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Chapter 6

MGEB06H3 Chapter Notes - Chapter 6: Frictional Unemployment, National Research Universal Reactor, Efficiency Wage

Economics for Management Studies
Course Code
Iris Au

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Examine: natural rate of unemployment (NRU) the average rate of unemployment around which the econ. fluctuates.
- It is the long run unemployment rate
- Economy gravitates towards NRU
Unemployment causes:
- Long run: structural and frictional
- Short run: cyclical
6.1 Job Loss, Job Finding, and the Natural Rate of Unemployment
Labour force L = E + U
L: labour force ; E: # of employed workers ; U: # of unemployed workers
The rate of unemployment U/L
* Assuming L is constant
What determines the rate of unemployment:
Individuals between employment and unemployment
s: rate of job separation
- the fraction of employed individuals who lose or leave their
job each month
f: rate of job finding
- the fraction of unemployed individuals who find a job each
When in steady-state
- the unemployment rate is neither rising nor falling
sE = fU
To find the unemployment rate in L
fU = s(L-U)
f(U/L) = s(1 [U/L])
U/L = s/(s+f) = 1/(1+[f/s])
U/L = steady state of unemployment within a constant labour force
The higher the job separation rate (s), the higher the U/L
The higher the job finding rate (f), the lower the U/L
- succeeds on relating U/L to s and f, fails to address why it happens
Model above assumes that job finding is not instantaneous, but doesn't explain why
Underlying reasons for unemployment: Job search and Wage rigidity
6.2 Job Search and Frictional Unemployment
Frictional unemployment: unemployment caused by the time it takes workers to search for a job
Inevitable as long as supply and demand for labour among firms is changing
- Change in the composition of demand among industries or regions: sectoral shift
Public Policy and Frictional Unemployment
Policy changes to ease transition of workers from declining to growing industries. Decrease U/L by increasing f
- Ex. Employment insurance (EI)
Softening the hardship of unemployment, policies increase the frictional unemployment thus raises the U/L and s
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