Question

If the fraction of employed workers who lose their jobs each month (the rate of job separations) is 0.01 and the fraction of the unemployed who find a job each month is 0.09 (the rate of job findings), then the natural rate of unemployment is:

A. 1 percent.
B. 9 percent.
C. 10 percent.
D. about 11 percent.

Answer 1

C. 10%

Explanation:

Assuming employment is in some sort of equilibrium and E and U are the numbers of Employed and Unemployed, respectively, we have ...

0.01E = 0.09U

E = (0.09/0.01)U = 9U

Then the unemployment rate as a fraction of the total workforce is ...

U/(U+E) = U/(U +9U) = 1/10

The natural unemployment rate is 10%.