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Chapter 9 Unemployment and its Natural Rate.docx

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Ryerson University
ECN 204
Paul Missios

Chapter 9 Unemployment and its Natural Rate Natural Rate of unemployment: refers to the amount of unemployment that the economy normal experiences Cyclical Unemployment: refers to the year to year fluctuations in unemployment around its natural rate, and it is closely associated with the short run ups and down of economic activity How is Unemployment Measured? -Statistic Canada job to produce data on unemployment each month; surveys each adult from 15 and older and categorizes them into three categories: employed, unemployed, not in labor force. -Person is considered employed if working at a paid job. Person is unemployed if she is on temporary layoff or is looking for a job. Person who fits neither such as homemaker, retiree, or student is not in the labor force. Labor Force: the total number of workers, including both the employed and the unemployed Calculation: Labor Force = Number of employed + Number of unemployed Unemployment Rate (“u-rate”): the percentage of the labor force that is unemployed Calculation: Unemployment Rate = Number of unemployed/Labor Force x 100 Labor Force Participation: the percentage of the adult population that is in the labor force Calculation: Labor-Force Participation Rate = Labor Force/Adult Population x 100 Activity 1: Question: Compute the labor force, the unemployment rate, the adult population, and the labor force participation Answer: Labor Force: 17 180 + 9062 = 18 673 thousand Unemployment Rate: 100 x 1493/18673 = 8% Population: 18673 + 9062 = 27 735 Labor Force Participation: 100 x 18673/27735 = 67.3%Does the Unemployment Rate Measure What we want it to? -it is hard to determine the actuality of the labor force because people are constantly coming into the labor force and leaving, some might be getting paid under the table, not trying hard enough to look for a job, etc which deems it hard to accurately categorize Discouraged Searchers: individuals who would like to work but have given up looking for a job, they are not included in the official unemployment rate but are classified as not in the labor force Why are there always some people Unemployed? Natural Rate of Unemployment: the rate of unemployment to which the economy tends to return in the long run (estimated to be 6-8% in Canada) Cyclical Unemployment: the deviation of unemployment from its natural rate Frictional Unemployment: unemployment that results because it takes time for workers to search for the jobs that best suit their taste (short spells unemployment) Structural Unemployment: unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one (longer spells unemployment) Job Search: the process by which workers find appropriate jobs given their tastes and skills Why some Frictional Unemployment is inevitable -it is inevitable because the economy is always changing. Workers in declining industries always find themselves out of place -frictional unemployment is often the result of changes in the demand for labor among different firms Sectoral Shifts: changes in the composition of demand among industries or regions. It takes time for workers to search for jobs in the new sectors, sectoral shifts temporarily cause unemployment Public Policy and Job Search -the faster information spreads about job openings and workers availability, the more rapidly the economy can match workers and firms. -Government offers employment searches and job training program to assist the unemployed Employment Insurance (EI): a government pr
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