Chapter 13, Problem 1FRQ

a)

To determine

The question requires us to determine the composition of the natural rate of unemployment.

Explanation of Solution

The unemployment rate that occurs from the effects of structural unemployment and frictional unemployment is considered the natural rate of unemployment.

So, the natural rate of unemployment consists of frictional unemployment (that occurs during the time workers spend searching for a suitable job according to their skill and wage requirement) and structural unemployment (that occurs when workers available for work lack the skills required for the job).

b)

To determine

The question requires us to determine the relationship between cyclical unemployment and the natural rate of unemployment.

Explanation of Solution

Cyclical unemployment is the difference between the actual and natural rates of unemployment or the divergence of the actual rate of unemployment from the natural rate. Cyclical unemployment, as its name suggests, is the portion of unemployment that results from the changes in the business cycle, it falls during the recession while rises during expansion. Jobs that were lost during a recession will be replaced once the economy enters an expansion because during expansion, the production of goods and services increases which cause employment to rise due to a rise in labor demand.

c)

To determine

The question requires us to list the three factors that cause the natural rate of unemployment to change.

Explanation of Solution

The following are the three factors that affect the natural rate of unemployment:

1. Change in characteristics of the labor force
2. Change in institutions for the labor market like ‘labor unions’
3. Change in government policies such as minimum wage law