Macroeconomics Chapter 22 The natural rate of unemployment Flashcard Example #21410

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Why can’t we have zero unemployment?
-Frictional unemployment
-Structural unemployment
Frictional Unemployment
Unemployment caused by workers searching for better jobs
-New entrants
-Workers changing jobs
It can exist even tho labor demand is equal to labor supply (equilibrium)
-Implies unemployed are searching for new/better jobs
-some are good for economy
time is required with skill set and experience
more workers find jobs that fit skills; productivity is enhances
Structural unemployment
Occurs when there’s a persistent mismatch between labor demand and supply at the current wage rate.
Supply > demand at current wage rate, causing surplus of labor
Implies current wage rate is higher than equilibrium wage rate
How can current wage remain higher than equilibrium wage?
1) Mismatch between skills employers demand and skills workers have
2) Minimum wage laws
3) Labor unions
4) Overly generous unemployment compensation (Europe)
5) Efficiency wages
Cyclical unemployment
Third type of unemployment can be positive of negative
Negative during expansions but positive during recessions
Total Unemployment
=frictional + structural + cyclical
Natural rate of unemployment
=frictional unemployment rate + structural unemployment rate
Natural rate is the long-term, trend, rate of unemployment
Actual unemployment rate fluctuates around natural rate over long-run
Associated with potential output if actual output = potential output, unemployment is at the natural rate
Cyclical unemployment =
difference between natural rate and actual unemployment rate
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