GWU ECON 2102 - Chapter 6 Classical Theory of Unemployment (27 pages)

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Chapter 6 Classical Theory of Unemployment



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Chapter 6 Classical Theory of Unemployment

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Lecture Notes


Pages:
27
School:
The George Washington University
Course:
Econ 2102 - Intermediate Macroeconomic Theory

Unformatted text preview:

Chapter 6 Classical Theory of Unemployment A crucial assumption for the labor market equilibrium in the benchmark model Chapter 3 Homogeneity of labor and jobs Allowing for heterogeneity of labor and jobs leads to another type of labor market equilibrium Inflow Outflow CHAPTER 6 Unemployment 0 Natural rate of unemployment Natural rate of unemployment The average rate of unemployment at which inflow is equal to outflow a long run concept In a boom the actual unemployment rate falls below the natural rate In a recession the actual unemployment rate rises above the natural rate CHAPTER 6 Unemployment 1 Actual and natural rates of unemployment U S 1960 2010 Percent of labor force 12 10 Unemployment rate 8 6 4 Natural rate of unemployment 2 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 A first model of the natural rate Notation L of workers in labor force E of employed workers U of unemployed U L unemployment rate CHAPTER 6 Unemployment 3 Assumptions 1 L is exogenously fixed 2 During any given month s rate of job separations the fraction of employed workers that become separated from their jobs f rate of job finding fraction of unemployed workers that find jobs s and f are exogenous CHAPTER 6 Unemployment 4 The transitions between employment and unemployment s E Employed Unemployed f U CHAPTER 6 Unemployment 5 The steady state condition Definition the labor market is in steady state or long run equilibrium if the unemployment rate is constant The steady state condition is s E f U of employed people who lose or leave their jobs CHAPTER 6 Unemployment of unemployed people who find jobs 6 Why is there unemployment There is no unemployment if Job separation is 0 s 0 OR If job finding were instantaneous There are two reasons for unemployment Frictional unemployment Sectoral shift Heterogeneity of workers and jobs Structural unemployment Minimum wage laws Union premium Efficiency Wage Theory CHAPTER 6 Unemployment 7 Job search frictional unemployment frictional



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