Natural Rate of Unemployment: Structural Causes & Potential GDP - Essay Sample

Introduction

The natural rate of unemployment relates to the rate of unemployment that results when the labor market is in equilibrium. The natural rate of unemployment refers to the concept of potential real GDP and full employment (Tinkler & Woods, 2013). The economy of any country is considered to be at complete work when the actual employment equalizes the natural rate. In most cases, the natural rate of unemployment results from structural factors such as inconsistent skills. Fundamentally, the natural rate of unemployment comprises structural and frictional unemployment (Stonecash, Gans, King & Mankiw, 2011). Therefore the factors that influence the structural and the frictional unemployment by an extension influence the structural rates of unemployment as well. Such factors include;

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Level of Unemployed Benefits

The level of the unemployed benefits could influence the frictional unemployment. When the ratio of the benefits to the paid employment is high, then there are resultant reduced incentives to take a job, thereby leading to a reduction in the natural rate of unemployment (Tinkler & Woods, 2013).

Again the wages for the lowest-paid would greatly influence the incentives to take a job. For example, the UK government introduced a national minimum wage and thus increased it from PS3.60 in 1997 to PS7.83 in 2018. The increase in the federal wage made work more relatively more attractive as compared to staying on benefits (Tinkler & Woods, 2013). As a result, if workers are offered a job, they are likely to accept or fall in the trap of losing the benefits that may accrue, thus reducing the natural unemployment rate.

Occupational and Geographical Mobility

The mobility of labor relates to how easy workers could move from various jobs within the country. Such labor mobilities could either be occupational or geographical, and they significantly influence the structural unemployment (Tinkler & Woods, 2013). The higher the mobility of the workers, the more significant the reduction in mobility that results from a mismatch of skills as well as geographical locations. For example, there has been a reduced north-south divide in the UK due to the regeneration in areas that had increased rates of sufferings due to unemployment. As a result, new industries have taken the positions of the heavy industries that were there in the past, thus resulting in a significant decline in geographical unemployment (Stonecash, Gans, King & Mankiw, 2011).

Skills and Education

Furthermore, gaining more abilities by the workers through education as well as retraining could have a positive influence in terms of reducing occupational immobility (Tinkler & Woods, 2013). Offering retraining services as well as educational programs to the workers has a cumulative effect of reducing the associated structural unemployment in various countries.

The Flexibility of the Labor Market

Moreover, the flexibility rates of the labor market are also essential in the determination of the natural rate of unemployment. For instance, in the event of the reduced restrictive practices of the trade unions, there would be more flexibility in the labor market; therefore, the firms are likely to be more willing and ready to hire more workers (Stonecash, Gans, King & Mankiw, 2011). As a result, there would be a significant reduction in natural unemployment rates. For example, various sources indicate that the UK labor market has been increasingly become more flexible, thus somehow explaining the reasons behind the drop in the natural unemployment rate (Tinkler & Woods, 2013).

Again, in case the restrictive practices by the various trade unions would be reduced, there could be a more flexible market where different firms would be more willing to hire workers. Research indicates that the UK labor market has become increasingly flexible in the recent past, thus resulting in a significant decline in the unemployment rates within the United Kingdom (Stonecash, Gans, King & Mankiw, 2011).

Hysteresis

The rise in the level of unemployment in a given area caused by recession causes a natural unemployment rate to increase. The Hysteresis hypothesis has also been blamed as a factor that influences the natural unemployment rate. For instance, the theory states that in case there is an increase in the unemployment rate, it is more likely to remain that high for quite some considerable duration (Stonecash, Gans, King & Mankiw, 2011). This could be attributed to the fact that the workers would feel demotivated and deskilled, therefore finding it hard to get another employment in the future. For example, after the period of recession in 1981, the unemployment in the UK stayed at 3 million for quite a long period despite the increasing period of growth witnessed subsequently (Tinkler & Woods, 2013).

Therefore, to reduce the natural unemployment rate, there should be the implementation of policies such as better training and education to reduce the immobility, ensuring that the labor market is more flexible as well as making it easier for the firms and the workers to be relocated.

In a case where people who previously had held jobs become cyclically unemployed at the same time, the inflation rate declines. Such cynical unemployment could be because the overall demand for goods cannot support the full employment of workers (Stonecash, Gans, King & Mankiw, 2011). A shift in the Philips curve occurs as a result of a change in the price level. In a situation where there is cyclical unemployment, there would be a shift of the short-run Philip curve (Tinkler & Woods, 2013). This is because there are expectations that there would be price level change. In case there is an expectation of inflation in the coming years, there would be a shift to the right, and a downward trend is expected for the increase; there would be a shift to the left (Tinkler & Woods, 2013).

For instance, in the short-run, there would either a shift to the right or the left if the relationship between inflation and unemployment is stable or instead, the inflationary expectations are stable (Stonecash, Gans, King & Mankiw, 2011). As such, if the inflationary expectations are perceived to be permanent, then there would be a resultant shift in the Philips curve (Tinkler & Woods, 2013). The theory of adaptive expectations could be used to determine the influence of the inflationary expectations.in the short term, people tend to make incorrect expectations of the price changes because of incomplete information.

In summary, any point that is along the short-run Philips curve is a representation of a combination of inflation and unemployment that could be experienced by an economy given the expectations in the inflation. Again, the economy often adjusts to the aggregate demand (Tinkler & Woods, 2013). For instance, if the aggregate demand increases, it would result in a corresponding increase in the price level. The rise in price levels results in higher wages, which will, in turn, cause the short-run aggregate to decline.

In case there is greater availability of online job placement services that generate a reduction in frictional unemployment during an interval in which the inflation rate remains unchanged, there would be a shift in the short-term Philip's curve (Stonecash, Gans, King & Mankiw, 2011). When the wages remain constant, the workers change their price expectations, thus unwilling to supply their labor; therefore, the real output reduces. As a result, the inflation rate remains unchanged, and the unemployment rate increases. An economy that operates full bellow capacity has a significant rise in the aggregate demand, thus causing a decline in unemployment and a subsequent increase in inflation (Tinkler & Woods, 2013).

During the first half of the 1960s, Singapore and Jamaica had nearly identical levels of GDP of about $ 2100 and almost the same population of about 1700000 when they got independence sometimes then. Jamaica's per capita real GDP has grown so much less than that of Singapore, even though the population of Singapore has increased at a faster rate (Tinkler & Woods, 2013). The economic growth of Singapore could be fundamental because of financial freedom that has been witnessed within the country over time. The people of Jamaica have less economic freedom as compared to Singapore (Tinkler & Woods, 2013).

Economic freedom relates to the degree of liberty possessed by people in a particular country to encourage them to make independent financial decisions. Generally, the economic independence of a nation enables it to achieve increased quantities of economic growth while at the same time improving the living standards of its citizens (Tinkler & Woods, 2013). Singapore has continually promoted economic growth through an active industrial policy that fundamentally targets various fiscal incentives, thereby enhancing public investment and developing skills that are attractive to foreign investors as well as economic diversification (Stonecash, Gans, King & Mankiw, 2011).

In Jamaica, the cost of registering a business is 13 percent of the value of a firm's capital, as compared with less than 0.2 percent in Singapore (Tinkler & Woods, 2013). As a result, Singapore will have more new companies started each year as compared to Jamaica. This is because government policies such as the reduced cost of company registration significantly promote the economic growth within the countries. The success of Singapore has been linked with the highly developed free business environment with elaborate policies to support various business initiatives. The well-developed trade and financial sectors in Singapore have much attracted more investors and entrepreneurs than in Jamaica (Stonecash, Gans, King & Mankiw, 2011).

If a nation's current annual rate of growth of per capita real GDP is 3.0 percent, and its annual rate of population growth is 3.4 percent, the rate of growth of per capita real GDP= Rate of growth in real GDP -Rate of increase in population (Tinkler & Woods, 2013). It follows therefore that;

The rate of growth of real GDP=rate of population growth+ rate of growth per capita

= 3.4+3.0

= 6.4%

If: in each $1 billion = 0.3% of the average percentage rate of growth of per capita real GDP

6 billion =1.8%

Bribes =$100million equivalent to 10% of 1 billion

Based on the old average annual rate of growth per capita GDP, $4 billion would yield= 4 o.3= 1.2

If 1billion=0.3

0.9 Billion = (0.90.3)/1

=0.27%

Therefore the new percentage point of the average percentage rate of growth of per capita real GDP is 0.27

Given that the companies cut back their total investment spending to $4 billion per year, the new average annual rate of growth of per capita real GDP will be 0.274 =1.08%

Concisely from the above calculations, it is essential to note that corruption within a country significantly inhibits economic growth as well as affecting the various business operations within the state. Consequently, the effectiveness of financial assistance programs, as well as tax revenue, are also reduced.

References

Sherman, H. J., Meeropol, M. A., & Sherman, P. D. (2018). Principles of Macroeconomics: Activist Vs. Austerity Policies. Routledge.

Stonecash, R., Gans, J., King, S., & Mankiw, N. G. (2011). Principles of Macroeconomics. Cengage Learning.

Tinkler, S., & Woods, J. (2013). The readability of principles of macroeconomics textbooks. The Journal of Economic Education, 44(2), 178-191. Retrieved from https://doi....