Answer:
a. What is the unemployment rate in this economy in a typical month?
b. What fraction of unemployment spells lasts for one month? What fraction lasts for six months?
- 1% lasts 1 month, 4% lasts 6 months
c. What is the average duration of a completed spell of unemployment?
d. On any particular date, what fraction of the unemployed are suffering a long spell (six months) of unemployment?
Explanation:
given:
total labor force = 500 people
every month 5 people are frictionally unemployed
at January 1, 20 people lose their jobs and find new jobs by the end of June
at July 1, 20 people lose their jobs and find new jobs by the end of December
total unemployed on a typical month = 5 + 20 = 25 ⇒ 5%
unemployed for 1 month = 5 ⇒ 1%
unemployed for 6 months = 20 ⇒ 4%
average duration of unemployment = [(20 x 6) + (5 x 1)] / 25 = 5 months
on any day, 20/25 = 80% of the unemployed are suffering a long spell unemployment