Chapter 6

# Chapter 6 - CHAPTER 6 Unemployment A PowerPoint Tutorial To...

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1 Chapter Six CHAPTER 6 Unemployment ® A PowerPoint Tutorial To Accompany MACROECONOMICS, 6th. ed. N. Gregory Mankiw By Mannig J. Simidian

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The average rate of unemployment around which the economy fluctuates is called the natural rate of unemployment. The natural rate is the rate of unemployment toward which the economy gravitates in the long run. Let’s start with some fundamental equations that will build a model of labor-force dynamics that shows what determines the natural rate. L = E + U L = E + U Labor force is composed of Number of employed workers Number of unemployed workers
3 Chapter Six f U U = = s E E Number of people finding jobs Number of people loosing jobs Steady-state unemployment rate From an earlier equation, we known that E = L – U, that is the number of employed equals the labor force minus the number of unemployed. If we substitute ( L-U ) for E in the steady-state condition, we find: U = U = (L – U) (L – U) Then, divide both sides by L and to obtain: U/L = U/L = (1-U/L) (1-U/L) Now solve for U/L for find : U/L = U/L = s / (s + f)

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4 Chapter Six U/L = U/L = s / (s + f) This can also be written as: U/L = 1 U/L = 1 / (1+ f/s) This equation shows that the steady-state rate of unemployment U/L depends on the rates of job separation s and job finding f.
5 Chapter Six Any policy aimed at lowering the natural rate of unemployment must either reduce the rate of job separation or increase the rate of job finding . Similarly, any policy that affects the rate of job separation or job finding also changes the natural rate of unemployment.

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## This note was uploaded on 04/02/2008 for the course ECON 420 taught by Professor Hill during the Fall '08 term at UNC.

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Chapter 6 - CHAPTER 6 Unemployment A PowerPoint Tutorial To...

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