Mankiw Ch. 7 (177-183)
The average rate of unemployment in the US is usually around 5 to 6%
Natural rate of unemployment – the average rate of unemployment around which the economy
fluctuates, the economy gravitates towards this in the long-run
The Labor Force is the sum of the employed and unemployed: L = E + U
- The rate of unemployment is L/U
If the unemployment rate is neither rising nor falling, then the number of people finding jobs
must be equal to the number of people losing jobs: fU = sE where f is the rate of job finding and
s is the rate of job separation.
Use this equation to find the steady-state unemployment rate. Substitute E = L – U into
the equation above to get fU = s(L – U), divide by L, and solve for the unemployment
rate to find that U/L = 1/1+f/s
This shows that the steady state rate of unemployment (U/L) depends on s and f.
Implication: any policy aimed at lowering the natural rate o