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ECON202 Study Guide - Final Guide: Real Wages

Department
Economics
Course Code
ECON202
Professor
Maryann Vaughan
Study Guide
Final

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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.
Labour Force Survey deliberately excludes individuals in all of the following categories:
Persons younger than 15 years old
Persons residing in the territories and aboriginal settlements
Full time members of the armed forces
Inmates in institutions
First Model for the Natural Rate
Notation:
L = # of workers in labor force
E = # of employed workers
U = # of unemployed
U/L = unemployment rate
Assumptions:
1. L is exogenously fixed.
2. During any given month,
a. s = rate of job separations, the fraction of employed workers that become separated
from their jobs
b. f = rate of job finding, fraction of unemployed workers that find jobs
c. s and f are exogenous

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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:
Finding the “Equilibrium” U Rate
f U = s E
= s (L U )
=  
 
  
Policy Implication
A policy will reduce the natural rate of unemployment only if it lowers s or increases f.
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:
o job search
o wage rigidity
Job Search and Frictional 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:
Us
L s f
If the labour market is in a steady state, then the number of people fining
jobs = the number people losing their jobs
Recall :L = E+U
This equation shows that the steady state rate of unemployment (U/L)
depends on the rate of job separation and the rate of job finding
↑S↑U/L
↑F↓U/L
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