E_-_Unemployment_020411

# E_-_Unemployment_020411 - Unemployment UCLA Winter 2011...

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0 Unemployment UCLA Winter 2011 Professor Mark Wright

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1 In this topic, you will learn… …about the natural rate of unemployment: what it means what causes it It’s costs understanding its behavior in the real world Readings: Chapter 3.5, 12.2
2 Unemployment The unemployment rate is the fraction of people in the labor force who are unemployed: u t =U t / L t t / (E t + U t ) The labor force ( L t ) is the number of people, aged between 16 and 65, who are either employed (E t ), or who are unemployed ( U t ) The labor force participation rate is the fraction of people between 16 and 65 in the labor force

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3 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.
4 Actual and natural rates of unemployment in the U.S., 1960-2009

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5 A first model of the natural rate Recall that: L = # of workers in labor force E = # of employed workers U = # of unemployed U / L = unemployment rate
6 Assumptions: 1. L is exogenously fixed. 2. During any given month, s = fraction of employed workers that become separated from their jobs s is called the rate of job separations f = fraction of unemployed that find jobs f is called the rate of job finding s and f are exogenous

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7 The transitions between employment and unemployment Employed Unemployed s E f U
8 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

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9 Finding the “equilibrium” U rate f U = s E = s ( L U ) = s L s U Solve for U / L : ( f + s ) U = s L so, Us Ls f
10 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: 001 0 05, or 5% 001 019 Us Ls f  . . ..

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11 Policy implication A policy will reduce the natural rate of unemployment only if it lowers s or increases f .
12 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.

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## This note was uploaded on 03/30/2011 for the course ECON 102 taught by Professor Serra during the Winter '08 term at UCLA.

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E_-_Unemployment_020411 - Unemployment UCLA Winter 2011...

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