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PS4 - Problem Set 4 Solutions Chapter 6#4 Consider the...

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Problem Set # 4 Solutions Chapter 6 #4 Consider the formula for the natural rate of unemployment, U/L = s/(s+f) If the new law lowers the rate of separation s, but has no effect on the rate of job finding f, then the natural rate of unemployment falls. For several reasons, however, the new law might tend to reduce f. First, raising the cost of firing might make firms more careful about hiring workers, since firms have a harder time firing workers who turn out to be a poor match. Second, if searchers think that the new legislation will lead them to spend a longer period of time on a particular job, then they might weigh more carefully whether or not to take that job. If the reduction in f is large enough, then the new policy may even increase the natural rate of unemployment. Chapter 6 #6 6. a. The labor demand curve is given by the marginal product of labor schedule faced by firms. If a country experiences a reduction in productivity, then the labor demand curve shifts downward as shown below. If labor becomes less productive,
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