ECON 101 1st EditionLecture 11Unemployment and Inflation Unemployment:o When we discussed the labor market, we defined equilibrium in that market as the point at which the supply of labor equals the demand for labor at a given wage rate. When the labor market is in equilibrium, it does not appear that there should be any unemploymentin the economy. o However, even when the economy is operating at what is commonly called full employment, unemployment still exists. In fact the unemployment rate when the economyis operating at full capacity is generally still quite high -- somewhere between 5.5 and 6 percent.  We define the natural rate of unemployment to be that rate of unemployment at which the economy is operating at full capacity with no tendency for inflation or deflation to occur. o Economists and policy makers have been concerned that even at full employment the natural rate of unemployment should still be in the range of 5.5 to 6 percent. This means that when the economy goes into a recession, the unemployment rate can climb much higher.  Many periods of high actual unemployment above the natural unemployment rate have been the result of deliberate government anti-inflationary policy designed to decelerate inflation by holding actual unemployment above the natural rate.Types of Unemployment  1. Frictional Unemployment: Unemployment that occurs in the normal course of job search, by individuals who have voluntarily quit their jobs, are entering the labor force for the first time, or are reentering the labor force. This contributes to the natural unemployment rate.2. Structural Unemployment: Unemployment that occurs when there is a mismatch between the skill or location requirements of job vacancies and the present skills or location of unemployed individuals. This also contributes to the natural unemployment rate.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.3. Cyclical Unemployment: Unemployment that is the difference between the actual and natural rates of unemployment. This is the kind of extra unemployment that occurs during recessions.Measurement of Unemployment:The Current Population Survey is performed each month on a rotating sample of 60,000 households (ca. 1 in every 1,400 households in the country).Why Is The Natural Unemployment Rate So High? The natural unemployment rate, UN, is determined by two basic factors:A. There is a mismatch of jobs and workers 1. Inflexibility of relative wages: For example wage rates are too high for teenagers because of minimum wage laws. Consequently they cannot find work.2. A general lack of incentives for firms to train workers: Firms are reluctant to give training to workers who might quit immediately after being trained and go to work for a competitor. This is the issue of general vs. specific training.3. “Rational” employer discrimination: Suppose employers routinely refuse to hire groups of people who exhibit an above average tendency to quit, e.g., teenagers, adult women. We say that this kind of discrimination is “rational” because its based on experience of employers about the costs of hiring these types of people.4. Pure discrimination: e.g., against blacks, women. This kind of discrimination is irrational because it is not based on the ability of the person to do the job.5. Hit and miss availability of training in school: Some schools simply don’t offer the kind of training that prepares people for jobs.6. Difficulty of borrowing to finance human capital accumulation: It’s difficult for a motorcycle repairman to get a loan because his future income is open to question. On the other hand, a medical student has little trouble financing his training because the lender knows that he’ll get the money back.7. Long adjustment lags in education: Students are still training for jobs that are irrelevant today.All of these factors make it difficult for some people to get work even in the best of times because for one reason or another they don’t fit the job description very well.B. Turnover unemployment and job searchThe natural unemployment rate also remains high because of factors that: (1) induce people to quit such as unemployment benefits(2) & factors that induce people to search longer such as unemployment compensation (as long as you’re on unemployment, you might just as welllook a little longer) and dead-end jobs that are so unattractive to the searcher that he/she keeps looking longer in hopes of finding a better