Which of the following contributes to the natural rate of unemployment?

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The natural rate of unemployment is a concept of economic activity developed in particular by Milton Friedman and Edmund Phelps in the 1960s.[1] It represents the hypothetical unemployment rate consistent with aggregate production being at the %26quot;long-run%26quot; level. This is the level the economy reaches in the absence of various temporary frictions such as incomplete price adjustment in labor and goods markets. The natural rate of unemployment therefore corresponds to the unemployment rate prevailing under a classical view of determination of activity. It is mainly determined by the economy%26#039;s supply side, and hence production possibilities and economic institutions. If these institutional features involve permanent mismatches in the labor market or real wage rigidities, the natural rate of unemployment may feature involuntary unemployment.

Occurrence of disturbances (e.g., cyclical shifts in investment sentiments) will cause actual unemployment to continuously deviate from the natural rate, and be partly determined by aggregate demand factors as under a Keynesian view of output determination. The policy implication is that the natural rate of unemployment cannot permanently be reduced by demand management policies (including monetary policy), but that such policies can play a role in stabilizing variations in actual unemployment.Reductions in the natural rate of unemployment must, according to the concept, be achieved through structural policies directed towards an economy%26#039;s supply side.

The development of the theory of the natural rate of unemployment came in the 1960s where economists observed that the Phillips-curve relationship between inflation and unemployment began to break down. Until then, it was widely believed that a stable negative relation between inflation and unemployment existed. This belief had the policy implication that unemployment could be permanently reduced by expansive demand policy and thus higher inflation.[3]

Friedman and Phelps opposed this idea on theoretical grounds, as they noted that if unemployment was to be permanently lower, some real variable in the economy, like the real wage, would have changed permanently. Why this should be the case because inflation was higher, appeared to rely on systematic irrationality in the labor market. As Friedman remarked, wage inflation would eventually catch up and leave the real wage, and unemployment, unchanged. Hence, lower unemployment could only be attained as long as wage inflation and inflation expectations lagged behind actual inflation. This was seen to be only a temporary outcome. Eventually, unemployment would return to the rate determined by real factors independent of the inflation rate. According to Friedman and Phelps, the Phillips curve was therefore vertical in the long run, and expansive demand policies would only be a cause of inflation, not a cause of permanently lower unemployment.

Milton Friedman emphasized expectations errors as the main cause of deviation in unemployment from the natural rate, whereas Edmund Phelps focused more in detail on the labor market structures and frictions that would cause aggregate demand changes to feed into inflation, and for sluggish expectations, into the determination of the unemployment rate. Also, his theories gave insights into what could cause the natural rate of unemployment to be too high (i.e., why unemployment could be structural or classical).The Natural Rate of Unemployment (NRU) is the equilibrium level of unemployment to which the economy tends, as defined by Milton Friedman%26#039;s misperception model of labour markets. This model assumes that, in the long-run, labour markets clear (i.e. supply of and demand for labour are equal, that is, in equilibrium, at a single wage rate and level of employment). According to this hypothesis, unanticipated inflation can cause money illusion: workers will ask for low nominal wage increases and think that their real wages are rising when in fact the real wage rate is falling. The workers%26#039; misperception will cause them to increase their labour supply, whilst the actual fall in real wages will cause firms to increase their labour demand, causing an overall increase in employment and output.

Once the workers realise that inflation has occurred, they will adjust their expectations and nominal wage demands, and unemployment will return to the NRU (although at a new, higher expected rate of inflation). The actual level of the NRU itself is determined by the inherent characteristics of the labour market, such as any market imperfections or informational problems.

The NAIRU (Non-Accelerating Inflation Rate of Unemployment) hypothesis, on the other hand, is based on the New Keynesian imperfect competition model of labour markets. This model assumes that both labour and product markets are imperfectly competitive, due to trade unions and oligopolistic firms. Labour (through the process of collective bargaining) can therefore demand a bargained real wage (BRW), whilst firms can set a price-determined real wage (PRW) at which they can earn supernormal profits. The firms%26#039; PRW consists of the actual value of output (as determined by the marginal product of labour) minus a per worker profit for the firm.

In the NAIRU model, labour%26#039;s BRW increases with the level of employment. This is because increased employment means that there are fewer unemployed workers looking for jobs, so labour markets become tighter and the bargaining power of labour increases. Unemployment disciplines the workforce. The PRW remains fixes at a set wage rate, on the other hand. This is because it represents the claims of firms on output per worker. The wage rate and level of employment at which the BRW and the PRW are equal is known as the NAIRU. This is the wage rate and level of employment at which the competing claims of labour (the workers) and capital (the firms) are satisfied.

Which of the following contributes to the natural rate of unemployment?credit counseling

The natural rate of unemployment is a purely theoretical construct and of interest to academics devoted to the now outdated notions of supply-side economics. In macro terms, the supply of labor is relatively fixed in the short/medium term and the demand for labor is derived from the demand for goods and services.

Which of the following contributes to the natural rate of unemployment? loan

I would agree with Bs%26#039;n except that the concept of the natural rate at least goes as far back as Keynes: Friedmand and Phelps did not invent the notion that economy had some stable level of unemployment that corresponded to equilibrium output. Keynes called %26#039;voluntary%26#039; unemployment, some people call it frictional unemployment: the idea is that people are constantly looking for better jobs, or perhaps changing their work habits and working part time or what have you. Or, there might be technological changes that force people into looking for work, for example IBM selling off its personal computer division.