Did the Natural Rate of Unemployment Rise?
Natural rate of unemployment: The concept of the natural rate of unemployment is proposed by Milton Friedman and Edmund Phelps. Natural rate of unemployment can be considered as the lowest rate of unemployment within an economy at which, the company can be survived for a longer period of time. As per the approach of natural unemployment, for the purpose of reducing the level of natural unemployment, the government should be able to accept a high degree of inflation of within the economy (Ostrup, 17) Natural rate of unemployment shows the unemployment in the conditions when labor market remains in the equilibrium conditions. The natural rate of employment denotes the different between the number of people who are willing to work at the current wage rate and the number of people are able to take such types of job (Arnold, 64). There are two types of natural unemployment:
Structural unemployment: Structural unemployment can be considered as the considered as the conditions in which, there is an absence of the demand of labor within the market place.
Frictional unemployment: Frictional unemployment can be considered as temporary unemployment, which takes place during the transitional period in which people show movement between jobs, locations and careers (Taylor 2006).
There are three prime factors which have enhanced the natural rate of unemployment since the period of the financial crisis. (1) Mismatch in the characteristics of the job opening, and skills of people (2) Enhanced benefits of unemployment insurance, which reduced the intensity and intentions of people regarding job search, and (3) Uncertain economic conditions of the market. These factors also enhance structural or frictional unemployment. For instance, mismatching in job characters and skills of people can lead to structural unemployment as it reduces the demand of workers in the economy. High degree of unemployment insurance benefits reduces the willingness of people to search jobs in the market. Owing to this reason, this leads to enhance the temporary unemployment in the market (Daly et al., 18). Along with this, due to uncertain economic conditions, the chances of employment decrease that lead to induce structured unemployment in the market.
On the basis of views of the authors, these all three factors can be considered as prime causes of permanent increment of the natural rate of unemployment. In the views of the author, these all the factors are capable to create a gap between the number of people who are willing to work and who are not currently satisfied with their existing job. However, the intensity of the impact of these all the three factors in the rise, in the natural rate of unemployment vary accordingly (Daly et al 18). For instance, mismatch in the job requirements and skills of people and economic uncertainties cast permanent and long term impact over the natural rate of employment, while increase in the benefits of unemployment insurance is short term aspects that affect the natural rate of full employment for a short time period (Arnold, 65).
As per the estimation of the authors, as per the existing conditions of the natural rate of employment the upper-bound estimate of the natural rate of unemployment will be 6.6% (Daly et al 2012). In relation to this, the Bureau of Labor Statistics of unemployment, in January 2014, the unemployment rate showed a slight change at 6.6% (Bureau of Labor Statistic 2014). In this way, it can be seen that there is a little gap between estimated data and actual rate of unemployment within the region. As per this data, it can be concluded that the country has not attained full employment equilibrium yet, though the rate of unemployment has not been changed too much during this period. This condition is relatively positive indication towards the achievement of full employment equilibrium in the economy, which means all those who can and are willing to work in the country are employed (Arnold, 68).
Roger A. Arnold. Macroeconomics. 11th Ed. UK: Cengage Learning, 2011
Bureau of Labor Statistic. Economic News Release, 7 February 2014. Web, 26 Feb. 2014. <http://www.bls.gov/news.release/empsit.nr0.htm>
Daly, M.C., Hobijn, B., Valletta, R.G., and Sahin, A. 2012. “A Search and Matching Approach to Labor Markets: Did the Natural Rate of Unemployment Rise?” Journal of Economic Perspectives, 2012: 26(3), pp 3-26.
Fred Ostrup, Money and the Natural Rate of Unemployment. Cambridge University Press, 2000
James Taylor, Principles of Economics. Cengage Learning, 2006.