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ECON 305

Econ 6 10/14/13  Unemployment  Natural rate of unemployment: average rate of unemployment around which the economy fluctuates. (gravitates towards in long run)  L = E + U  L= labor force  E = # of employed workers  U = # of unemployed workers  Assume labor force fixed  fU = sE (when unemployment rate is neither rising nor falling) steady state  f = rate of job finding  s = rate of job separation • fraction of people who lose or leave their job each month U = 1  L 1+f  Higher the rate of job separation the higher the u-rate  Higher the rate of job finding, lower the u-rate  Frictional unemployment: caused by the time is takes workers to search for a job  Because of not all workers are equally suited for a job.  Causes  Change in demand for goods changes demand in labor  Sectoral shift: change in the composition of demand among industries or regions • Different regions produce different goods (rising in one area but not another)  Firms fail, job performance bad, skills not needed  Public policy  Government gives info about jobs and matches  Publicly funded training programs  Unemployment insurance: government program where unemployed workers can collect benefits for a certain period of time after losing their job. • Increases frictional unemployment and raises natural rate • People are less pressured to find jobs ♦ Raise rate of job sep and reduce rate of job finding ♦ Firms must pay for some / all of unemployment benefits  Real wage rigidity and structural unemployment  Wage rigidity: failure of wages to adjust to a level at which labor supply equals labor demand  When real wage is above equilibrium, supply > demand • Raise unemployment and reduce f  Structural unemployment: unemployment resulting from wage rigidity and job rationing.  Mismatch between supply and demand for labor  Causes of wage rigidity  Minimum wage laws  Important for unskilled whose wage it rises above equilibrium and reduced demand  Greatest impact on teenage unemployment
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