What determines the natural rate of unemployment and what policies might be used to reduce the natural rate?

-- COLLETTE ROWLANDS (BUSCROW1@livjm.ac.uk), April 10, 2002

Answers

Strictly speaking, the "natural" unemployment rate equals the actual unemployment rate minus frictional unemployment and minus cyclical unemployment.

Basically some people are out of job even though there are jobs available. They just haven't "matched up" with a job. Those people are "frictionally unemployed."

Others will return to work just as soon as the economy recovers from the short-term down-turn that put them out of work. Those people are "cyclically unemployed." Anyone else who is still looking for a job but can't get one is "naturally unemployed." Employers continue to hire more and more labor until the (market established) "net wage" equals the marginal product of labor. Thus by definition the only way to reduce "natural" unemployment is to either decrease the "net wage" increase the marginal product of labor.

Factors that can reduce the "net wage." - A reduced income taxes (because of elasticity some of these are passed on to the employer) - A reduce payroll taxes (the matching FICA tax employers pay) - A reduce required "in-kind" and benefit payments (health care, unemployment insurance, retirement etc.)

Factors that can increase the marginal product of labor include - More capital stock, (more factories etc.) - Cheap, plentiful inputs and power - A better skilled or harder working labor force - A reduced regulatory burdens on employers.

Of course if you take any of these measures too far you wind up back n the days of the industrial robber barons (the late 1800's), with 60 hour work weeks for tiny wages and dangerous conditions. Still in the late 1800's the US had a labor SHORTAGE and we imported new labor through Ellis Island like cattle,(many of my ancestors included).

~ Bob

-- bob hyneman (bobhyneman@bigfoot.com), April 25, 2002.