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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

What forces create the natural rate of unemployment for an economy?

To determine

The forces that create natural rate of unemployment in an economy are to be determined.

Explanation

Even when the economy is at its full employment level of output there are chances that natural rate of unemployment exists. To ascertain the factors that force natural rate of unemployment to exist, we assume for now that the economy is neither in boom nor in recession. There are a variety of economic, social and political factors that do not let unemployment rate fall to zero. Thus, even when the economy is realizing its potential GDP (Gross Domestic Product), there exists some unemployment that is called natural rate of unemployment (NRU).

These forces can be either public policies unfavorably affecting labor market, social and economic factors affecting labor market, the employers’ usual process of expanding/ shrinking workforce or forces affecting either peoples’ decision to work or employers’ decision to hire. For example, if the public policies regarding labor market are strong i.e. there exists unemployment insurance, welfare benefits, etc., then the workers would not care much about being unemployed.

Two major components of natural rate of unemployment are:

1. Frictional Unemployment: It is defined as the unemployment that exists when workers change between jobs. That is, if a worker quits his present job and seeks new employment, he is said to be frictionally unemployed. Frictional unemployment can be explained with the following few examples:

  1. If a worker quits his job and looks for another job,
  2. If a worker is terminated and looking for another job,
  3. If a worker is unemployed because his term/ contract of job has ended and he seeks another employment, etc...

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