what is natural rate of unemployment and how can be reduced?

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what is the full rate of unemployment in an economy? what is it and what is it made up of? how can the government or the market place reduce this level?

-- jon durrant (durrantj@hinchbk.cambs.sch.uk), July 04, 2000


The natural rate of unemployment represents a level of employment such that everyone who wants jobs have one. It is also known as the NAIRU or non-accelerating inflation rate of unemployment. The natural rate is therefore made up by those who cannot work and those who do not choose to work. The government cannot really reduce this level given that, with reference to the NAIRU, any level below it leads to massive inflation and thus the market can only stand the reduction for a short while. However through education schemes etc.. the government may be able to persuade people back into work, but even so there may not be jobs for them.

-- Robert Javin-Fisher (robert.javin-fisher@exeter.ox.ac.uk), July 30, 2002.

The natural rate of unemployment is related to the number of people who currently have no job, and think that by waiting, they can get a better job than any of their current employment opportunities. Let's face it, anybody who is unemployed can instantly find a job if they accept one on poor enough terms. You can trivially say that anybody who is unemployed is unemployed by choice. As von Mises put it, they prefer leisure to all available employment. While that's true, and elucidating, some of these people aren't enjoying their leisure very much and consider it a best of a set of bad choices.

It's not at all clear that reducing this level of unemployment is possible or good even if possible. Let's say that you could. If somebody can find a better job without waiting, then people will be constantly switching jobs. Eventually, though, everybody would have switched to the best job they can find. If they leave or lose that job, they'll be unhappy about taking a worse job. Everybody's natural reaction is to invest some time in searching for a new best job. The only want to reduce that is to ensure that everybody has a better job immediately available to them, but now you're back to an unstable situation again.

Consider visiting my blog at http://angry-economist.russnelson.com.

-- Russell Nelson (nelson@crynwr.com), March 24, 2004.

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