Question

Suppose that for a certain economy, frictional unemployment = 3.1% and structural unemployment = 2.4%. If...

Suppose that for a certain economy, frictional unemployment = 3.1% and structural unemployment = 2.4%. If the current (actual) unemployment in the economy is 5%, how much cyclical unemployment is there?

What is the natural rate of unemployment for this economy?

Why is it important for an economy to have some positive level of unemployment?

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Answer #1

Cyclical unemployment = current rate of unemployment - natural rate of unemployment

= Current rate of unemployment - Frictional rate of unemployment - structural rate of unemployment

= 5% -3.1 % - 2.4 %

= -0.5%

Natural rate of unemployment = 3.1 % + 2.4 % = 5.5%

natural rate of unemployment is not zero which means there is some positive level of unemployment necessary for the economy. This is because if there is no unemployment there will be no vacancy which means all the jobs will be accommodated by the same worker set. There will be no improvement in productivity and firms will not be able to hire productive workers at a given wage rate. Some sort of job friction is necessary for the labour market.

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