Suppose that on average, unemployed workers find jobs at the rate of 30% per period, and employed...
Question:
Suppose that on average, unemployed workers find jobs at the rate of 30% per period, and employed workers lose jobs into unemployment at a rate of 2% per period. Assume the size of the labor force is forever fixed.
1. Beginning with an unemployment rate of 5% this period, what will be the unemployment rate next period?
2. What is the steady-state unemployment rate?
Steady-State Unemployment:
In labor economics we often say there is a steady-state unemployment rate equal to {eq}\frac{s}{s+f} {/eq} where s is the rate at which employed people are separated from their jobs and f is the rate at which unemployed people find jobs.
Answer and Explanation: 1
1: 5.4%
The amount of newly unemployed as a % of the labor force grew by 0.95*0.02=1.9%. The amount that are newly employed as a % of the labor force is 0.05*0.3=1.5%. Thus, the new unemplyment rate in the next period is 5+1.9-1.5=5.4%.
2: 6.25%
Remember from above, the steady-state unemployment rate is equal to {eq}\frac{s}{s+f} {/eq} which in our case s is 0.02 and f is 0.3 which means the steady-state unemployment rate is equal to {eq}\frac{0.02}{0.02+0.3}=0.0625 {/eq} or 6.25%.
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Why the Unemployment Rate Decreases and Increases
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Chapter 6 / Lesson 2
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Unemployment rates are an important indicator of the economy. This lesson will explore what defines unemployment, why unemployment rates change, the way unemployment is calculated, and look at the three types of unemployment.
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