Question

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How do unions affect the natural rate of unemployment? Discuss

Answer 1

The union could effect the natural rate of unemployment by two ways, either from inside or outside. Suppose in the case of hyperinflation the real wage of workers start decreasing to exert this union came to play a role to stablize and demanding for higher wages which results into demand supply mismatch in the economy. Union raise the wages above the equilibrium level, as a result labor becomes expansive and firm would start usinh less lobor in the production of goods and services. Hence the quantity of labor demand decreases in the economy while the quantity of labor rises, it results into unemployment. Outsider who has two choices whether being employed in other ununionized firm or remain unemployed. Therefore the natural rate of unemployment rate is affected by unions.