3.3 3.4 3.5 Define the natural rate of unemployment in terms of flows into and out of the labor market What are the key factors that determine the structural and frictional unemployment rates? How does the natural rate of unemployment change as the demographic composition of the population changes? What is the effect of unemployment insurance on the natural rate of unemployment? Explain the ways in which technological change might alter the natural rate of unemployment Visit www.myeconlab.com to complete these exercises online and get instant feedback Find more at www.downloadslide.com Chapter Summary and Problems 267 Problems and Applications 3.6 3.7 3.8 3.9 Suppose that the rate of job separation is 2% and the job-finding rate is 18% a What is the natural rate of unemployment? b If the job-finding rate doubles, what is the new natural rate of unemployment? c Return to the original scenario If the rate of job separation is cut in half, what is the new natural rate of unemployment? d Which has more impact: a doubling of the jobfinding rate or a halving of the job-separation rate? Does your result have any implications for government policy? How would you expect each of the following factors to affect the natural rate of unemployment? a There is an increase in the rate of technological change b The minimum wage falls c Unemployment benefits (that is, the percentage of wages replaced by unemployment) are increased d Improvements in information technology speed the matching of jobs and workers e There is a recession The CBO estimated that the natural rate of unemployment was 6.8% in 1979 and 5.0% in 2001 If you examine Figure 7.10 on page 250 carefully, you can see that the natural rate remained relatively constant during the 1980s and then fell more rapidly during the 1990s a Considering only the frictional component of the natural rate of unemployment, what might explain this change? b Productivity growth was slow during the 1980s One theory about this slow growth was that innovations in computer technology were not increasing productivity in ways that were directly measurable Productivity growth increased in the 1990s, and at the same time, the natural rate fell Does this fact suggest anything about structural unemployment in the 1980s and 1990s? Increases in the generosity (percentage of wages replaced) and duration of unemployment benefits are associated with increases in the natural rate of unemployment a Why governments provide unemployment benefits if they may increase unemployment rates? b Among the measures passed by the U.S government during the 2007–2009 recession were temporary increases in the duration of unemployment benefits Would you expect these measures to increase the natural rate? 3.10 In countries with high birthrates, such as many of the Central and South American nations, unemployment rates are typically far higher than in countries with lower birthrates Explain why 3.11 Demographic studies show that the Hispanic population of the United States is increasing Traditionally, Hispanics have had higher-than-average rates of unemployment However, it is also true that Hispanic women tend to have lower labor force participation rates (in other words, are less likely to enter the labor force) than women of other ethnic groups How would these demographic trends be likely to affect the natural rate of unemployment? 3.12 In an article about the impact of the 2007–2009 recession on the labor market, Bloomberg quotes Lawrence Mishel, president of the Economic Policy Institute in Washington, as saying: “People tend to think that when you come out of a recession you get the labor market you had when you entered it This time you may get something quite different.” Why might a prolonged recession cause changes in the natural rate of unemployment? Source: Matthew Benjamin and Rich Miller, “‘Great’ Recession Will Redefine Unemployment as Jobs Vanish,” Bloomberg.com, May 3, 2009 3.13 [Related to Solved Problem 7.3 on page 247] The following table, based on data from the Bureau of Labor Statistics, gives total nonfarm employment in October, November, and December 2010: Total nonfarm employment (in thousands) October November December 130,538 130,609 130,712 Source: Bureau of Labor Statistics a Calculate the change in nonfarm employment between October and November and between November and December b Because new workers constantly enter the labor market, the economy must create approximately 150,000 jobs each month to keep unemployment constant, all other things being equal What would you expect to have happened to the unemployment rate during November and December? Visit www.myeconlab.com to complete these exercises online and get instant feedback Find more at www.downloadslide.com 268 CHAPTER • The Labor Market 7.4 Why Does Unemployment Exist? Explain how government policies affect the unemployment rate SUMMARY Unemployment exists when the real wage is above the equilibrium real wage When this occurs, a surplus of workers exists, and the surplus is equivalent to the unemployed in the household survey by the Bureau of Labor Statistics An efficiency wage is a higher-thanequilibrium real wage that firms voluntarily pay This wage may reduce quit rates, increase worker productivity, and improve the average quality of the workforce, which can increase firms’ profits Labor unions can have market power and drive the real wage above the equilibrium real wage Minimum wage laws force some firms to pay a wage higher than the equilibrium real wage The classical dichotomy asserts that in the long run, nominal variables, such as the money supply or the price level, not affect real variables, such as the levels of employment or real GDP Review Questions 4.1 How does a real wage above equilibrium cause unemployment? 4.2 What is an efficiency wage, and how efficiency wages affect the labor market? 4.3 How might labor unions contribute to unemployment? Problems and Applications 4.4 Suppose the equations for the demand and supply of labor are given by: LD = 100 - 2w LS = 10 + 3w where w is the real wage and LD and LS are the quantity of labor demanded and supplied, respectively 4.5 a Solve for the equilibrium wage and the quantity of employment and graph your results b Assume that the government imposes a $20 minimum wage Find the new quantity of labor demanded and supplied c How many people lose their jobs because of the minimum wage? How many workers are now unemployed? In 1914, Ford Motor Company doubled its wage to $5 per day, a rate that was considerably above the average wage at that time a In terms of efficiency wages, explain why Ford would have had an incentive to this b What data would you look for to determine whether Ford’s wage increase was successful in achieving its goals? 4.6 Minimum wage laws are controversial for many reasons One is that they may not be beneficial to the workers that they are most intended to help a What type of workers are most likely to be paid the minimum wage? b What happens to employment of these workers when a minimum wage is enacted (or increased)? c Overall, who gains and who loses from a minimum wage law? 4.7 Some economists studying the effects of the minimum wage law have found that it tends to reduce the employment of black teenagers relative to white teenagers Briefly explain the economics behind this finding 4.8 Some craft unions, such as electricians, restrict the number of workers who can join the union and then negotiate with employers to hire only union workers Use a demand and supply graph to illustrate the effect of a craft union on emoloyment and wages in an industry 4.9 Traditionally, unions have been strongest in manufacturing industries In the United States, unionism reached its peak in 1945, and it has been falling since then a How does the changing sectoral composition of the U.S economy help to explain this trend? b Two industries in which, traditionally, unions have been very strong are automobile manufacturing and airlines Why has union power weakened in these industries? 4.10 Unemployment in the labor market is increased by forces that keep wages from falling to the equilibrium level Other than efficiency wages, unionism, and minimum wages, what other factors might cause this wage stickiness? Visit www.myeconlab.com to complete these exercises online and get instant feedback Find more at www.downloadslide.com Chapter Summary and Problems 269 7.5 Comparisons of Unemployment Rates in Western Europe and the United States Describe how economic policy explains differences in unemployment rates between Europe and the United States SUMMARY Western European countries have higher average unemployment rates than does the United States, and workers in Western Europe work fewer hours There are three broad explanations for why this is the case First, workers in Western Europe may simply choose to work fewer hours than workers in the United States However, the differences in unemployment rates and leisure time are recent developments, so the differences in preferences must have been a recent development Second, income tax rates are higher in Western Europe, which reduces the opportunity cost of leisure The tax rates in Western Europe rose relative to the rates in the United States in the 1970s and 1980s as the differences in unemployment rates and leisure started to develop However, given what economists know about how much leisure responds to tax rates, the increase in Western European tax rates may not be large enough by itself to explain the differences in leisure and unemployment that we observe Finally, labor unions are stronger in Western Europe and may negotiate higherthan-equilibrium real wages, long vacations, more holidays, and shorter workweeks In addition, strong unions may pressure politicians into passing regulations that make it difficult to fire workers Firms may respond by being reluctant to hire workers in the first place This reluctance would reduce the rate of job finding and increase the natural rate of unemployment in the U.S may be very different from those they employ in Europe Bloomberg Businessweek reports: “With more than million Americans now employed by foreign-owned companies, U.S labor unions are starting to export their grievances.” If U.S unions are successful in getting these companies to follow European practices, what would you expect to see happen to the natural rate of employment in the United States? Source: Carol Matlack, “U.S Labor Takes Its Case to European Bosses,” Bloomberg Businessweek, January 22, 2010 5.5 Source: European Central Bank, Monthly Bulletin, May 13, 2010 5.6 Review Questions 5.1 5.2 5.3 How might differences in preferences explain the difference between European and U.S unemployment rates? Why would tax rates have an impact on unemployment rates? Does the extent of labor unionism explain the difference between European and U.S unemployment rates? Problems and Applications 5.4 Discussing the recovery of the labor market in Europe, the European Central Bank (ECB) noted: “Hourly wages adjusted earlier and more sharply in the United States than in the euro area Different labor market policies and a greater degree of wage flexibility played a role.” What did the ECB mean by “different labor market policies?” 5.7 In Japan, relationships between labor unions and management tend to be less adversarial and more cooperative than those in the United States and Europe What are the implications of this observation for the size of Japan’s natural rate of unemployment, relative to the natural rates of unemployment in the United States and Europe? The number of U.S autoworkers has decreased considerably, in part due to the decline of the auto industry but also due to changes in the way that automobiles are manufactured In light of the information presented in this chapter on European unionism, how might the strength of U.S autoworkers’ unions actually have caused some of the long-run trends in employment in that industry? [Related to the Making the Connection on page 259] Some European companies have U.S subsidiaries, and the labor practices they employ Visit www.myeconlab.com to complete these exercises online and get instant feedback Find more at www.downloadslide.com 270 CHAPTER • The Labor Market DATA EXERCISES D7.1: [Related to Macro Data on page 242] The CIA World Factbook (https://www.cia.gov/library/ publications/the-world-factbook/) gives the sectoral composition of GDP for most countries a Examine the sectoral compositions for highincome countries Are they similar to or different from those of the United States? b Examine the sectoral compositions for lowincome countries How are these distributions different? c What implications might the different sectoral distributions have for natural rates of unemployment? D7.2: Under the World Bank’s Labor and Social Protection data (see http://data.worldbank.org/topic/ labor-and-social-protection), there is information on long-term unemployment by country a In what countries is the percentage of longterm unemployed individuals (as a percentage of total unemployed individuals) the highest? The lowest? b Can you relate the differences in the duration of unemployment to differences in labor markets in these countries? D7.3: How has the 2007–2009 recession affected U.S unemployment? Go to the Bureau of Labor Statistics Web site (www.bls.gov) and find monthly unemployment rates for the past decade a What was the average rate of unemployment for the 2002–2006 period? b What has been the average rate of unemployment from 2007 to the present? c At this time, does it appear that the labor market has recovered from the 2007–2009 recession? d Search the Web to find the most recent government projections for unemployment in the coming years D7.4: Return to the Bureau of Labor Statistics Web site and look for data on the duration of unemployment a What percentage of unemployment is accounted for by spells lasting less than five weeks b What percentage of unemployment is accounted for by spells lasting over 26 weeks? c If you chart unemployment spells, you observe that, during normal periods, many workers become unemployed and reemployed relatively quickly Others not find jobs until just before or after the 26-week mark What does this suggest about the relationship between unemployment benefits and longer spells of unemployment? D7.5: [Excel question] The standard measure of unemployment is called the U-3 rate in data from the Bureau of Labor Statistics There is a broader measure, U-6, which includes those measured as unemployed under the U-3 rate plus workers who are underemployed and marginally attached to the labor force a Go to the Web site for the Bureau of Labor Statistics and find the definition of the U-6 rate b Use Excel to chart the U-3 and U-6 data for the past ten years c How the U-3 and U-6 measures move during the business cycle? d What is the average level of unemployment, as based on each rate? Is one more volatile than the other? e To what extent are the U-3 and U-6 rates correlated? Visit www.myeconlab.com to complete these exercises online and get instant feedback ... 11 9 Aggregation 11 9 4.3 Accounting for Growth in Real GDP 12 0 Accounting for Real GDP Growth 12 1 Accounting for Labor Productivity Growth 12 2 Solved... Events 1. 2 How Economists Think About Macroeconomics 11 What Is the Best Way to Analyze Macroeconomic Issues? 11 Macroeconomic Models 12 Solved Problem 1. 2: Do Rising... Rate? 210 Inflation Uncertainty 211 Benefits of Inflation 211 6.6 Hyperinflation and Its Causes 212 Causes of Hyperinflation 213 German Hyperinflation