5 - The Macroeconomics of “the” Labor Market

Summary

Theoretical and empirical descriptions of the Beveridge curve are critiqued. The lack of empirical evidence for a matching function is discussed together with a simple example of how the aggregate unemployment rate is determined by underlying labor-market flows. The relation of output growth to changes in the unemployment rate (Okun’s law) is estimated at the aggregate level and for various demographic groups, and the practical usefulness of Okun’s law is examined. The role that estimates of the natural rate of unemployment should play in the policy process and the usefulness of the natural rate concept are also examined.