CHAPTER 6 UNEMPLOYMENT: DEFINITIONS AND STEADY STATE NOTATIONS AND DEFINITIONS

• L denotes the labour force. The labour force is the sum of the unemployed and employed; L = E + U. The rate of unemployment is U/L • E is the number of employed workers • U is the number of unemployed workers. • s denotes the rate of job separation. This is the fraction of unemployed persons who leave or lose their job each month. • f denotes the the rate of job finding. This is the fraction of unemployed persons who find new jobs each month. • s + f = U. • In a condition of steady state, unemployment is neither falling nor climbing. This condition is defined as: fU = sE

USING STEADY STATE TO FIND THE UNEMPLOYMENT RATE
STEP ONE • Substitute L - U for E in the steady state equation. • The equation is now rewritten as fU = s(L - U) STEP TWO • Divide both sides of the equation by L to obtain: f (U/L) = s (1- U/L) STEP THREE • Solve for U/L, to find: U/L = s/s+f

Thus steady state = 0. the unemployment level is 208. Thus U = 12% of the Labour force. The higher the rate of separation the higher unemployment level.Tutorial Sheet: Question 5 The separation rate in an economy is 5 percent and the rate of job finding is 7 percent. Thus. In the above question: f = 5% U = f+s =12%. what happens to the steady state unemployment rate and unemployment level? The equation above shows that the steady state rate of unemployment is dependent on rate of separation and the rate of job finding.416 Under the assumption that the natural rate of employment is equivalent to the unemployment rate under the classical purview. U/L = 3/10. If the separation rate falls to 3 percent. calculate the steady state unemployment rate and the unemployment level. b. a. If this economy has 500 workers in the labor force.30 Unemployment level = 0.416 of the labour force. and the lower the rate of separation the lower the level unemployment. the unemployment level will be equal to 0. if the rate of separation falls to 3% to 7% it can be assumed that unemployment rate as well as the unemployment level will also fall. Thus.30 x 500 = 150 the the of the . The condition of steady state unemployment is found at fU = sE where: f: is the rate of job finding U: is the number of unemployed persons in the labour force s: the rate of separation E: the number of employed persons in the work force. 12% of 500 = 60 s = 7% E = 88% of 500 = 440 A rearrangement of the condition will give: U/L = s/s+f 5/12 = 0.

what is the immediate change in the unemployment rate? What is the new steady state rate of unemployment? Also describe the immediate and steady state change in the unemployment level.c. Now if the labor force suddenly increases to 600 workers (the separation rate remains at 3 percent). Steady state: U/L = 3/10 Unemployment level: 0.30 x600 = 180 Unemployment rate: 10% .

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