Question

Explain what is meant by natural unemployment and give the factors that affect what the level of natural unemployment should be in a healthy economy, and how those factors can be changed to influence those levels.

Answer 1

Natural unemployment means which is combination of frictional , structural and surplus unemployment. The natural rate of unemployment is determined by economic supply side and hence production possibility and economic institution.if these institution features involves permanent mismatch in labour market or real wage rigidity the natural rate of unemployment may features involuntary unemployment. Even a healthy economy will have this level of unemployment because workers are always coming and going.

The natural rate of unemployment occur when the labour market is in equilibrium.it is mainly composed of frictional and structural unemployment.the natural rate of unemployment is affected by supply side factors such as geographical immobility and labour market imperfections.if workers were more mobile this would help reduce unemployment caused by mismatch of skill and geographical location.