Question

Explain why a policy aimed at lowering the natural rate of unemployment given by the steady state model must either reduce the rate of job separation or increase the rate of jobs finding

Answer 1

The natural rate of unemployment is a mix of frictional and structural unemployment that persists in an efficient, expanding economy when labor and resource markets are in equilibrium.

In the steady state model,

Steady state condition is defined by when-

No. of people who loss or leave their jobs = No. of people who finds employment

Assuming s = rate of job separation, f = rate of finding new job, U = no. of unemployed people, E = no. of employed people

L = total labor force and r = U/L is the unemployment rate.

Using steady state condition,

Thus natural rate of unemployment is given by

Thus to reduce the natural rate of unemployment, either f (rate of job finding) should be increased or s(rate of job separation) should be decreased.