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Summer 2018

Summer 2018. Macroeconomics. Note: Lectures cannot be reprinted or distributed without express written consent of Erik Hurst. Question: How Healthy is the Current US Labor Market?. Unemployment Rate: 1970M1 – 2018M5. Note: Throughout class – shaded years on similar graphs are recessions.

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Summer 2018

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  1. Summer 2018 Macroeconomics Note: Lectures cannot be reprinted or distributed without express written consent of Erik Hurst.

  2. Question: How Healthy is the Current US Labor Market?

  3. Unemployment Rate: 1970M1 – 2018M5 Note: Throughout class – shaded years on similar graphs are recessions

  4. Unemployment Duration: 1970M1 – 2018M5

  5. How is Unemployment Measured? • Standardized Definition of the Unemployment Rate: Unemployed = jobless but looking for a job Labor Force = #Employed + #Unemployed Unemployment Rate = (# Unemployed) / (Labor Force) This is the definition used in most countries, including the U.S. U.S. data: http://stats.bls.gov/eag.table.html U.S. measurement details: http://stats.bls.gov/cps_htgm.htm Issues: Discouraged Workers, Underemployed, Measurement Issues

  6. Components of Unemployment • Flow of people into the unemployment pool o Flow into unemployment from employment (job loss) o Flow into unemployment from out of labor force (stop being discouraged) • Flow of people out of the unemployment pool o Flow out of unemployment into employment (job finding) o Flow out of unemployment out of labor force (discouraged workers)

  7. A Few More Definitions • Labor Force Participation Rate o Labor Force/ Population (age 16+) • Employment Rate o Employed / Population (age 16+) o Employment rate defined out of total population as opposed to labor force. o Also referred to as employment to population rate (EPOP).

  8. Labor Force Participation Rate

  9. Employment to Population Rate: Men

  10. Employment to Population Rate: Men 25-54

  11. Employment to Population Rate: Men 21-54

  12. Employment to Population Rate: Men 21-54

  13. Employment to Population Rate: Men 21-54

  14. Employment to Population Rate: Men 21-54

  15. Fraction of Men 21-55 Working Zero Weeks During Prior Year, March CPS

  16. Employment to Population Rate: Men 21-30 (Not in School)

  17. Employment to Population Rate: Women 25-54

  18. Employment to Population Rate: Women 21-54

  19. Take Away 1 • Unemployment rate is giving a misleading statistic of the US labor market • Unemployment rate is low by historical standards (and back to early 2000 levels). • Employment rate for prime age workers is still WELL below 2000 levels. o Declines are particularly pronounced for less educated individuals. • Workers have left the labor force and are no longer looking for jobs. • While the labor market is improving, its “health” is still quite a bit below early 2000s levels.

  20. Inflation Adjusted Wages, Men 21-55 (Education and Age Adjusted)

  21. Types of Unemployment • Frictional Unemployment: Result of Matching Behavior between Firms and Workers. • Structural Unemployment: Result of Mismatch of Skills and Employer Needs • Cyclical Unemployment: Result of output being below full-employment. Individuals have the desire to work and the skills to work, yet cannot find a job. • Is Zero Unemployment a Reasonable Policy Goal? • No! Frictional and Structural Unemployment may be desirable (unavoidable).

  22. Why is the Distinction Important? • How much of the current unemployment is structural vs. cyclical? • This is a current debate among policy makers (and a question I am trying to answer in my own research) • Why could there be structural unemployment? o Some industries have been in secular decline during the 2000s (manufacturing). The jobs being created now are not in those industries. o Former workers in manufacturing need to be reallocated to other sectors.

  23. Some Other Labor Market Facts

  24. Bring Some Research into the Classroom • A large amount of my current work has been trying to understand the current low employment rates of prime age workers. • We will talk about much of my current work – as well as frontier research from other top academic economists – as the course progresses. • Today: Talk about the role of declining manufacturing sector in contributing to low employment rates of prime age workers. • Highlight that automation – not trade – has been a key driver of the declining manufacturing sector. • Show how the decline in the manufacturing sector is associated with many other social phenomenon.

  25. U.S. Manufacturing Employment, BLS 2010 1980 2000 1990 ~ -1.7 million ~ -6.0 million ~ + 0.4 million ~ -0.3 million

  26. U.S. Manufacturing Establishments - 75,000 Establishments

  27. U.S. Manufacturing Establishments - 75,000 Establishments • Despite falling employment and establishments, real manufacturing output rose slightly during 2000s (~7%)

  28. Labor Share Index (1987 = 100) Labor Share = Share of earnings to workers out of output

  29. Capital Intensity Index (1987 = 100) Ratio of capital services to hours worked in the production process.

  30. Share of Production Workers in Manufacturing Industry: Age 21-55, CPS

  31. Regional Identification • Can we use regional variation to get causal estimates of the effects of local manufacturing declines on local labor market outcomes? … Yes • Places that were historically centered around manufacturing experienced much larger declines in employment and wages!

  32. Distribution of Manufacturing Activity in US in 2000 Share of individuals 21-55 working in manufacturing (commuting zone)

  33. Change in Manufacturing Share vs Change in Employment Rate, Prime Age Men Each circle is a commuting zone (MSA) – size of circle is population size of commuting zone.

  34. Change in Manufacturing Share vs Change in Employment Rate, Prime Age Women

  35. Question: Is Manufacturing Decline Related to Political Shifts?

  36. Shift towards Republican Presidential Voting 2016 Vote Share Republican 2016 – Vote Share Republican 2012 (by county)

  37. Shift towards Republican Presidential Voting 2016 Vote Share Republican 2016 – Vote Share Republican 2012 (by state)

  38. Question: Is Manufacturing Decline Related to Increased Opioid Use?

  39. Back to the Course…

  40. Questions We Will Address In This Course • What causes recessions? What causes unemployment? • What caused the Great Recession? Is another recession on the horizon? • What is the link between the banking sector and “real” economic activity? • Should we be concerned with inflation? What about deflation? • What causes inflation/deflation? • How can policy makers (Fed/Congress/President) influence economic activity in the short run (fight inflation and recessions) and in the long run (promote economic growth)? • What are the pitfalls of government intervention? • What makes economies grow in the LONG RUN? • How worried should we be about long run government deficits? What are the costs/benefits of altering the nature of the Federal Reserve? • What is the influence of China and India on the U.S. economy? • Brexit? • What are costs/benefits of altered immigration policy or changes in minimum wage laws?

  41. Caveat #1 • My course takes the perspective of analyzing any large macroeconomy (with respect to the models we build). • The examples will come primarily from the U.S. (because that is what I study) • However, the insights apply equally well to all large developed economies including: • The European Union • Japan • Canada, Australia, etc. • The models you will learn in this class also explain consumer, business, and government behavior for all economies (China, India, etc.).

  42. Caveat #2 • The course takes time to build. • Our goal is to construct and analyze the economy as a whole. • To do that, we separately build the parts. • After we build the parts, we put them together to see how they interact. • At certain points in the class, you may feel that we are losing sight of the big picture and you may feel lost. That is common. • But, I promise, by week 7 or 8 everything will come together (it always does).

  43. TOPIC 1 A Introduction to Macro Data

  44. Goals of the Lecture What is Gross Domestic Product(GDP)? Why do we care about it? How do we measure standard of living over time? What are the definitions of the major economic expenditure components? What are the trends in these components over time? What is the difference between ‘Real’ and ‘Nominal’ variables? How is Inflation measured? Why do we care about Inflation? What have been the predominant relationships between Inflation and GDP over the last four decades? NOTE: This lecture will likely go into next week. This is by design. It does not mean we will be short-changed on other material later in the class.

  45. Part A: Measuring GDP (Production)

  46. Gross Domestic Product (GDP) • GDP is a measure of output. • Why Do We Care? • Because output is highly correlated (at certain times) with other things we care about (standard of living, wages, unemployment, inflation, budget and trade deficits, value of currency, etc…) • Formal Definition: • GDP is the MarketValue of all FinalGoods and Services Newly Produced on DomesticSoil During a Given TimePeriod (different than GNP)

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