Chapter6

Chapter6 - Inthischapter,youwilllearn about the natural...

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slide 1 CHAPTER 6 Unemployment In this chapter, you will learn… …about the natural rate of unemployment: what it means what causes it understanding its behavior in the real world

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slide 2 CHAPTER 6 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.
slide 3 CHAPTER 6 Unemployment Actual and natural rates of unemployment  in the U.S.,  1960-2007 Percent of labor force Unemployment rate Natural rate of unemployment 0 2 4 6 8 10 12 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

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slide 4 CHAPTER 6 Unemployment 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
slide 5 CHAPTER 6 Unemployment 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 workers that find jobs f is called the rate of job finding s and f are exogenous

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slide 6 CHAPTER 6 Unemployment The transitions between  employment and unemployment Employed Unemployed × E × U
slide 7 CHAPTER 6 Unemployment 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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slide 8 CHAPTER 6 Unemployment 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,
slide 9 CHAPTER 6 Unemployment 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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slide 10 CHAPTER 6 Unemployment Policy implication A policy will reduce the natural rate of unemployment only if it lowers s or increases f .
slide 11 CHAPTER 6 Unemployment 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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slide 12 CHAPTER 6 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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Chapter6 - Inthischapter,youwilllearn about the natural...

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