Question

Unemployment. Recall the model of long-run unemployment E' f-U+(1-8) . E = where E denotes current employment, U denotes current unemployment, s denotes the se aration rate, f denotes the job finding rate, and E and U denote future employment and unemployment. As usual, we define the labor force as and the unemployment rate as: Answer the following (a) (3 points) Derive an expression for the steady state or natural rate of unemployment u" as a function of the job finding rate f and the separation rate s. Show your work. b) (3 points) Chearl axplain the difference betwen /riction d structurud unemployment and provide an example of a cause for each.

Answer 1

A steady state rate of unemployment is a state in which the unemployment rate does not change (AL-0) Assume that the labor force L is composed of employed workers E and unemployed workers U. This implies L+U Substitute the value E -L-U in the equation and find that: (f +s)-s The right-hand side is the steady state rate of unemployment and is expressed as a function of job finding rate and job separation rate. Frictional unemployment is the unemployment caused due to workers changing or switching between jobs, mostly to find a better one. Frictions in the labor market are always existing so there is always frictional unemployment persisting in the economy. For example, a worker quits his job and is giving interviews for other vacancies is temporarily unemployed. This type of unemployment is frictional in nature. On the other side, there is structural unemployment which results when workers experience a job loss only because their skills are no more in demand. Hence, fundamental or structural changes in the demand for some workers, bring this type of unemployment in the nation. For example, when workers have to leave a region because another region has a better job, or when a minimum wage displaces existing workers, there is structural unemployment.