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Unformatted text preview: 28 Unemployment and Its Natural Rate We learn: • How to measure an economy’s rate of unemployment • Natural rate of unemployment in the long run: – What is the determinants? – Four explanations: frictional and structural • Cyclical unemployment in the short run 28.1 Identifying unemployment 28.1.1 How is unemployment measured? • Economists and policymakers are interested in monitoring changes in the labor market in the economy over time. • Three categories of employment status: – Employed – if one spent most of the previous week working at a paid job – Unemployed – if one is on temporary layoff, is looking for a job, or is waiting for the start date of a new job – Not in the labor force – a person who fits neither of the first two categories (e.g.: a full-time student, retiree • Labor force : L t = empl t + unempl t where L t is the total number of workers at period t , empl t is the number of the employed, and unempl t is the number of the unemployed. • Definition of unemployment rate, u t : u t = unempl t L t × 100 • Definition of labor-force participation rate – the percentage of the total adult population of the economy is the labor force: Labor-force participation rate = L t Adult population × 100 • The natural rate of unemployment: the normal rate of unemployment around which the unemployment rate ﬂuctuates • The cyclical unemployment rate: the deviation of unemployment from its nat- ural rate....
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- Spring '09