This article will cover the economics of job separation and job finding and how to calculate them. If job finding is instant then f = 1, and the natural rate of unemployment would be near zero, if f < 1, it is because of job search and wage rigidity. Firstly, some economic terms to know are frictional unemployment which is caused by the time it takes workers to search for a job and structural unemployment results from wage rigidity and job rationing. To address frictional unemployment consider (sectoral shift) trying to align changes in the differing wages and skills demanded among industries or regions in a state of imperfect information. While, to address structural unemployment consider (wage rigidity) the failure of wages to adjust to a level at which labour supply equals labour demand, comparing the number of people who want to work to the number of jobs available.
Secondly, reasons for wage rigidity can be minimum wage laws, labour unions, and efficiency wages. Note any policy (such as severance pay) that affects job separation or job finding also changes the natural rate of unemployment. If firms have to pay an amount to fire workers it would decrease job separation and job finding. Also, a minimum wage would decrease job finding as firms would limit the number of workers having to pay higher wages, while unskilled workers could not compete on price. Supply and demand curves show the elasticity for labour.
Question A) Use the following data to calculate (i) the labour force, (ii) the # of people not in the labour force, (iii) the labour force participation rate, (iv) the unemployment rate. Population: # employed = 140.58 million, # unemployed = 14.32 million, adult population = 238.75 million
(i) The labour force: L = #E + #U => 140.58 + 14.32 = 154.90
(ii) The # of people not in the labour force: NILF = P – L => 238.75 – 154.90 = 83.85
(iii) The labour force participation rate: L/P x 100% => (154.90/238.75) x 100% = 64.87%
(iv) The unemployment rate: U/L x 100% => (14.32/154.90) x 100% = 9.24%
Question B) Compute the steady-state rate of unemployment, using the following data. Job separation is 3% (s=0.03), job finding is 40% (f=0.40).
(i) The steady-state of unemployment: U/L = s / s+f, where 0.03 / 0.03+0.40 = 0.0697
(ii) To find the rate of unemployment from 0.0697 x 100, 6.97%
Math Abbreviations & Equations:
L = # workers in labour force
E = # employed workers
U = # unemployed
P = Adult population
U/L = unemployment rate
s = rate of job separation
f = rate of job finding
E/L x 100 = unemployment rate
L/P x 100 = labour force participation rate
U/L = rate of unemployment
E + U = L labour force
fu = SE steady-state
L – U = E # employed
L – E = U # unemployed
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