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Unemployment student - Unemployment Click to edit Master...

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Click to edit Master subtitle style Unemployment
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Topics …about the natural rate of unemployment: what it means what causes it understanding its behavior in the real world
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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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Actual and natural rates of unemployment in the U.S., 1960-2009 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 0 2 4 6 8 10 12 Percent of labor force Unemployment rate Natural rate of unemployment
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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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Assumptions: 1. L is exogenously fixed. 2. During any given month, s = rate of job separations , the fraction of employed workers that become separated from their jobs f = rate of job finding , fraction of unemployed workers that find jobs s and f are exogenous
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The transitions between employment and unemployment Employed Unemployed E U
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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
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Finding the “equilibrium” U rate f EU = s n E = s n ( L U ) = s n L s n U Solve for U / L : ( f + s ) n U = s n L so, = + U s L s f
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Example: Each month, 1% of employed workers lose their jobs ( s = 0.01) 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 = = = + + . . . .
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Policy implication A policy will reduce the natural rate of unemployment only if it lowers s or increases f .
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Why is there unemployment? If job finding were instantaneous ( f = 1), then all spells of unemployment would be brief, and the natural rate would be near zero. There are two reasons why f < 1: 1. job search 2. wage rigidity
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Job search & frictional unemployment frictional unemployment : caused by the time it takes workers to search for a job occurs even when wages are flexible and there are enough jobs to go around occurs because workers have different abilities, preferences jobs have different skill requirements geographic mobility of workers not instantaneous flow of information about vacancies and job candidates is imperfect
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