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# lecture3 - Lecture 3 CHAPTER 6 Unemployment slide 1 Chapter...

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CHAPTER 6 CHAPTER 6 Unemployment Unemployment slide 1 Lecture 3

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CHAPTER 6 CHAPTER 6 Unemployment Unemployment slide 2 Chapter objectives Chapter objectives The natural rate of unemployment: what it means what causes it understanding its behavior in the real  world
CHAPTER 6 CHAPTER 6 Unemployment Unemployment Natural Rate of Unemployment Natural Rate of Unemployment Natural rate of unemployment :   the average rate of unemployment around  which the economy fluctuates.  In a recession, the actual unemployment rate  rises above the natural rate.  In a boom, the actual unemployment rate falls  below the natural rate.

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CHAPTER 6 CHAPTER 6 Unemployment Unemployment slide 4 U.S. Unemployment, U.S. Unemployment, 1958-2002 1958-2002 2 3 4 5 6 7 8 9 10 11 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Percent of labor force Unemployment rate Natural rate of unemployment
CHAPTER 6 CHAPTER 6 Unemployment Unemployment slide 5 A first model of the natural rate A first model of the natural rate Notation: L  = # of workers in labor force E  = # of employed workers U  = # of unemployed U / L   = unemployment rate

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CHAPTER 6 CHAPTER 6 Unemployment Unemployment slide 6 Assumptions: Assumptions: 1. L  is exogenously fixed.   2. During any given month,  s  = fraction of employed workers  that become separated from their jobs,  f   = fraction of unemployed workers  that find jobs.   s   = rate of job  s eparations f    = rate of job  f inding (both exogenous)
CHAPTER 6 CHAPTER 6 Unemployment Unemployment slide 7 The transitions between The transitions between employment and unemployment employment and unemployment Employed Unemployed × E × U

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CHAPTER 6 CHAPTER 6 Unemployment Unemployment slide 8 The steady state condition The steady state condition Definition:  the labor market is in  steady state , or long-run equilibrium,  if the unemployment rate is constant.   The steady-state condition is: s   ×    =     × U # of employed  people who  lose or leave  their jobs # of unemployed  people who find  jobs
CHAPTER 6 CHAPTER 6 Unemployment Unemployment slide 9 Solving for the “equilibrium” U rate Solving for the “equilibrium” U rate     f  × U   =    s   × =   s   × ( ) =   s   × L      s   × Solve for  U / L :     (  +  s ) ×    =   s   × so,

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CHAPTER 6 CHAPTER 6 Unemployment Unemployment slide 10 Example: Example: Each month, 1% of employed workers lose  their jobs  ( s  = 0.01) Each month, 19% of unemployed workers  find jobs  ( f  = 0.19) Find the natural rate of unemployment: 0.01 0.05, or 5% 0.01 0.19 U s L s f = = = + +
CHAPTER 6 CHAPTER 6 Unemployment Unemployment slide 11 policy implication policy implication A policy that aims to reduce the natural  rate of unemployment will succeed only  if it lowers  s   or increases  f .

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lecture3 - Lecture 3 CHAPTER 6 Unemployment slide 1 Chapter...

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