Bathtub Model of Unemployment
Inflows and outflows setting the unemployment rate, the simplest honest model of the labor market.
The Bathtub Model of Unemployment model, in writing
Definition
Unemployment as a bathtub: the pool of unemployed fills through job separations and drains through job finding, settling where inflow equals outflow at the natural rate.
u* = s / (s + f), where s = separation rate, f = job-finding rate
The intuition
Even a healthy economy has unemployment because jobs constantly end and searching takes time. The steady-state rate depends only on the two flow rates: recessions are mostly a collapse in the finding rate f, not a surge in firings. Policies that speed matching (job boards, retraining) drain the tub faster and lower u* permanently.
Exam tip
Compute u* from s and f rather than describing it: with s=2% and f=30%, u* = 2/32 ≈ 6.25%. Flows, not stocks, drive the answer.
Related models in Labor Economics