Consider an economy where people can be either employed (e) or unemployed (u) . Let’s normalize e+u=1 , so that at any given point in time, e is the fraction of people employed. Conditional on being employed today, the probability of getting fired is x ; and conditional on being unemployed today, the probability of finding a job is w .
(a) What is the employment rate tomorrow (et+1) if today’s employment rate is (et) ?.
(b) Derive the stationary rate of unemployment u in term of x and w .
(c) Suppose we find in the data that w= 0:8 and x= 0:10 , what is the stationary employment rate e?