Macroeconomic

Please read policy_paper_1_spring_2013

Policy Paper 1

Economists study the relationships between variables. For example, economists might study the relationship between education and income, between investment and exchange rates, or between prices and quantities sold. Macroeconomists are concerned with the relationships between macroeconomic indicators like unemployment, inflation, growth, and the supply or money. Because of their knowledge of these relationships, economists are often asked to provide policy recommendations. For example, should the Federal government raise taxes? If so, on whom?

This assignment provides you with an opportunity to provide your own policy prescriptions. There are two major objectives of this assignment. First, you will demonstrate knowledge of the relationship between inflation and unemployment through use of the Phillips curve. Second, you will provide policy recommendations, in light of this relationship, on how to achieve low long-term unemployment in the US. This is a long-run paper. Therefore, I am looking for evidence that you understand the relationship between government policies and long-run unemployment. If you find yourself thinking about a short-run benefit, you may be off track. In this case, I recommend talking with me.

Part 1: Economic Concepts. This section covers the relationship between unemployment and inflation through use of the short-run and long-run Phillips curves. You may type or write your answers to questions in this section. However, please note that it must be stapled to your essay in part 2.

a. Copy and paste the following link into your browser:

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212

What are the Federal Open Market Committee’s “Longer-run” projections for unemployment? Please choose the “central tendency” numbers.

b. How can you argue that long-run unemployment projections are the same thing as the natural rate of unemployment/NAIRU? I’m looking for a 3-4 sentence answer here.

c. According to the Federal Reserve, when is the earliest possible year we could reach the natural rate of unemployment/NAIRU?

d. According to the Wall Street Journal article (that you read before the first midterm), what are three reasons for the increase in the natural rate of unemployment? You may note that the previous estimate was around 5%.

e. Read the NY Times NAIRU article posted on blackboard and answer the following two questions

i. According to the New York Times article, why are lots of manufacturers unable to find adequate workers?

ii. According to the New York Times article, what are examples of skills that manufacturers now require more than they used to?

f. Draw a short-run Phillips Curve where a 2% rate of inflation is associated with the NAIRU (you may choose any within the range given in the Federal Open Market Committee’s projections).

g. Draw the long-run Phillips Curve associated with the new NAIRU. Label this LRPC.

h. Suppose the Federal Reserve does not realize the NAIRU has increased and continues to use expansionary policy after the economy has completely recovered (the unemployment rate is equal to the new NAIRU). What will happen to inflation (in the short-run)? Draw the new point on your graph and label it point A

i. What will the new rate of inflation do to expected inflation? Make sure you explicitly answer this. What will this do to the graph? Draw this change on your graph, labeling the change “I”

j. What will the unemployment rate eventually return to? Draw a point on your graph to represent this. Label this point B.

k. Using your graph, show what will happen to the economy as long as the Federal Reserve continues to use expansionary policy to try to obtain a 5% rate of unemployment. You may go through two or so cycles in order to do so.

Part 2: Policy Proposal

For this section, you will write an essay answering the following question: “What three policies should the US government pass to promote PERMENANTELY low unemployment?” The essay will contain the following information

There are two main parts to the essay.

a. First, you must draw insights through your work on the economic concepts above to describe why expansionary policy will not reduce US unemployment in the long-run. You must refer to the phillips curve (and specifically the answers to your questions above) in order to do so.

b. Given the context described above, you will write your policy proposal. In this part of the paper, you will propose and justify three policies that WILL promote low long-run unemployment in the US. You must be specific about what each policy entails. For example, you can’t simply say that the US government should invest in green technology. If you choose this sort of a policy, you will need to specify exactly what technology the US should invest in and why. You must also explicitly justify why the policy will promote low long-term unemployment. For example, you may argue that a policy will reduce frictional unemployment by better matching workers with jobs.

The paper will be at least five paragraphs long

Paragraph 1 will contain part a

Paragraphs 2-4 will describe your three policies

Paragraph 5 will conclude

There is no page requirement for the essay. However, I would be concerned if it’s less than two pages (double-spaced) or more than 5.

Grading Criteria/Expectations

1. You do not need any sources for the paper. I am grading this on your knowledge of course materials, so you may certainly earn an A without using external sources.

2. However, you may use sources if you don’t know much about a topic. If you use a source, you MUST cite it using an MLA or APA format. If I suspect you are plagiarizing, I will submit an honor code violation.

3. If you’re excited about a policy and believe you may make TWO arguments, you may choose to substitute one of your three policies for an argument. That is, you may have two policies instead of three, but one of the policies should have two separate arguments.

4. You must justify that your policy will cause LONG-TERM changes in the labor market. Justify this as clearly as possible. If you are unsure about the difference between long-term changes and expansionary policy, ask me!

5. Your policy must be realistic. In other words, you can’t say that we should invade Mexico. If you’re not sure whether your policy is realistic (or are very excited about an unconventional policy), ask me.

6. Your policy might have unexpected benefits. For example, you might argue that there are also moral or political reasons to enact your policy. These benefits will be helpful to include, but are not a substitute for explaining why the policy will permanently change the natural rate of unemployment.

7. Your policy might also help stimulate the economy. For example, government spending on something might also help get the US out of our current recessionary gap. Keep in mind that stimulating the economy is very different from changing the natural rate of unemployment. Any argument that a policy will stimulate the economy will not count for credit. You might choose to mention these things (to strengthen your case), but you absolutely do not have to.

8. If English is your second language, you may need to put in extra work. I recommend signing up for an appointment with me (see the instructions below). However, because I have limited time available, I will focus more on your arguments than your writing during our appointment. If you are concerned about your writing, I strongly recommend seeing the writing center. This means that you must start your essay early.

Grading Rubric

1. Did the student correctly draw on the short-run and long-run Phillips curves to set up the appropriate context for his/her proposals?

highly competent competent
emerging
not competent

2. Did the student make three clear, specific policy recommendations?

highly competent competent
emerging
not competent

3. Did the student convincingly argue that each policy will have long-run implications in the labor market?

highly competent competent
emerging
not competent

4. If there are additional benefits to a policy, did the student adequately distinguish these from the long-run benefits?

highly competent competent
emerging
not competent
N/A

5. Did the essay proceed in a clear and logical manner that follows a clear thesis statement?

highly competent competent
emerging
not competent

6. Do the sentences enable smooth reading of the student’s ideas?

highly competent competent
emerging
not competent

7. Did the student take the time to edit the paper? If there are obvious spelling or grammatical errors, you will lose points here.

highly competent competent
emerging
not competent

Decoding ‘Natural’ Rate of Unemployment

By Neil Shah

September 7, 2012

Wall Street Journal Online

Unemployment, the seemingly intractable knot in the U.S. recovery, is a normal part of even the healthiest economy.

Some measure of joblessness is inevitable when workers move freely among jobs, and employers expand and shrink their work forces as business ebbs and flows.

Before the recession of 2007-2009, many economists believed the nation’s “natural” rate of unemployment was 5%. Three years into the recovery, the nonpartisan Congressional Budget Office says this rate has risen to 6%. A survey of economists by the Federal Reserve Bank of Philadelphia recently pegged the rate at 6%. And Fed officials say their forecast for “longer run” unemployment—a proxy for natural unemployment—is between 5.2% and 6%.

Why the rise? America’s more than five million long-term unemployed, those jobless for 27 weeks or more, may struggle for years to find positions as their skills and attractiveness to employers erode. The recession also heightened a mismatch between employers’ needs and job seekers’ skills, which is considered a “structural,” or longer-term, problem rather than a “cyclical” one. In addition, more-generous unemployment insurance means people can take longer to look for positions.

But the official unemployment rate, which clocked in for August at 8.1%, remains much higher than the “natural” rate of 6%. That suggests much of America’s unemployment is a result of skimpy demand for goods and services—and workers—rather than structural changes that have led to more joblessness. The CBO estimates structural issues have raised the unemployment rate about one percentage point since the start of the recession in December 2007 and that most of the increase since then is from weak demand for workers.

There are different ways to measure the natural rate of unemployment. The CBO tracks the “nonaccelerating inflation rate of unemployment,” or NAIRU—the rate below which employers have to pay more to attract qualified workers. Since 1949, one version of this rate, now at 5.4%, has remained between 5% and 6.3%. By contrast, San Francisco Fed researchers Justin Weidner and John C. Williams have analyzed four factors—the availability of jobs, perceptions of how hard it is to land a job, people quitting jobs and businesses reporting “hard to fill” vacancies. They say the natural unemployment rate is 6.7%, though much of that bump up is temporary.

Gauging the natural rate of unemployment isn’t just an academic exercise. The extent to which America’s unemployment is structural is important for Fed officials deciding whether to take more action to spur the economy. If the rise in America’s unemployment rate isn’t “natural,” the Fed, which is mandated by Congress to maximize employment and preserve price stability, may feel justified taking more steps to push down long-term interest rates. That tends to spur spending and investment and—hopefully—hiring. But if today’s 8.1% rate reflects fundamental changes in the labor market, more Fed action may not be very effective. Worse, it could fuel unwanted inflation.

The problem is pinpointing where normal unemployment ends and abnormal joblessness begins, since the natural rate can’t be measured directly. Structural factors can offset one another. Some employers are loath to hire from the ranks of the long-term unemployed. The effect of such a structural change is somewhat countered by another—the aging of the U.S. population, which shrinks the labor force and tends to push down the unemployment rate. Officially, the unemployment rate is the share of the labor force working or seeking work.

July 1, 2010

Factory Jobs Return, but Employers Find Skills Shortage

By

MOTOKO RICH

BEDFORD, Ohio — Factory owners have been adding jobs slowly but steadily since the beginning of the year, giving a lift to the fragile economic recovery. And because they laid off so many workers — more than two million since the end of 2007 — manufacturers now have a vast pool of people to choose from.

Yet some of these employers complain that they cannot fill their openings.

Plenty of people are applying for the jobs. The problem, the companies say, is a mismatch between the kind of skilled workers needed and the ranks of the unemployed.

Economists expect that Friday’s government employment report will show that manufacturers continued adding jobs last month, although the overall picture is likely to be bleak. With the government dismissing Census workers, more jobs might have been cut than added in June.

And concerns are growing that the recovery could be teetering, with some fresh signs of softer demand this week. A central index of consumer confidence dropped sharply in June, while auto sales declined from the previous month.

Pending home sales plunged by 30 percent in May from April as tax credits for home buyers expired. Fretting that global growth is slowing, investors have driven stock indexes in the United States down to their levels of last October, for losses as great as 8 percent for 2010.

As unlikely as it would seem against this backdrop, manufacturers who want to expand find that hiring is not always easy. During the

recession

, domestic manufacturers appear to have accelerated the long-term move toward greater automation, laying off more of their lowest-skilled workers and replacing them with cheaper labor abroad.

Now they are looking to hire people who can operate sophisticated computerized machinery, follow complex blueprints and demonstrate higher math proficiency than was previously required of the typical assembly line worker.

Makers of innovative products like advanced medical devices and

wind turbines

are among those growing quickly and looking to hire, and they too need higher skills.

“That’s where you’re seeing the pain point,” said Baiju R. Shah, chief executive of BioEnterprise, a nonprofit group in Cleveland trying to turn the region into a center for medical innovation. “The people that are out of work just don’t match the types of jobs that are here, open and growing.”

The increasing emphasis on more advanced skills raises policy questions about how to help low-skilled job seekers who are being turned away at the factory door and increasingly becoming the long-term unemployed. This week, the Senate reconsidered but declined to extend unemployment benefits, after earlier extensions raised the maximum to 99 weeks.

The Obama administration has advocated further stimulus measures, which the Senate rejected, and has allocated more money for training. Still, officials say more robust job creation is the real solution.

But a number of manufacturers say that even if demand surges, they will never bring back many of the lower-skilled jobs, and that training is not yet delivering the skilled employees they need.

Here in this suburb of Cleveland, supervisors at Ben Venue Laboratories, a contract drug maker for pharmaceutical companies, have reviewed 3,600 job applications this year and found only 47 people to hire at $13 to $15 an hour, or about $31,000 a year.

The going rate for entry-level manufacturing workers in the area, according to Cleveland State University, is $10 to $12 an hour, but more skilled workers earn $15 to $20 an hour.

All candidates at Ben Venue must pass a basic skills test showing they can read and understand math at a ninth-grade level. A significant portion of recent applicants failed, and the company has been disappointed by the quality of graduates from local training programs. It is now struggling to fill 100 positions.

“You would think in tough economic times that you would have your pick of people,” said Thomas J. Murphy, chief executive of Ben Venue.

How many more people would be hired if manufacturers could find qualified candidates is hard to say. Since January, they have added 126,000 jobs, or about 6 percent of those slashed during the recession. The number may understate activity somewhat, as many factories have turned to temporary workers.

Christina D. Romer

, chairwoman of the

Council of Economic Advisers

, said the skills shortages reported by employers stem largely from a long-term structural shift in manufacturing, which should not be confused with the recent downturn. “I do think that manufacturing can come back to what it was before the recession,” she said.

Automakers, for example, have been ramping up and mainly filling slots with people laid off a year or two ago.

Manufacturers who profess to being shorthanded say they have retooled the way they make products, calling for higher-skilled employees. “It’s not just what is being made,” said David Autor, an economist at the

Massachusetts Institute of Technology

, “but to the degree that you make it at all, you make it differently.”

In a

survey

last year of 779 industrial companies by the

National Association of Manufacturers

, the Manufacturing Institute and Deloitte, the accounting and consulting firm, 32 percent of companies reported “moderate to serious” skills shortages. Sixty-three percent of life science companies, and 45 percent of energy firms cited such shortages.

In the Cleveland area, historically a center of metalworking and rubber production, more than 40,000 manufacturing workers lost their jobs in the recession, a 21 percent decline, according to an analysis of employment data by Cleveland State University. Since the beginning of the year, the region has added 4,500 positions.

Employers say they are looking for aptitude as much as specific skills. “We are trying to find people with the right mindset and intelligence,” said Mr. Murphy.

Ben Venue has recruited about half its new factory hires from outside the pool of former manufacturing workers. Zachary Flyer, a 32-year-old Army veteran, had been laid off from a law firm filing room when he applied at the drug maker last summer.

He spent four months this year learning how to operate a 400-square-foot freeze dryer that helps preserve vials of medicine. Monitoring vacuum pressure and temperatures on a color-coded computer screen with flashing numbers, Mr. Flyer said last month that he preferred his new work to the law firm, where he had spent seven years.

“I like jobs that are more hands-on, as opposed to watching paperwork all day,” he said.

Local leaders worry that the skills shortage now will be exacerbated once baby boomers start retiring. In Ohio, officials project that about 30 percent of the state’s manufacturing workers will be eligible for retirement by 2016.

“The new worker of tomorrow is in about sixth grade,” said John Gajewski, executive director of the advanced manufacturing, engineering and apprenticeship program at Cuyahoga Community College in downtown Cleveland. “And they need training to move into manufacturing.”

At Astro Manufacturing and Design, a maker of parts and devices for the aerospace, medical and military industries, Rich Peterson, vice president for business development, recently gave a tour to a group of eighth graders.

He showed off surgical simulators and torpedo parts, saying he wanted them to see the “cool” things the company makes. By the end of the tour, more than a third of the students said they might consider working at a place like Astro, which is based in Eastlake and has five plants in the Cleveland area.

For now, the company urgently needs six machinists to run what are known as computer numerical control — or CNC — machines. An outside recruiter has reviewed 50 résumés in the last month and come up empty.

The jobs, which would pay $18 to $23 an hour, require considerable technical skill. On an afternoon last month, Christopher Debruycker, 34, was running such a machine, the size and shape of a camper van parked on the factory floor.

Mr. Debruycker, who has been an operator for 15 years, had programmed the machine to carve an intricate part for a flight simulator out of a block of aluminum, and he monitored its progress on a control pad with an array of buttons.

“We need 10 more people like him,” Mr. Peterson said.

David Maxwell contributed reporting.