ECON 7750 Chapter Notes - Chapter 7: Frictional Unemployment, Unemployment Benefits

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7 Mar 2014
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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. 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 of unemployment must either reduce the rate of job separation or increase the rate of job finding. This will change the natural rate of unemployment. Frictional unemployment unemployment caused by the time that is takes workers to search for a job.

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