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name: labor-markets description: Labor market economics — unemployment, wages, Phillips Curve. Cover NAIRU, Phillips Curve, Okun's law.
| Type | Definition | Duration | Policy Response |
|---|---|---|---|
| Frictional | Workers transitioning between jobs; normal search process | Short-term | Improve information, matching platforms |
| Structural | Mismatch between worker skills and job requirements | Long-term | Retraining, education, relocation support |
| Cyclical | Demand-deficient unemployment during recessions | Varies with cycle | Fiscal/monetary stimulus |
| Seasonal | Predictable fluctuations (tourism, agriculture, construction) | Recurring | Seasonal adjustment in data |
Measurement:
Unemployment rate = Unemployed / Labor Force x 100%
Labor force = Employed + Unemployed (actively seeking work)
Participation rate = Labor Force / Working-age Population x 100%
Employment rate = Employed / Working-age Population x 100%
Broader measures:
U-3: Official unemployment rate (ILO definition)
U-6: Includes marginally attached workers and involuntary part-time
(better measure of labor market slack)
Beveridge Curve: Relationship between vacancy rate and unemployment rate
- Outward shift = increased mismatch (structural unemployment rising)
- Movement along curve = cyclical changes
The unemployment rate consistent with stable inflation. Below NAIRU, inflation accelerates; above NAIRU, inflation decelerates.
NAIRU estimation approaches:
1. Phillips Curve estimation: Extract NAIRU as the unemployment rate
where inflation is stable (inflation expectations = actual inflation)
2. Kalman filter / state-space models: Estimate time-varying NAIRU
3. Structural models: Based on wage-setting and price-setting equations
4. Reduced-form: HP filter or similar statistical decomposition
Typical NAIRU estimates (as of mid-2020s):
US: ~4.0-4.5%
Eurozone: ~6.5-7.0%
Germany: ~3.0-3.5%
UK: ~4.0-4.5%
Japan: ~2.5-3.0%
NAIRU is NOT constant — it shifts due to:
- Labor market reforms (flexibility, matching efficiency)
- Demographic changes (aging workforce)
- Globalization and trade openness
- Hysteresis effects (prolonged unemployment raises NAIRU)
- Technology and automation
Policy significance: Central banks use NAIRU estimates to gauge labor market slack and calibrate monetary policy. If unemployment < NAIRU, expect inflationary pressure. Wide uncertainty bands around NAIRU estimates limit its precision as a policy guide.
Original Phillips Curve (1958): Negative relationship between wage growth and unemployment.
Expectations-Augmented Phillips Curve (Friedman-Phelps):
pi = pi_e - beta * (u - u*) + supply_shock
pi = actual inflation
pi_e = expected inflation
u = actual unemployment rate
u* = NAIRU
beta = slope parameter (sensitivity of inflation to unemployment gap)
supply_shock = cost-push factors (oil prices, exchange rate, etc.)
When u < u*: inflation exceeds expectations (economy overheating)
When u > u*: inflation falls below expectations (slack in economy)
When u = u*: inflation equals expectations (stable)
New Keynesian Phillips Curve:
pi_t = beta * E[pi_t+1] + kappa * x_t
pi_t = current inflation
E[pi_t+1] = expected future inflation (forward-looking)
x_t = output gap (or real marginal cost)
kappa = slope (sensitivity to the output gap)
Key feature: Forward-looking expectations (rational expectations),
not backward-looking (adaptive expectations)
Phillips Curve flattening: Since the 1990s, the Phillips Curve has appeared flatter in many economies — inflation is less responsive to unemployment changes. Explanations:
Relationship between output gap and unemployment gap:
u - u* = -beta * (Y - Y*) / Y*
Typical beta: ~0.4-0.5 for the US
→ A 1 percentage point increase in unemployment corresponds to
roughly 2-2.5% decline in GDP relative to potential
Alternative (growth rate form):
Change in u = -beta * (g - g*)
g = actual GDP growth
g* = potential GDP growth (typically ~2% for advanced economies)
beta = ~0.4-0.5
→ If GDP growth is 1pp below potential, unemployment rises ~0.4-0.5pp
Limitations:
Wage-setting frameworks:
Wage Phillips Curve:
Nominal wage growth = Inflation expectations + Productivity growth - beta * (u - u*)
Real wage growth should track productivity growth in equilibrium.
If real wages grow faster than productivity → unit labor costs rise → inflationary
If real wages grow slower than productivity → labor share of income falls
Labor share of income:
| Institution | Effect on NAIRU | Effect on Resilience |
|---|---|---|
| Employment protection (strict) | Raises NAIRU (slower adjustment) | Dampens cyclical fluctuations |
| Unemployment benefits (generous) | Raises NAIRU (higher reservation wage) | Provides automatic stabilization |
| Active labor market policies | Lowers NAIRU (better matching) | Supports reallocation |
| Minimum wage (moderate) | Ambiguous (depends on level) | Floor on wages, may reduce inequality |
| Collective bargaining (coordinated) | Lowers NAIRU (wage moderation) | Facilitates adjustment |
| Flexible contracts (widespread) | Lowers NAIRU (easier hiring) | Increases volatility (dual labor market) |
Country: __________ Period: __________
Employment Indicators:
Unemployment rate (U-3): ____% (NAIRU estimate: ____%)
Unemployment rate (U-6): ____%
Labor force participation: ____%
Employment rate: ____%
Vacancy rate: ____%
V/U ratio: _____
Wage Indicators:
Nominal wage growth (YoY): ____%
Real wage growth (YoY): ____%
Productivity growth (YoY): ____%
Unit labor cost growth (YoY): ____%
Labor share of GDP: ____%
Phillips Curve Assessment:
Unemployment gap (u - u*): ____%
Implied inflation pressure: [ ] Disinflationary [ ] Neutral [ ] Inflationary
Okun's Law Implied:
Output gap from unemployment: ____%
Consistent with GDP growth: ____%