Question

Natural Rate of Unemployment #2

a) An economy has had an unemployment rate of 10% for a very long time. 18% of all unemployed workers find a job every month. What share of workers lose their job every month?

b) An economy has had an unemployment rate of 5% for a very long time. 3% of all employed workers lose their job every month. What share of unemployed find jobs every month?

Natural Rate of Unemployment #3

a) An economy has a job separation rate of 2% per month and a job finding rate of 38% per month. The labour force has 100 million workers. What is the steady state unemployment rate in this economy?

b) In the year 2020, the economy is hit by a recession and unemployment jumps to 10%, but the job separation rate and job finding rate return immediately to their pre-recession rates of 2% and 38%. How many unemployed workers find jobs this month? How many employed workers lose their job this month? What will the unemployment rate be next month?

c) In the year 2030, the economy has a great year and unemployment declines to 2%, but the job separation rate and job finding rate return immediately to their pre-recession rates of 2% and 38%. How many unemployed workers find jobs this month? How many employed workers lose their job this month? What will the unemployment rate be next month?

d) If the job finding rate and job separation rate never change again, what will the unemployment rate be in the long run?

Answer 1

Answer 2(a) : Overall unemployment rate = 10%

                        Out of the 10%, 18% find Job every month, that means, the remaining amount of unemployed is 82%.

                         Now, the vacancy created by the 18% who got the Job, will need to be filled in by a percentage of the remaining 90% who are employed.

                       18% of 100 = 20% of 90

                       Therefore, 20% of workers lose Jobs every month.

Answer 2(b) : Overall unemployment rate = 5%

                        Out of the 95% remaining, 3% find lose every month, that means, the remaining amount of employed is 92%.

                         Now, the vacancy created by the 3% who lost the Job, will need to be filled in by a percentage of the remaining 5% who are unemployed.

                       3% of 100 = 60% of 5

                       Therefore, 60% of workers find Jobs every month.

Answer 3(a) : Job separation rate is 2% and Job finding rate is 38%

                        Now, the total population of the economy is = 100 million workers

                        Therefore, 2% i.e. 2 million workers lose their jobs per month

                        & 38% of those 2% find Jobs their Jobs i.e. = 38/100 x 2,000,000

                                                                                                    = 760,000

                    Therefore, the remaining of the unemployment is the steady state unemployment rate in the economy. i.e. = 2,000,000 - 760,000

                                = 1,240,000

                                 

Answer 3(b): Number of unemployed in 2020 = 10% of 100 million workers.

                                                                                  = 10 million workers

                         Remaining population = 90 million

                         Job separation rate is 2% and Job finding rate is 38%

                        Now, the total population of the economy is = 90 million workers

                        Therefore, 2% i.e. 1.8 million workers lose their jobs per month

                        & 38% of those 1.8 % find Jobs their Jobs i.e. = 38/100 x 1,800,000

                                                                                                    = 684,000

                    Now, since the economy goes back to the 2% unemployment, this means the 10 million + 684,000 will gain their jobs the next month.

                                                              = 10,000,000 + 684,000

                                                              = 10,684,000 workers

                                 

Answer 3(c) : Job separation rate is 2% and Job finding rate is 38%

                        Now, the total population of the economy is = 100 million workers

                        Therefore, 2% i.e. 2 million workers lose their jobs per month

                        & 38% of those 2% find Jobs their Jobs i.e. = 38/100 x 2,000,000

                                                                                                    = 760,000

                    Therefore, the remaining of the unemployment is the steady state unemployment rate in the economy. i.e. = 2,000,000 - 760,000

                                = 1,240,000 + 8% of 100,000,000

= 1,240,000 + 80,000,000

= 81,240,000

                                 

Answer 3(d) : If the Job separation rate and the Job finding rate never change, then the unemployment rate in the longer run will be 2% of the total population, i.e. 2% of 100 million

= 20,00,000