Economics Chapter 7 - Natural Rate of Unemployment

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Questions and Answers

What is the natural rate of unemployment and what is it determined by?

The natural rate of unemployment is the unemployment that happens when the economy's production is at the long run level. It is mainly determined by the economy's productive capacity and its institutions.

What is the relationship between the natural rate of unemployment and booms and recessions?

In a recession, the unemployment rate will rise higher than the natural rate. In a boom, the unemployment rate will fall below the natural rate.

What is the steady state of unemployment and when is the labor market in it?

The steady state is when job loss equals job finding, meaning inflow equals outflow. The labor market is in steady state when the unemployment rate is constant.

What are the first assumptions made about the first model of natural rate?

Labor (L) is exogenous and fixed. The rates of job separation (s) and job finding (f) are also exogenous during any given month. Signup and view all the answers

What is the steady state in mathematical terms?

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What is the formula to find the equilibrium unemployment rate?

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According to the equilibrium real wage model, when is the market in equilibrium?

The market is in equilibrium when the marginal product of labor (MPL) equals the real wage. Signup and view all the answers

What are the two reasons that the rate of job finding (f) is less than 1?

Wage rigidity and job search. Signup and view all the answers

What is frictional unemployment and why does it occur?

Frictional unemployment is the time it takes workers to find a job. It occurs due to flexible wages and differing worker abilities, preferences, geographic mobility, and job information imperfections. Signup and view all the answers

What are sectoral shifts and what does it result in?

Sectoral shifts are changes in the composition of demand among industries or regions, resulting in frictional unemployment. Signup and view all the answers

How do government programs affect unemployment?

Government unemployment agencies provide job information to better match workers and jobs; public training programs help displaced workers learn new skills. Signup and view all the answers

What is unemployment insurance and how does it affect unemployment?

Unemployment insurance (UI) is a program that offers benefits to unemployed workers. It can increase search unemployment by reducing the urgency to find work. Signup and view all the answers

What are the benefits of UI?

UI helps maintain a minimum standard of living for unemployed workers and provides more time for job matching, enhancing productivity and income. Signup and view all the answers

What is structural unemployment and what causes it?

Structural unemployment occurs when the number of available jobs does not match the number of job seekers, caused by wage rigidity and job rationing. Signup and view all the answers

What is job rationing and what leads to it?

Job rationing occurs when real wages are stuck above the equilibrium level, necessitating firms to ration jobs among workers. Signup and view all the answers

What are the three reasons for wage rigidity?

Minimum wage laws, labor unions, and efficiency wages. Signup and view all the answers

What is the minimum wage and how does it affect unemployment?

The minimum wage is typically set higher than the equilibrium wage for unskilled workers, which can decrease employment among teen workers. Signup and view all the answers

Study Notes

Natural Rate of Unemployment

Represents unemployment at long-run production levels, average around which economy fluctuates.
Determined by productive capacity and institutional factors.

Economic Fluctuations

Unemployment rises above natural rate during recessions.
Unemployment falls below natural rate during economic booms.

Steady State of Unemployment

Defined as job loss equal to job finding (inflow equals outflow).
Indicates a constant unemployment rate in the labor market.

Model Assumptions

Labor (L) is exogenous and fixed in the first model of natural rate.
Job separation rate (s) and job finding rate (f) are also exogenous.

Equilibrium Unemployment Rate

Formula and mathematical representation of steady state are crucial for analysis (details not provided).

Equilibrium in Labor Market

Achieved when Marginal Product of Labor (MPL) equals real wage; no unemployment occurs at this point.

Job Finding Rate Factors

Rate of job finding (f) is less than 1 due to wage rigidity and complications in job search processes.

Frictional Unemployment

Time taken for workers to find new jobs.
Arises due to differences in worker abilities, preferences, and imperfect information flow about job vacancies.

Sectoral Shifts

Changes in demand across industries or regions lead to frictional unemployment.
Examples include technological advancements and international trade shifts.

Impact of Government Programs

Unemployment agencies provide job information to match workers with available positions.
Public training programs help displaced workers acquire new skills.

Unemployment Insurance (UI)

Mandatory insurance providing temporary benefits to unemployed workers, financed by taxpayers.
Increases duration of unemployment by reducing urgency for job search.

Benefits of Unemployment Insurance

Supports unemployed workers and families to maintain minimum living standards.
Enhances job matching, potentially improving productivity and worker income.

Structural Unemployment

Occurs when job availability does not meet the number of job seekers, creating a disequilibrium.
Caused by wage rigidity and job rationing practices.

Job Rationing

Situation where real wages are above equilibrium, leading firms to ration jobs among workers.

Causes of Wage Rigidity

Influenced by minimum wage laws, labor unions, and efficiency wages.

Minimum Wage Effects

Minimum wage typically set above equilibrium wage for unskilled workers.
Can reduce employment opportunities for youth, though overall unemployment impact is limited as many earn above minimum wage.

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Description

Explore the concepts surrounding the natural rate of unemployment in this comprehensive quiz. Understand how it is determined, its significance in economic performance, and its relation to productive capacity and institutions. Perfect for Economics students studying Chapter 7!