Understanding unemployment rates Phelps was suspicious of the tradeoff suggested by the Phillips curve. He thought that sensible, forward-looking people should not change their behavior just because 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 obs. 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 thatpeople are added to the unemployment rolls.
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.
Now suppose that in September, the job separation rate returns to normal: 3% of the workers who were employed at the beginning of the month become unemployed. As always, 10% of the workers who are unemployed find jobs during the month. In the last question, you calculated a lower unemployment rate for the beginning of September. Use the numbers of employed workers and unemployed workers implied by this unemployment rate to calculate how many employed workers become unemployed during September and how many unemployed workers find jobs during September. The unemployment rate at the end of September is.