Natural rate of unemployment
Natural rate of unemployment is the speculative rate of unemployment depending on cumulative production on a ‘long-run’ level. At this level, it is only consistent with cumulative production as long as temporary frictions like absence of cost regulations in the labor market. This rate of unemployment occurs even in considerably healthy economies. This is mainly because workers will always change careers or move along career lines. As they seek better jobs they remain, unemployed between the times they leave their jobs to the time find another job (Gwartney, 181). Economists place the natural rate of unemployment at 4% in America if all economic factors are constant and in absence of overheated economy.
This rate of unemployment is reliant on the rate of inflation of market price of labor in the market as explained in Philips curve. This curve tries to explain the causes of business fluctuation, and Philip concluded that there is a downbeat association between price increases and joblessness. This means that reducing the joblessness level in an economy the financial system has to accept higher inflation rates. Economists Friedman and Phelps disapproved this as according to them artificially sustained inflation cannot affect output or employment. According to them demand and supply in the labor market depends on real wage and not nominal wage (William & Melvin, 322). This is because inflation will make labor agents fix their prices upwards. With time, these agents will revise their expectations to accommodate unexpected inflation. They will in turn readjust perception between actual and anticipated inflation thus unemployment returns to previous level.
Economists who develop economic policies require this knowledge. In an economy, labor products and price are the key determinants of the state of the economy. To come up with sound economic policies, they have to evaluate the current economic position to determine what needs to change (William &Muysken, 101). Policies set should be at equilibrium where there is balance between demand and supply of various commodities. Failure to have this creates an artificially sustained inflation that the economy cannot support and it increases risks of unemployment with time. Higher bodies that have control over the economy, and can link all needs of the economy set these economic policies. This ensures that the government and other economic experts do not leave the economy at the hand of those that run the economy.
Studying the natural unemployment rate the government can develop many economic policies to run the economy. This unemployment rate is reliant on inflation that is part of monetary policy (William &Muysken, 101). If the government ignores to put reliable monetary policies in the market, this will lead to unusually high level of inflation. Inflation of commodities means that a country’s standards of living are going down. If the government closely observes the labor market, when level of natural unemployment rate drops it will indicate inflation is rising. To control this government needs introduce stabilization policy, which is a long time goal. Introduction of policies to control forces of the economy are mainly long term (Howard & Mulhearn, 85). Citizens expect the government to reduce inflation and unemployment as in nominal sense they both do not appeal to the citizens. In these circumstances, the government can only stabilize them, as reducing inflation will result in an increase of unemployment and reduction of unemployment increases inflation. Government introduces monetary policy also to check level of inflation (Howard & Mulhearn, 85). Checking the natural unemployment rate then the government can determine monetary policies to take to control inflation.
Economy policies are heavily reliant on its inflation levels. Observing the natural rate of unemployment economic players can determine the levels of inflation in their economy. This means that the government needs to monitor levels of natural unemployment to keep it in balance with inflation. If any of these two rises above, the other will be an indicator that some economic policies are failing.
Works cited
Boyes, William J, and Michael Melvin. Economics. Eagan, MN: South-Western Cengage Learning, 2009. Print.
Gwartney, James D. Economics: Private and Public Choice. Australia: South-Western Cengage Learning, 2009. Print.
Mitchell, William, and Joan Muysken. Full Employment Abandoned: Shifting Sands and Policy Failures. Cheltenham [u.a.: Elgar [u.a., 2008. Print.
Vane, Howard R, and Chris Mulhearn. The Nobel Memorial Laureates in Economics: An Introduction to Their Careers and Main Published Works. Cheltenham, UK: Edward Elgar, 2005. Print.
