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Chapter 6

ECON 2000 Chapter Notes - Chapter 6: Frictional Unemployment, Unemployment, Active Labour Market Policies

Course Code
ECON 2000
Perry Sadorsky

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ECON 2000 Chapter 6 Notes
In this chapter we examine the determinants of the natural rate of unemployment –
the average rate of unemployment around which the economy fluctuates (the level
of “structural” + “frictional” unemployment)
This is the level of unemployment toward which the economy gravitates in the long
run, given labour-market imperfections
Unemployment rises above the natural level when the economy is in recession, and
falls below it when the economy is overheated
These short-run variations are referred to as cyclical unemployment
Actual Unemployment (for a period) = Natural Unemployment Rate + The Period’s
Level of Cyclical Unemployment
Let L denote the labour force, E denote the number of employed workers, and U the
number of unemployed workers
L = E + U
Unemployment rate = U/L
Let s denote the rate of job separation, the fraction of employed individuals who lose
or leave their job each month, and let f denote the rate of job finding, the fraction of
unemployed individuals who find a job each month
If the unemployment rate is neither rising nor falling, then the number of people
finding jobs must equal the number of people losing jobs, therefore:
fU = sE
By manipulating and rearranging the above equations, we can find that:
This shows us that the higher rate of job separation, the higher the unemployment
rate, and the higher the rate of job finding, the lower the unemployment rate
This means that any policy aimed at lowering the natural rate of unemployment
must either reduce the rate of job separation or increase the rate of job finding.
Similarly, any policy that affects the rate of job separation or job finding also
changes the natural rate of unemployment.
One reason for unemployment is that it takes time to match workers and jobs
The unemployment caused by the time it takes workers to search for a job (i.e., they
cannot find one that suits them, they do not want to accept a job offer, etc.) is called
frictional employment
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