(Chapter 7) Unemployment and the Labor Market

Natural rate of unemployment: The average rate of unemployment around which the
economy fluctuates.
A first model of the natural rate:
L= # of workers in labor force --- L is exogenously fixed.
E= # of employed workers

S= rate of job separations. (fraction of employed workers that become separated from their
jobs)
F= rate of job finding, (fraction of unemployed workers that find jobs)

Employed Unemployed

The steady state condition:

 The labor market is in steady state, or long run equilibrium.

S*E=f*U
F*U=s*E -------- U / L = s / (s + f) --------
= s * (L-U)
=s*L–s*U

Policy implication: A policy will reduce the natural rate of unemployment.

Frictional Unemployment:
 caused by the time it takes workers to search for a job.
 Occurs even when wages are flexible and there are enough jobs to go around
 Occurs because; - workers have different abilities, preferences
- Jobs have different skill requirement

Sectoral Shifts: Technological Change

-More jobs repairing computers instead of typewriters
-Industrial revolution(1800s): agricultural declines, manufacturing soars
- Energy Crisis(1970s): demand shifts from larger cars to smaller ones

Public Policy and Job Search

 Govt employment agencies (İş Kur)
 Public job training programs (Halk Eğitim)
Unemployment Insurance(UI):
 Uı increses frictional unemployment, because it reduces;
1- The opportunity cost of being unemployed
2- The urgency of finding job
Benefits of UI:
1- By allowing workers more time to search
2- UI may lead to better matches between jobs and workers, which would lead to
greater productivity and higher incomes.
Why is there unemployment?
The natural rate of unemployment: