1. What determines the natural rate of unemployment?

The natural rate of unemployment is determined by the rate of job separation (a fraction of
people who lose their job every month) and job findings (a fraction of people who find jobs
every month).
DENOTING;

L= Labour force

E = Employed

U = Unemployed

f = Job Finding Rate

s = Job Separation Rate

To calculate the labour-force we provide a sum of both employment and unemployment

which is L = E + U and according to this equation if we need to calculate the employment
we need to turn the equation making it E = L – U which means that we can substitute L – U
instead E in any equation as it means the same. As the natural rate of unemployment is the
steady rate of un employment we need to assume that the number of people finding jobs must
be equal to the number of people losing jobs which will give us an equation f U = s E; f
representing the fraction of unemployed people who are able to find a job each month and s
representing the fraction of employed workers who lose their job each month.

Moreover, we will further substitute the E with (L – U) which will turn the equation as f U=
s (L - U) and divide both of the sides with L (Labour); U / L = s / s + f. After this we will
start solving for the unemployment rate which is U / L and turn the equation into U / L =
s / s + f Or U / L = 1 / 1 + f / s.

This condition shows that the consistent state pace of joblessness U/L depends
on the paces of occupation partition s and occupation discovering f. The higher the pace of
work division, the higher the joblessness rate. The higher the pace of occupation finding, the
lower the joblessness rate.