A first model of the natural rate
Notation:
L = # of workers in labor force
E = # of employed workers
U = # of unemployed
U/L = unemployment rate
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Unemployment
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Assumptions:
1. L is exogenously fixed.
…[Labor force is constant]
2. During any given month, s =rate of job separations fraction of employed workers that become separated from their jobs f =rate of job findings fraction of unemployed workers that find jobs s and f are exogenous
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Unemployment
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The transitions between employment and unemployment s E
Employed
Unemploye d f U
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Unemployment
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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:
# of employed people who lose or leave their jobs
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s E
U
Unemployment
=
f
# of unemployed people who find jobs 7
Finding the “equilibrium” U rate f U = s x E = s x ( L-U)
Solve for U/L: f x U =s x L – s x U so, f x U + s x U = sL, U( f+s ) =sL
U (f+s)/ L= sL/L U(f+s)/L(f+s)=s/f+s
U/L = s/(f+s)
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Unemployment
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Example:
Each month,
1% of employed workers lose their jobs
(s = 0.01)
19% of unemployed workers find jobs
(f = 0.19)
Find the natural rate of unemployment:
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Unemployment
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Example:
Each month,
1% of employed workers lose their jobs
(s = 0.01)
19% of unemployed workers find jobs
(f = 0.19)
Find the natural rate of unemployment:
U
s
0.01
0.05, or 5%
L s f
0.01 0.19
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Unemployment
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Policy implication
A policy will reduce the natural rate of unemployment only if it lowers s or increases f.
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Unemployment
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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: Why?
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Unemployment
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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:
1. job search
2. wage rigidity
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Unemployment
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Job search & 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
workers have different abilities, preferences
jobs have different skill requirements
geographic mobility of workers not instantaneous
flow of information about vacancies and job candidates is imperfect
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Unemployment
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Sectoral shifts
def: Changes in the composition of demand among industries or regions.
example: Technological change more jobs repairing computers, fewer jobs repairing typewriters
example: A new international trade agreement labor demand increases in export sectors, decreases in import-competing sectors
These scenarios result in frictional unemployment
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Unemployment
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CASE STUDY:
Structural change over the long run CHAPTER 7
Unemployment
16
More examples of sectoral shifts
Industrial revolution (1800s): agriculture declines, manufacturing soars
Energy crisis (1970s): demand shifts from larger cars to smaller ones
