Unemployment

Unemployment - Unemployment EC121 – Intermediate...

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Unformatted text preview: Unemployment EC121 – Intermediate Macroeconomics Brown University Monday, October 24 th Overview ¡ The Natural Rate of Unemployment ¢ Definition ¡ The LR steady-state rate of unemployment ¢ Determinants ¡ Rate of job loss/separation ¡ Rate of job finding ¢ Components ¡ Frictional unemployment ≠ due to job search frictions ¡ Structural unemployment ≠ due to real wage rigidities Defining the Natural Rate ¡ Def: The average rate of unemployment around which an economy fluctuates in the SR: ¢ actual rate > natural rate ñ Recession ¢ actual rate < natural rate ñ Boom ¡ Def: The unemployment rate towards which the economy gravitates in the LR, given labor market imperfections that impede workers from instantly finding jobs. A Simple Model of the Natural Rate ¡ Notation ¢ L ª number of workers in the labor force ¢ E ª number of workers employed ¢ U ª number of workers unemployed ¢ s ª instantaneous rate of job loss/separation ¢ (fraction of E losing jobs every instant). ¢ f ª instantaneous rate of job finding ¢ (fraction of U finding jobs every instant). A Simple Model (cont.) ¡ Model Basics ¢ L ª E + U ¢ Since every worker is either employed or unemployed ¢ Rate of unemployment ª U/L ¢ Note: U represents the LEVEL of unemployment ¢ Law of motion of U : ¢ dU/dt = s*E – f*U = s*(L – U) – f*U ¢ Recall the law of motion of k in the Solow model A Simple Model (cont.) s*E = s*L – s*U Concentrates Unemployment f*U Dilutes Unemployment Unemployment L s*L Steady-state Level of Unemployment dU/dt = sE- fU > 0 dU/dt = sE- fU < 0 A Simple Model (cont.)A Simple Model (cont....
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Unemployment - Unemployment EC121 – Intermediate...

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