Question

In a competitive labor market condition, the equilibrium of real wage is Rp 1 million. The government considers that the wage generated in the market is too low for labors. Thus, the government imposes a minimum wage policy of Rp 1.2 million. Describe the impact of this minimum wage policy on the natural rate of unemployment in the short-run?

Answer 1

Natural rate of unemployment is the unemployment rate that is when inflation is constant. or Unemployment towards which economy tends in long run.

Natural rate is sum of frictional and structural unemployment

Structural unemployment refers to unemployment due to structural changes in economy. For example , unemployment due shift from labour intensive technology to Capital intensive technology, technological progress that make unskilled workers unemployed, unemployment due to minimum wage,that changes labour market mechanism etc.

So minimum wage will change the natural market mechanism of the economy, thus people get employed due to structural changes.

So minimum wage increase structural unemployment and thus lead to increase in natural rate of unemployment in short run.

If minimum wage law remain in long run, so natural rate of unemployment wilk change permanently.