PowerPoint® Slides by Ron Cronovich
© 2010 Worth Publishers, all rights reserved
In this chapter, you will learn:
…about the natural rate of unemployment:
what it means
what causes it
understanding its behavior in the real world
Natural rate of unemployment
Natural rate of unemployment:
The average rate of unemployment around which the economy fluctuates.
In a recession, the actual unemployment rate rises above the natural rate.
In a boom, the actual unemployment rate falls below the natural rate.
Actual and natural rates of unemployment in the U.S., 1960-2009
Percent of labor force
Natural rate of unemployment 2
1 The of Macroeconomics
1980 1985 1990 1995 2000 2005 2010
A first model of the natural rate
L = # of workers in labor force
E = # of employed workers
U = # of unemployed
U/L = unemployment rate
1. L is exogenously fixed.
2. During any given month, s = rate of job separations, the fraction of employed workers that become separated from their jobs f = rate of job finding, fraction of unemployed workers that find jobs s and f are exogenous
The transitions between employment and unemployment s E
Unemploye d f U
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
# of unemployed people who find jobs 8
Finding the “equilibrium” U rate f U = s E
= s (L – U )
= s L – s U
Solve for U/L:
(f + s) U = s L so, CHAPTER 6
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:
0.05, or 5%
L s f
A policy will reduce the natural rate of unemployment only if it lowers s or increases f.
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
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
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
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
Structural change over the long run Agriculture
More examples of sectoral shifts
Industrial revolution (1800s): agriculture declines, manufacturing soars
Energy crisis (1970s): demand shifts from larger cars to smaller ones
Health care spending as % of GDP:
In our our dynamic dynamic economy, economy, smaller smaller sectoral sectoral shifts shifts occur