Question

Suppose that the labor force has 100 million people, of whom 92 million initially have jobs and 8 million are unemployed. Assume that the job-separation rate is 2% per month and the job finding rate is 40% per month. Trace out the time paths of unemployment and unemployment. what is he natural unemployment rate

Answer 1

Job separation rate is 2% per month. Therefore frictional unemployment is 2 million people . 8 million are unemployed. Hence it is structural unemployment. Since structural unemployment is long term unemployment. Therefore natural rate of unemployment is the sum of frictional and structural unemployment. I.e 2+8 = 10 millions.

Every month 2 million quits Job and 40 million gets job. Time paths of employment and unemployment depends on the frictional unemployment because frictional is not long term .