Question

roblem sets Problem set 2 et 2 3. All About the Natural Rate of Unemployment Answer the following questions. a. What do economists mean by the natural rate of unemployment? b. Describe three factors that can affect the natural rate of unemployment and indicate the impact of each on the value of the natural rate of unemployment in an economy. c. What can you deduce if the actual rate of unemployment exceeds the natural rate of unemployment?

Answer 1

a) The natural rate of unemployment is frictional,structural and surplus unemployment combined.This generally takes place in an economy which is growing and where labor and the resources are said to be in equilibrium.In such kind of unemployment the people are jobless for sometime and until they find a new job, is known as natural rate of unemployment.It is estimated that this amounts to 4.5 to 5 % .

b)The factors that effect frictional and structural unemployment have their impact on natural rate of unemployment as well since it is combination of both.The level of unemployment benefits in the country affects frictional unemployment. If the ratio of benefit to employment is high,in such circumstance people do not have the incentive to work. The impact of this was felt in 1980 when inflation was high in UK and wages rose faster than inflation .The difference between unemployment benefit and paid employment grew and people felt it is better to take a job rather than get unemployment benefit.So the incentive to work increased since the ratio of benefit was less than paid employment.So unemployment was reduced.Another  important factor that affects structural unemployment is geographical and occupational mobility of workers .If workers become more skilled through training and education ,this mobility can be reduced.In the UK , the north south divide was reduced and new industries came up and thus mobility was reduced.We can say the third  factor is HYSTERESIS hypothesis which states that if during recession, unemployment goes high, it will have the tendency to remain high for a longer period because people get demotivated and lose their skill which makes it difficult to get job in future. As seen ,after the recession of 1981, in UK unemployment rate was high for a long period even though there was growth in the economy. So the impact of these factors on the value of natural rate of unemployment in economy is stated above.

c) If the actual rate of unemployment is higher than the natural rate of unemployment, the economy is in slump that is in recession.and if the actual rate is lower than the natural rate than inflation might occur .