Chapter 6_Unemployment

# Chapter 6_Unemployment - Natural rate of unemployment...

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1 Chapter 6 Unemployment P’ O Tuitional EBA Macroeconomics 2 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. 3 • Let L = Labor force E = Employed workers U = Unemployed workers L = E + U U/L = Unemployment rate • 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 4 The transitions between employment and unemployment Employed Unemployed Job Separation Job finding In every period, a fraction s of the employed lose their jobs, and a fraction f find jobs. The rates of job separation and job finding determine the rate of unemployment.

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5 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 × E = f × U # of employed people who lose or leave their jobs # of unemployed people who find jobs 6 • We can rearrange this equation to find the steady-state unemployment rate. Note that E = L – U; that is, the
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Chapter 6_Unemployment - Natural rate of unemployment...

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