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MACROECONOMICS CHAPTER 7: Unemployment and the Labor Market
Macroeconomics 11th Edition By N. Gregory Mankiw
Unemployment and the Labor Market The natural rate of unemployment
● The normal rate of unemployment around which
the economy fluctuates
● The rate of unemployment toward which the
economy gravitates in the long run, given all the
labor-market imperfections that impede workers
from instantly finding jobs
Job Loss, Job Finding, and the Natural Rate of Determinants of the natural rate of unemployment
Unemployment ● L→ the labor force
● E→ the number of employed workers
● U→ the number of unemployed workers
● Every worker is either employed or unemployed,
so the labor force = the sum of both:
○ L=E+U
● So the rate of unemployment = U / L
A model of the natural rate of unemployment
● Assumption→ the labor force L is fixed
● (s)→ the rate of job separation
○ The fraction of employed individuals who
lose or leave their jobs each month
● (f)→ the rate of job finding
○ The fraction of unemployed individuals
who find a job each month
● Together, s and f → the rate of
unemployment.
Labor market in a steady state
● If the unemployment rate is neither rising nor
falling
● In a steady state→ the number of people
finding jobs fU must equal the number of
people losing jobs sE:
○ The steady state condition→ fU = sE
● To find the steady-state unemployment rate:
○ We know that E = L – U
○ So fU = s(L – U)
● This shows that the steady-state rate of
unemployment (U/L) depends on the rates of job
, MACROECONOMICS CHAPTER 7: Unemployment and the Labor Market
Macroeconomics 11th Edition By N. Gregory Mankiw
separation s and job finding f. The higher the rate
of job separation, the higher the unemployment
rate. The higher the rate of job finding, the lower
the unemployment rate.
Important implications for public policy
● 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.
● Any policy that affects the rate of job separation or
job finding also changes the natural rate of
unemployment
Job Search and Frictional Unemployment Frictional unemployment
● The unemployment caused by the amount of time
it takes workers to search for a job
● Because different jobs require different skills and
pay different wages, unemployed workers may
not accept the first job offer they receive
● The flow of information about job candidates and
job vacancies is imperfect, and the geographic
mobility of workers is not instantaneous.
● For all these reasons, searching for a job takes
time and effort, reducing the rate of job finding.
Causes of Frictional Unemployment Causes of Frictional Unemployment
● Sectoral shifts
○ A change in the composition of demand
among industries or regions
○ Because sectoral shifts are always
occurring, and because it takes time for
workers to change sectors, there is always
frictional unemployment
● When workers’ firms fail
● When their job performance is deemed
unacceptable
● When their skills are no longer needed
● Workers may quit their jobs to change careers or
to move to different parts of the country
● It takes time and effort for the worker to
find a new job→ frictional unemployment is
unavoidable
Public Policy and Frictional Unemployment How public policies try to decrease the natural rate of
unemployment
● By reducing frictional unemployment
● Government employment agencies disseminate
information about job vacancies to match jobs and
workers more efficiently
● Publicly funded retraining programs are designed
to ease the transition of workers from shrinking
industries to growing industries
● If these programs succeed→ they decrease
the natural rate of unemployment
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