Question

. Some economists explain why the natural rate of unemployment decreased from the 1980s in the U.S. with the following factors: “increasing globalization and competition; changing nature of labor market; the aging of the U.S. population; increase in the incarceration rate, increase in the number of workers in disability.” Write a short essay that explains (a) only the meaning of “increasing globalization and competition” and “changing nature of labor market” and (b) how they affect wage-setting relation [W/P=F (u, z)], price-setting relation [W/P=1/(1+m)] and therefore the natural rate of unemployment (Un=(m+z)/a)?

Answer 1

Increasing globalization and competition has led to decline in the level of natural rate of unemployment in the economy. This is because when outside firms enter the country by setting up offices in the country it leads to creation of jobs in the country as demand for labor increases. This leads to decline in the level of unemployment rate in the economy. There is also a change in the nature of the labor force as increase in skilling centers has led to decline in level of structural unemployment in the country. This is mainly because of skilled labor force being increase in demand. This shifts the wage setting and price setting curves upwards and thus leads to decline in natural rate of unemployment in the economy.