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Labor Market Guesstimate (very shaky)

  In 1980s the natural unemployment could be around 2.5%.  In 1990s the rate could be around 4.0%.  If equilibrium employment entry and exit rates are 2%, the average unemployment period could be about 2 months.  Since November 2008, the accumulated gap of exit rate over entry rate is 1.44%.  As this rate should be adjusted in terms of labor force, it would be 1.6% or so.  If we add this to 4%, which is unemployment rate in November 2008, the result is 5.6% which is close enough to 5.7%, the current unemployment rate.  Tentative conclusion is that the increase in unemployment rate has not been caused by some structural change so far, but output gap (demand minus supply).  In other words, 1.7%, which is 5.7% minus 4.0%, is the consequence of output gap.  Assuming Okun's Law in Japan is 1 to 3, the current output gap would be 5.1%.  The BOJ estimate of GDP gap is around 9% on a semester basis.  If continued in a year, it would derive unemployment rate of 7%.  If GDP gap in a year is around 6%, the unemployment rate is 6%.  So, the on-going "recovery" could be consistent with this scenario.  My scenario rests on the assumption that the GDP gap of the second half of this year would be 4% or so.

  Then, what would be the next "equilibrium conditions" in labor market?  My casual hunch is as follows.  The equilibrium entry and exit rates are both 2% (or 2.25%).  The both should be the same in equilibrium.  The average unemployment period could be about 2.8 months (or 2.5 months).  The equilibrium entry and exit rates are related to fluidity in labor market.  DPJ's policy direction is in general against the fluidity.  The average unemployment period is related to the increase in unemployment benefit and training, as well as the direction of employment change on a sector basis.  Since DPJ's policy stance is in general for resource reallocation, the consequent increase in unemployment period could be a likely event.  The unemployment rate consistent with this scenario is 6%.  In the transition period, Effective Ratio of Job Offers to Applicants would go up, while the unemployment rate would stay around.  [091018I172.xls]

  We have not considered the effect of technological change so far.  That would be a long-term consideration.  However, the technological trend is labor-saving, not labor intensive.  Thus, it would push unemployment rate up.

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