Question

1. It can be shown that a country’s long run unemployment rate is a function of the finding rate, f and the separation rate, s.  The finding rate is the share of unemployed people who find a job in a given period (say a month) and the separation rate is the share of employed people who lose or leave a job in a period.

The equation is UR = s/(s+f)

1. If the separation rate is 3% and the finding rate is 50% what is the nation’s long run unemployment rate?
2. If the separation rate is 1% and the finding rate is 16.9% what is the nation’s long run unemployment rate?
3. Which type of economy would you prefer to live in?
4. List some policies that a government may enact to alter the finding rate? (either positive or negative)
5. List some policies that a government may enact to alter the separation rate? (either positive or negative)
6. What exogenous factors may affect either?

Answer 1

a).

Here the equilibrium unemployment rate is “UR = s/(s+f)”, where “s=job separation rate” and “f=job finding rate”. If “s=3%=0.03” and “f=50%=0.5”, => the equilibrium unemployment rate is given by.

=> UR = s/(s+f) = 0.03/(0.03+0.5) = 0.03/0.53 = 0.0566 = 5.66%, => UR = 5.66%.

b).

If separation rate is 1% that is, “s=1%=0.01” and finding rate is 16.9%, that is “f=16.9%=0.169, => the equilibrium unemployment rate is given by.

=> UR = s/(s+f) = 0.01/(0.01+0.169) = 0.01/0.179 = 0.0558 = 5.58%, => UR = 5.58%.

c).

Here the equilibrium unemployment rate is, => UR = s/(s+f) = 1/(1+f/s). The unemployment rate will increase if the “s=job separation rate” increases and on the other hand the unemployment rate will decrease if the “f=job finding rate” increases.

An economy having higher “f=job finding rate” and lower “s=job separation rate”, will be preferred.

d).

Here “f=job finding rate” is negatively related to unemployment rate, => as the “f=job finding rate” increases the unemployment rate decreases. So, as policy by government that increase the “f=job finding rate” will reduce the unemployment rate.

Now, “f=job finding rate” will increase it the output or income of the economy increases. If “Y=output or income” increase that also increase the employment generation, => “f=job finding rate” also increases. So, “expansionary fiscal policy” that is either increase in “government spending” or “decrease in tax” increases the total spending of an economy that further increase the output of an economy and the “f=job finding rate”.

Similarly, “expansionary monetary policy” that is the increase in “money supply” also increases the total spending of an economy that further increase the output of an economy and also “f=job finding rate”.