Question

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How do unions affect the natural rate of unemployment? Discuss

Answer 1

The natural rate of unemployment typically rises after a recession.It is a is a combination of frictional, structural and surplus unemployment.

The insiders and outsiders effect affects the natural rate of unemployment by unions.Unions increase wages above equilibrium which leads to decline in aggregate demand for labor and increase in aggregate demand for supply.Hence there is a mismatch between them which led to surplus unemployment.

Insiders keep their jobs where as outsiders who were unemployed will either do job in ununionized firms or wait to get a job in unionized firms which is involuntary unemployment. Due to this natural rate of unemployment increases without unions.