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Lecture

Chapter 6 - Unemployment.docx

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Department
Economics
Course
EC250
Professor
Karen Huff
Semester
Fall

Description
Chapter 6Unemployment See last page of chapter 2 notes for more informationNatural unemployment u average rate of unemployment around which the economy fluctuates the rate toward which the economy gravitates in the LR structuralfrictional unemploymentCyclical unemployment SR variations in the unemployment rate Unemployment rises during recessions and falls when economy is overheated Actual unemployment u natural ratethe periods level of cyclical unemployment61Job Loss Job FindingNatural Rate of Unemploymentflow of workers who losequit jobs or get hired determines unemployment rateassumes that job finding is not instantaneous unlike before when we assumed all jobs and workers were similarLEU where Llabour force E employed workers and U unemployed workersRate of unemploymentUL depends on s and fAssume L is fixed and focus on transition of people in L between employment and unemployment Let srate of job separation fraction of employed people who loseleave their job each monthLet frate of job finding fraction of unemployed people who find a job each monthSteady state condition If unemployment rate is steady not risingfalling then sEfU where sE and fU are respectively the number of people losingfinding jobsCycle Employedjob separation sunemployedjob finding f We know ELU then fUsLUfs1Shows that the steady state rate of unemployment UL depends on s and f which are ratesThe simple model of the natural unemployment rate implies that any policy aimed at lowering the natural unemployment rate must either reduce s or increase f changing s or f changes natural rateModel can only be used to deal with changes in enteringexiting between E and U not questions that deal with changes in other macroeconomic variables like population growth or recessionsAverage duration of unemployment is the inverse of the job finding rate and the average duration of employment is the inverse of the job separation rate So if f50 then answer2 monthsEx If s001 1 of the employed lose jobs every month t on average jobs last 100 months62Job SearchFrictional UnemploymentFrictional unemployment is caused by the time it takes workers to search for a jobinevitableFirms fail or job performance is unacceptable or workers skills are no longer needed technologyReasons for unemployment low rate of job finding 1 Flow of information about job candidates and job vacancies is imperfect 2 Geographic mobility of workers is not instantaneous 3 Workers have different preferences and abilities while jobs have different attributesTypes of goods demanded vary over time demand for labour that produces those goods shifts Different regions produce different goods so demand for labour may be rising in one part of the country while falling in another Ex increase in oil price may cause demand for labour to rise in Alberta which produces oil but expensive oil makes driving expensive so this decreases demand for labour in autoproducing province like OntarioSectorial shift change in the composition of demand among industries or regionsPublic PolicyFrictional Unemploymentpublic policies try to decrease natural unemployment rate by reducing frictional unemployment
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