Answer to Question #264509 in Macroeconomics for udoy

Question

11. Define and put an example of frictional, structural and cyclical unemployment? What is

the natural rate of unemployment?

12. Describe the flowing concepts:

(a) Real versus nominal wage,

(b) Minimum wage versus efficiency wage

(c) What is steady-state unemployment? If a fraction of job separation is 1.5% and a fraction of job

finding is 23%. What will be the steady-state unemployment rate?

Answer 1

Question 11

Frictional unemployment is caused by voluntary job transfers within an economy. Even in a rising, stable economy, frictional unemployment occurs. Workers who choose to quit their jobs in search of new ones and those who enter the labor force for the first time form frictional unemployment. Employees leaving their existing jobs to search for new ones are examples of frictional unemployment, as are persons entering the labor field for the first time. For example, someone who has recently graduated from college and is looking for their first job is experiencing frictional unemployment.

Structural unemployment is a type of long-term unemployment produced by fundamental alterations in an economy and exacerbated by external factors such as technology, competition, and government policy. Mr. A's current company has requested that he resign with a severance package. Mr. A is currently unable to locate work that matches his skill level. He is, however, being offered a position as a sales manager with a significantly lower pay scale and title.

Cyclical unemployment is the component of overall unemployment that is caused directly by economic ups and downs. Typically, unemployment rises during recessions and falls during economic expansions. For example, Construction employees were laid off during the Great Recession following the 2008 financial crisis, cyclical unemployment. Construction of new homes declined drastically as the housing market struggled, leading to an increase in cyclical unemployment for construction employees.

The natural unemployment rate is the rate of unemployment that would exist in a healthy and developing economy. In other words, the natural rate of unemployment excludes cyclical unemployment and only includes frictional and structural unemployment.

Question 12 (a)

A worker's nominal wages are the monetary wages they receive. On the other hand, actual earnings can be defined as the number of goods and services purchased by a worker from their nominal wages. As a result, real wages equal the purchasing power of nominal earnings.

Question 12 (b)

The "Webb" effect refers to the idea that a minimum wage increases efficiency. Higher salaries lead to greater efficiency for the simple reason that better-paid workers not only have more incentive to put in more effort, but they also have less motive to pick up and quit.

Question 12(c)

The steady-state rate of unemployment, also known as the natural rate of unemployment, is the average unemployment rate that the economy bounces around. When the unemployment rate remains constant, the labor market is in a steady-state or long-run equilibrium.

U/L = s/(s + f ).

(23+1.5)1.5

= 16.33%