3. Understanding unemployment rates Aa Aa E Phelps was suspicious of the trade-o

Question

3. Understanding unemployment rates Aa Aa E Phelps was suspicious of the trade-off suggested by the Phillips curve. He thought that sensible, forward-looking people should not change their behavior just because all the prices on all the price tags in the economy increased at 4% per year instead of at 2% per year. Phelps started his analysis by asking what determines the unemployment rate. One of the key points he recognized was that unemployment is the inevitable consequence of an economy in which some firms go out of business each month and some workers quit their jobs each month. Once a worker is out of a job, the individual will take some time searching for the next one. Picture an economy with 100,000 workers in its labor force. The unemployment rate is simply the number of unemployed workers divided by the number of workers in the labor force. At the beginning of January, the unemployment rate is 4.76%, so 4,760 people in the labor force are unemployed. Suppose that during January, 20% of the workers who were unemployed at the beginning of the month start new jobs. This means that people leave the unemployment rolls in January. Suppose that during January the job separation rate equals 1%. That is, 1% of the people who were employed at the beginning of the month are laid off or quit. This means people are added to the unemployment rolls that month. (Round your answer to the nearest whole number.) Assume the size of the labor force does not change from January to February. Considering that the job separation rate is 1% during January and 20% of unemployed workers find new jobs, the unemployment rate at the beginning of February will be Generalizing from your calculations for January, if the job separation rate is 1% each month, and 20% of unemployed workers get jobs each month, the unemployment rate each month will be At the beginning of August, the unemployment rate is 4.76%, as it was at the beginning of January. But this month, something changes. All of the workers who would ordinarily have quit their jobs decide to stay on. Some workers are still fired, so in August, just 0.5% of the employed workers become unemployed. Suppose that during August, 20% of the workers who were unemployed at the beginning of the month find new jobs. The unemployment rate be at the beginning of September will be . (Round your answer to two decimal places.)

Explanation / Answer

Expected Inflation Rate : 2%
Actul Inflation Rate : 4%

Labor Force 10,000
Unemployment Rate in Jan 4.76%
Unemployed People = 476

20% of unemployed workers start working at beginning of January. So, 95 people leave the unemployment rolls in January.

People Unemployed = 476-95 = 381
People Employed = 10000-381 = 9619

During January, 1% people quit/laid off

1% of people employed at beginning of Jan

= 0.01*9619

= 96.2

96 people are added to the unemployment rolls that month.

People Unemployed : 381+96 = 477
People Employed = 9523

Unemploymen Rate in the begining of Feb = 4.77%

The unemployment rate each month if the job separation rate and people getting jobs percentage remain same,then the unemploymnet rate will4.76%

In August, the rate will be same ...almost equal to 4.76%

The unemplyment rate willconvergeslowly back to the value at the begining of Jan,4.76%

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