1. THE NATURAL UNEMPLOYMENT RATE Recall: 1) when the economy is at full employment, there is still some amount of unemployment. (recall the definition of full employment) 2) The natural unemployment rate is the rate of unemployment when the economy is at full employment. Ques: What types of unemployment exists when the economy is at full employment? Can you describe them? Two Factors determining the natural unemployment rate, that is factors creating unemployment not due to general recession of the economy. 1) Job search 2) Job rationing

2. THE NATURAL UNEMPLOYMENT RATE Job search is the activity of looking for an acceptable vacant job. The amount of job search depends on Demographic change Unemployment benefits Structural change The idea is that changes in these factors will shift the labor supply and labor demand curves. How?

3. THE NATURAL UNEMPLOYMENT RATE Job rationing: is a labor market friction in which the wage rate is set above the equilibrium. Efficiency wage Minimum wage Union wage These forms of job rationing increases the natural unemployment rate.

4. Practice Questions 1) Explain the relationship between the opportunity cost and the slope of the labor supply curve. 2) Explain how the real wage and the extra output produced by each worker determine the quantity of labor demanded by a firm. 3) ʺ Job rationing occurs when the quantity of labor demanded exceeds the quantity supplied. ʺ Is the previous statement true or false? Explain your answer. 4) What is job rationing and how does it relate to unemployment? What factors can lead to job rationing? Briefly explain these factors.