Assume that the job separation rate s is 0.01 (1%) per month and that the job fi

Question

Assume that the job separation rate s is 0.01 (1%) per month and that the job
finding rate f is 0.2 (20%) per month.
Assume that the labor force today (period t = 0) is 100 million.
(a) What is the steady state unemployment rate for this economy?
(b) Given that L = 100 million, what is the steady state number of employed
E and unemployed U today in period t = 0?
(c) Assume U.S. immigration policy changed tomorrow (period t = 1) such
that we allowed more people to enter the country and L increased to 110
million from its inital value of 100 million. Assume that these new entrants
would be unemployed first and then find jobs at the job finding rate f .That
is, at time t = 1, the number of unemployed is U1 =U+10 million, and
the number of employed equals E1 = E. Create a table (maybe in Excel)
that shows how Et , Ut , and Ut=L evolve over time, given s = 0:01 and
f = 0:2, starting at t = 1 and ending when the unemployment rate reaches
its steady stateU=L rounded to the nearest thousandth (tenth of a percent).
(d) In the table from the previous scenario, how many periods does it take for
the unemployment rate to reach its steady state level rounded to the nearest
thousandth (tenth of a percent)?

Explanation / Answer

steady state unemployment rate for this economy (U/L)= ( s /s + f )

where s=0.01, f=0.2

steady state unemployment rate for this economy= 0.01/(0.01+0.2) =0.0476 = 4.76%

L E U s f 100000000

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