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Natural Rate of Unemployment

Natural Rate of Unemployment. Full Employment is not zero. Cyclical. Structural. 4-Types of Unemployment. Seasonal. Frictional. Natural Rate of Unemployment. What: Unemployment that does not go away in long run Also called “ Full Employment ” (know this!)

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Natural Rate of Unemployment

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  1. Natural Rate of Unemployment Full Employment is not zero

  2. Cyclical Structural 4-Types of Unemployment Seasonal Frictional

  3. Natural Rate of Unemployment • What: Unemployment that does not go away in long run • Also called “Full Employment” (know this!) • Rate without cyclical unemployment • Also, total of frictional & structural(seasonal is adjusted out)

  4. We will use 5% for Natural rate (Full Employment) Critical Thinking: Why is it lower today? Calculating the Natural Rate • Economists debate actual level • Was considered to be 5-6% before the 1990’s • 2006 considered 4-5% • Many Reasons: • Improved Job. Info on internet • Temporary Work Agencies • New Welfare Laws

  5. Unemployment rate Natural rate of unemployment Unemployment Rate vs. Natural Rate When is the economy clearly strong below? Percent of Labor Force 10 8 6 4 If unemployment rate is less than Full Employment, things are good! 2 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 BUT!---inflationary pressures rise

  6. 2-Types of Inflation • Demand-Pull Inflation: • Too many dollars chasing too few goods • Spending increases faster than production • Demand Side Inflation • Cost-Push Inflation • Increase in cost of any factors of production (input prices) • examples: price of oil, labor, steel, etc….) • Supply Side Inflation

  7. Low Unemployment & Inflation Business competes for workers Wages begin to increase => The cost of doing business rises Leads to “cost push” inflation As unemployment rate falls Below full employment

  8. Labor Force Participation: Men versus Women Labor-Force Participation Rate (in percent) 100 Men 80 60 40 Women 20 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

  9. Labor-Market Participation

  10. Economic History 1970-2007 • Analyze GDP, Unemployment & CPI data

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