Natural Rate of Unemployment

Natural Rate of Unemployment

Equilibrium unemployment in an economy

Is defined as the natural rate of unemployment with the unemployment rate of any balance in the unemployment rate in real wages and found the level of the free market, and where the aggregate supply of labor in balance with the aggregate demand for labor. In the normal range, and has found all those who want to work in real wage rates prevailing there, and thus the work is supposed to be no involuntary unemployment. There are still some voluntary unemployment and some people are still of the search function on the work offers the highest real wages or better conditions.

It should be noted at this point that some economists simply do not believe in the authenticity of the simple natural unemployment in the labor market when they are in balance and where the unemployment rate "settle" at the level of wages in line with inflation and stable prices. This supports the concept of the natural rate economists who believe in the ability of markets to clear at equilibrium, which display in the job market like any other market in the economy.

Consider the following chart which shows some of the labor demand and supply analysis. In the rate of real wage W1, is hiring workers E1. But in this prevailing wage rate, exceeding the total labor force of the workforce. Natural rate of unemployment = AB, and consists of frictional and structural unemployment. The government can try to reduce the natural rate by dropping the horizontal distance between the labor supply curve and the labor force.

And any supply-side policy that can increase the number of people who are interested in working age that are willing and able to find jobs in the labor market shift the supply curve in the labor market to the right, thus narrowing the gap.

Policies to reduce the natural rate of unemployment usually focus on improving the efficiency of the labor market to remove the so-called "labor market imperfections." For example, can form a government and a desire to achieve low unemployment rate of balance do the following:

v  Reform the system of social benefits, so as to reduce the risk of a "poverty trap":

v  Reform of trade unions to limit their ability to bargain collectively and to reduce some barriers to labor mobility offered by the professional bodies and associations that have an impact in reducing the supply of labor in the occupation of

v  Reducing income tax to improve the incentives to look for and accept paid work

v  Adopting a more relaxed approach to labour migration

v  In general terms, and economists who believe that it can reduce the natural unemployment rate to say that government policies should seek to make labor markets more competitive and flexible. We now turn to discuss the nature of flexible labor markets as part of strategies to enhance employment opportunities and thereby reduce unemployment.

Key Points

v  Balance in the labor market when the demand for labor equals supply in the labor market
Even when the labor market in balance will not be there is still friction and structural unemployment, as well as some seasonal unemployment

v  And can reduce the natural unemployment rate mainly through supply-side policies in the labor market that will improve work incentives and re-skill people looking for work

v  It is very difficult to note that the natural rate of unemployment because it is rarely directly to the labor market to be in a state of balance!