Question

Unemployment rates have been higher in many European countries in recent decades than in the United States. Is the main reason for this long-term difference in unemployment rates more likely to be cyclical unemployment or the natural rate of unemployment? Explain briefly.

Answer 1

In recent decades, unemployment rates have been higher in the European countries as compare to US. The difference in the unemployment rates of both the countries is not due to recessions in Europe. European rates of unemployment have been higher mainly because of public policies of Europe. Public policies of Europe caused the difference between the demand and supply of labors in Europe. Public policies in Europe strongly favor labor unions and high minimum wages. Also offers many unemployment benefits. Due to these factors, opportunity cost of being unemployed is lower in these European countries and worker become less willing to work. As a result natural rate of unemployment increases in Europe.