Unemployment
1. What determines the natural rate of unemployment?
The rates of job separation and job finding determine the natural rate of
unemployment.
The rate of job separation is the fraction of people who lose their job each
month. The higher the rate of job separation, the higher the natural rate of
unemployment.
The rate of job finding is the fraction of unemployed people who find a
job each month. The higher the rate of job finding, the lower the natural
rate of unemployment.
2. Outline the factors that will explain the length of job search.
Frictional unemployment: May increase during boom periods, may
be larger for young people.
Sectoral shifts: Large scale structural change in an economy may
result in mismatch or workers and jobs with respect to skills and/or
geography.
Public Policy and Job Search: Policies to help a better match of
workers and jobs should reduce job search
Unemployment insurance (UI): Reduces opp.cost of being u/e.
3. Explain what is meant by real wage rigidity and discuss how real
wage rigidity may contribute to the natural rate of unemployment.
1. Suppose that a country experiences a reduction in productivity –
that is, an adverse shock to the production function.
(a) Give an example of such a shock.
1
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