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A Theory of The Natural Rate of Unemployment
Mark L. J. Wright
February 17, 2009
Abstract
These notes clarify discussion in class that relate to questions on previous
exams.
INTRODUCTION
In class, we discusses a model of the natural rate of unemployment. In that model,
the size of the population did not change over time.
On some past exams, I ahve
asked students to solve variants of this mkodel in which the population is changing
over time. The point of those questions is that it matter whether new entrants to
the population (and hence also, to the workforce, since everyone wants to work in
this model) start with a job, or start unemployed.
L
t
is the size of the labor force at a point
in time
t
,
E
t
is the number of employed at a point in time
t
,
U
t
is
the number of
unemployed at a point in time
t
, and that
u
t
=
U
t
=L
t
is the unemployment rate at
that point in time. We assume that every period, the fraction
s
of employed workers
are SEPARATED from their jobs, and the fraction
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 Winter '08
 Serra
 Macroeconomics, Unemployment

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