ECON 2000 Lecture Notes - Lecture 6: Efficiency Wage, Baby Boomers, Frictional Unemployment
Document Summary
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. L = # of workers in labor force. Assumptions: l is exogenously fixed, during any given month, s = rate of job separations, fraction of employed workers that become separated from their jobs f = rate of job finding, fraction of unemployed workers that find jobs. Definition: the labor market is in steady state, or long-run equilibrium, if the unemployment rate is constant. The natural rate of unemployment: (equilibrium unemployment rate) A policy will reduce the natural rate of unemployment only if it lowers s or increases f. If job finding were instantaneous (f = 1), then all spells of unemployment would be brief, and the natural rate would be near zero.
