Question

In our model of the natural unemployment rate, we showed that the steady-state rate of unemployment is U/L=s/(s+f). Suppose that the unemployment rate does not begin at this level. Show that unemployment will evolve over time and reach this steady state. (Hint: Express the change in the number of unemployed as a function of s, f, and U. Then show that if unemployment is above the natural rate, unemployment falls, and if unemployment is below the natural rate, unemployment rises.

Answer 1

Unemployment in the model of the natural unemployment rate evolves over time and reaches the steady state.

Step-by-step explanation:

In the model of the natural unemployment rate, the steady-state rate of unemployment is expressed as U/L=s/(s+f). If the unemployment rate does not begin at this level, it will evolve over time and reach the steady state. We can express the change in the number of unemployed as a function of s (job separation rate), f (job finding rate), and U (unemployment rate).

If unemployment is above the natural rate, unemployment falls over time as the job finding rate exceeds the job separation rate. If unemployment is below the natural rate, unemployment rises over time as the job separation rate exceeds the job finding rate.