unemployment

unemployment - Unemployment UCLA Winter 2008 Professor Mark...

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0 Unemployment UCLA Winter 2008 Professor Mark Wright
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1 In this topic, you will learn… …about the natural rate of unemployment: z what it means z what causes it z It’s costs z understanding its behavior in the real world z Readings: Chapters 3, 12.2
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2 Unemployment z The unemployment rate is the fraction of people in the labor force who are unemployed: u t =U t / L t t / (E t + U t ) z The labor force ( L t ) is the number of people, aged between 16 and 65, who are either employed (E t ), or who are unemployed ( U t ) z The labor force participation rate is the fraction of people between 16 and 65 in the labor force
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3 Natural rate of unemployment z Natural rate of unemployment : The average rate of unemployment around which the economy fluctuates. z In a recession, the actual unemployment rate rises above the natural rate. z In a boom, the actual unemployment rate falls below the natural rate.
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4 Actual and natural rates of unemployment in the U.S., 1960-2006 Percent of labor force 0 2 4 6 8 10 12 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Unemployment rate Natural rate of unemployment
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5 A first model of the natural rate Recall that: L = # of workers in labor force E = # of employed workers U = # of unemployed U / L = unemployment rate
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6 Assumptions: 1. L is exogenously fixed. 2. During any given month, s = fraction of employed workers that become separated from their jobs s is called the rate of job separations f = fraction of unemployed that find jobs f is called the rate of job finding s and f are exogenous
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7 The transitions between employment and unemployment Employed Unemployed s × E f × U × ×
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8 The steady state condition z Definition: the labor market is in steady state , or long-run equilibrium, if the unemployment rate is constant. z The steady-state condition is: s × E = f × U # of employed people who lose or leave their jobs # of unemployed people who find jobs
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9 Finding the “equilibrium” U rate f × U = s × E = s × ( L U ) = s × L s × U Solve for U / L : ( f + s ) × U = s × L so, = + Us Ls f
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10 Example: z Each month, 1% of employed workers lose their jobs ( s = 0.01) 19% of unemployed workers find jobs ( f = 0.19) z Find the natural rate of unemployment: 001 005 , or 5% 001 019 Us Ls f == = ++ . . ..
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11 Policy implication z A policy will reduce the natural rate of unemployment only if it lowers s or increases f .
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12 Why is there unemployment? z If job finding were instantaneous ( f = 1), then all spells of unemployment would be brief, and the natural rate would be near zero.
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unemployment - Unemployment UCLA Winter 2008 Professor Mark...

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