Lecture 11 - Econ 102 Fall 2008 Lecture 11 The Natural Rate...

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1 Econ 102 Fall 2008 Lecture 11 The Natural Rate of Unemployment
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2 The Phillips Curve A.W. Phillips – article in 1958 Argued that there is a tradeoff between inflation and unemployment It disappeared in the 1970s
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3 Unemployment and Inflation 0 2 4 6 8 10 0 2 4 6 8 10 Nominal Wage Inflation (percent) Unemployment rate 1949-1959 0 2 4 6 8 10 0 2 4 6 8 10 Nominal Wage Inflation (percent) Unemployment rate 1959-1969
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4 Unemployment and Inflation 0 2 4 6 8 10 0 2 4 6 8 10 Nominal Wage Inflation (percent) Unemployment rate 1969-1979 0 2 4 6 8 10 0 2 4 6 8 10 Nominal Wage Inflation (percent) Unemployment rate 1979-1989
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5 Phelps and Friedman Introduced the natural rate theory What determines the unemployment rate? Preferences endowments and technology
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6 The Labor Market 154m in the Labor force (66%) 80m Out of the Labor force (34%) 9m Unemployed (6.1%) 145m Employed (93.9%) 234m people over 16 years old
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7 A Model Out of the labor force Unemployed Employed This is a constant rate We model this Assume the labor force is fixed
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8 A Model Assume that people lose jobs at a fixed rate Assume that people find jobs at a variable rate Jobs evolve according to a matching function
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9 How many people find jobs? ( 29 , m m H V = Matching function Number of workers looking for jobs Number of vacancies posted by firms looking for workers
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10 Main Idea Find a job is like building a car To build a car you need two inputs: labor and capital
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