Question

If the economy were at a steady-state unemployment rate with a separation rate of .02 per month and a job-?nding rate of .10 per month and the labor force was 100 million.

PART A. What is the natural unemployment rate? How many individuals would lose their jobs

each month?

PART B. Suppose the job separation rate is still .02 per month and the rate of job ?nding is

now .13 per month. What is the natural unemployment rate? How many individuals would lose

their jobs each month?

PART C. Use your answer from PART A and PART B. to explain how an increase in the rate of job ?nding affects the natural unemployment rate?

Answer 1

Natural rate of unemployment = s / (s + f) where s: Job separation rate, f: Job finding rate

(PART A)

Natural rate of unemployment = 0.02 / (0.02 + 0.1) = 0.02 / 0.12 = 0.1667 = 16.67%

Individuals losing their job per month (Million) = 100 x 0.02 = 2

(PART B)

Natural rate of unemployment = 0.02 / (0.02 + 0.13) = 0.02 / 0.15 = 0.1333 = 13.33%

Individuals losing their job per month (Million) = 100 x 0.02 = 2

(PART C)

Increase in job finding rate (f) decreases the natural rate of unemployment.