The Natural Rate of Unemployment Flashcards
(25 cards)
What is the Natural Rate of Unemployment (NRU)?
The NRU is the rate of unemployment when the labor market is in equilibrium. It includes structural, frictional, and seasonal unemployment, but not cyclical unemployment.
Does full employment mean 0% unemployment?
No. Full employment occurs at the Natural Rate of Unemployment, where the only unemployment present is structural, frictional, or seasonal—not cyclical.
What types of unemployment make up the NRU?
Structural, frictional, and seasonal unemployment.
What does the labor supply curve represent?
It shows the number of people willing and able to work at different wage rates. It is upward sloping—higher wages attract more workers.
What is meant by “actual labor supply”?
The actual number of people who take jobs at varying wage rates; it reflects real-world behavior more accurately than the theoretical supply curve.
When does labor market equilibrium occur?
When the actual labor supply equals labor demand. This is known as full employment and corresponds to the NRU.
How does the NRU relate to the AD/AS model?
In the AD/AS model, the NRU corresponds to the level of output where the economy is producing at potential GDP (denoted by Yₑ).
What does QFE represent in the labor market?
QFE is the number of workers that firms are willing and able to hire at a given wage rate (W₁). It reflects the quantity of labor demanded.
What does Q2 represent in the labor market?
Q2 is the number of workers willing and able to work at wage W₁, but not all are employed. Only QFE are actually hired.`
What does the gap between Q2 and QFE represent?
The difference represents the Natural Rate of Unemployment (NRU)—workers willing and able to work, but not employed due to structural, frictional, or seasonal reasons.
What is structural unemployment?
Unemployment caused by a mismatch between workers’ skills and job requirements, or by geographic immobility (workers unwilling or unable to move for jobs).
What is frictional unemployment?
Short-term unemployment as workers search for better jobs, transition between jobs, or enter the labor force.`
What is seasonal unemployment?
Unemployment due to changes in demand for labor at different times of the year (e.g., holiday workers, farm labor).
Why do Q2 workers not all end up employed at QFE?
Because some are structurally, frictionally, or seasonally unemployed—they are willing and able but not currently employed due to skill mismatches, job searching, or seasonal factors.
What is the main point of debate about the causes of the Natural Rate of Unemployment (NRU)?
Whether it’s caused by too much government intervention (free-market view) or by market failures (interventionist view).
What do free-market economists blame for a high NRU?
Government intervention—especially generous welfare systems and excessive labor market regulation.
How might a generous welfare system increase the NRU?
It can reduce incentives to find work, encourage longer job searches (increasing frictional unemployment), and reduce geographic and occupational mobility (worsening structural unemployment).
What kind of labor market regulation do free-marketers criticize?
Strict hiring and firing laws that discourage firms from hiring low-skilled workers, which increases structural unemployment.
What do interventionist economists believe causes a high NRU?
Market failures, such as lack of affordable transport or housing infrastructure, which reduce labor mobility and job matching.
How does poor transport and housing affect unemployment?
It makes it harder for workers to relocate or commute to where jobs are available, contributing to structural unemployment.
How does poor housing infrastructure contribute to unemployment?
It limits geographic mobility, causing workers to search within a smaller area—leading to higher frictional unemployment.
Why do interventionists support government investment in housing and transport?
Because market failures lead to under-provision. Government intervention can improve mobility and reduce structural and frictional unemployment.
What is in-work training, and why is it important?
Training provided while employed; it ensures workers maintain transferable skills, reducing structural unemployment after job loss.
Why might the free market underprovide in-work training?
Because it generates positive externalities (benefits to society), which leads to underproduction and underconsumption without government support.
