Natural Rate of Unemployment | Model Answer
A-level Economics
Explain how a government could reduce the natural rate of unemployment in a country.
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Explain how a government could reduce the natural rate of unemployment in a country.
Definitions & Background
The natural rate of unemployment is the rate of unemployment that is considered full employment. It is the rate of unemployment where we have as many workers as possible working in the labour force. There will always be some frictional unemployment and some structural unemployment, and this is taken into account by the natural rate.
Decreasing Unemployment
In order to decrease the natural rate of unemployment, the government need to target 3 areas:
flexibility of the labour
force frictional unemployment
structural unemployment.
Government Policies
Retraining schemes, education – occupational immobility – help structural unemployment increases flexibility of labour.
Improving information about jobs – reduces frictional unemployment – takes less time to find the ideal job
Reducing benefits, reducing direct taxes – provides incentive to find jobs more quickly and to work longer hours – reduces frictional unemployment.
Increasing the flexibility of wages – so firms are able to pay workers different wages in line with the level of aggregate demand in the economy. In recessions, wages could lowered to levels that keep people in jobs rather than redundancy. Reducing or getting of rid of the NMW – this will allow firms to pay lower than the minimum wage in times of need.
This problem is often referred to as “sticky wages”.
Limiting trade union power to increase wage flexibility.
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