Answer to Question #140306 in Macroeconomics for Kamga nicanor

Question

Discuss how the following changes would affect the natural (or frictional) rate of unemployment:

a. Elimination of unions.

b. Increased participation of teenagers in the labor market.

c. Larger fluctuations in the level of aggregate demand.

d. Increase in unemployment benefits.

e. Elimination of minimum wages.

f. Larger fluctuations in the composition of aggregate demand.

Answer 1

(a) unions function by negotiating with employers to create a collective agreement that applies to all union members and typically last for a set time period. these unions are able to raise wages by turning labor market into a monopoly market. so if unions get eliminated, the bargaining power of labor get reduced and employer will lower the wage rate level, these will lead to fall in supply of labor leading to rise in natural rate of unemployment.

(b) As the number of teenagers increases in the labor market, this will lead to increased labor force participation, that is increase in supply of labor force for a given level of demand for labor, this will raise the natural rate of unemployment.

(c) Large fluctuations in level of aggregate demand will lead to large uncertainty in labor market. This will make employers to lay off workers from the job leading to rise in natural rate of unemployment.

(d) A increase in unemployment benefits would make the unemployed delay the search to find new jobs. They would be less likely to accept early job offers and the length of unemployment would increase. Therefore the natural rate of unemployment would increase.

(e) Elimination of minimum wage will lead to higher employment by the firms, as the firms will now be able to pay the workers in accordance with their marginal productivity. All workers will be paid according to their skill levels. Now the workers will not be paid more than their skill level. A no minimum wage rate might make some firms more likely to skilled workers, reducing the natural rate of unemployment.

(f) Larger fluctuations in the composition of aggregate demand lead to increase in aggregate demand makes firms to find more customers. This reduces the idle time of their employees and thus increases their labor demand. This in turn reduces natural rate of unemployment