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Define the natural rate of unemployment in terms of flows into and out of the labor market.
What are the key factors that determine the structural and frictional unemployment rates?
How does the natural rate of unemployment change as the demographic composition of the population changes?
1.This represents the rate of unemployment to which the economy naturally gravitates in the long run. The natural rate of unemployment is determined by looking at the rate people are finding jobs, compared with the rate of job separation (i.e. People quitting). In any given period, people are either employed or unemployed. As a result, the sum of structural and frictional unemployment is referred to as the natural rate of unemployment also called “full employment” unemployment rate. This is the average level of unemployment that is expected to prevail in an economy and in the absence of cyclical unemployment. 2. a)It is argued the level of unemployed benefits can affect frictional unemployment. If the ratio of benefits to paid employment is high then there is little incentive to take a job. b)A key factor affecting structural unemployment is the geographical and occupational mobility of labour. If workers were more mobile this would help reduce unemployment caused by a mismatch of skills and geographical location. c)The flexibility of the labour market is also a key feature for determining the natural rate. d)Another potential cause of the natural rate is the Hysteresis hypothesis. This states that if unemployment increases (e.g. during a recession) then it is likely to remain high for a considerable period. This is because workers become de-motivated and deskilled whilst remaining unemployed and therefore find it difficult to get a job in the future 3.Among the various…

minants of natural rate of unemployment the changing demographic mix is said to play an important role. Over the years there has been a relative increase in the number of females and teenagers in the labor market, people with relatively little skill. They are reported to have driven up the amount of employment and the rate of unemployment.If the level of skills actually affects the rate of unemployment, it follows that the influx of young people with few skills must bear some of the responsibility for rising unemployment.Actually, the level of productive skill merely determines individual productivity and labor income; it has no bearing whatever on employment and unemployment. Surely, unemployment is more concentrated among females and young people who are congregating in white collar and service areas. They are flocking to these areas for a great number of reasons. Union rules and regulations may bar them from industrial employment, which makes white collar and service areas the only entrance gates to the labor market. As millions of females and young people are streaming through those gates, wage rates tend to be relatively low. They may approach the minimum allowable rate, the legal minimum. When they fall below this rate unemployment raises its head. It rises or falls, always reacting directly to the excess of the legal rate over the market rate.


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