Chapter 17, Problem 17.1LO

To determine

The reasonthe actual unemployment ratesdeviate from the natural rate of unemployment.

Concept Introduction:

Structural Unemployment: It arises when an industry is re-organized due to technological change. It results from a mismatch between the skills a worker can offer and the skills demanded by the employer.

Cyclical unemployment: it arises when the full employment level of GDP is not supported by the actual overall demand for goods and services. It occurs due to changes in business cycles (recession).

Frictional unemployment: It arises when people switch their jobs. It is the time spent looking for a new job.

Natural Rate of Unemployment: It is the minimum level of unemployment that persists in an expanding economy when all factors of production are in equilibrium. It is the combination of structural and frictional unemployment.

Actual Rate of Unemployment - It is the rate of unemployment of those people who want to work at the existing wage rate but are not able to find the work. Unemployment rate can be determined by dividing the number of unemployed by the total labor force.

Explanation of Solution

In the logical sense, the actual rate of unemployment is bound to differ from the natural rate in the sense that the actual rate includes all three types of unemployment (cyclical, structural, and frictional unemployment), whereas natural rate consists of frictional and structural unemployment.

Thus, actual unemployment rate departs from its natural rate because of the presence of cyclical unemployment in the economy.