Question

Explain why government economic policies should not seek to push unemployment levels below the natural rate of unemployment.(the answer is expected to be around 200 words. )

Answer 1

Natural Rate of Unemployment & Government Policies
Natural rate of unemployment is the minimum rate of unemployment resulting from some economic forces. The rate of unemployment due to the structure of the labour force, lack of skills and technology replacing labour is known as the natural rate. Even a full employment economy poses a rate of unemployment. Full employment refers to the situation where the entire resources are fully utilized and not where there is any unemployment. When the actual GDP becomes equal to potential GDP, there is full employment.
There are many factors which affect the natural rate of unemployment. Recession can often be affected since they may reduce the ability of workers to increase skills which the industry demands. A government policy which pushes the level of unemployment below the natural rate affects the output of the economy. Government should always implement policies which helps the economy to reduce the structural unemployment which influences the natural rate of unemployment. Unemployment should be at the natural rate where the economy can produce at its potential. Policies which reduce the unemployment rate than the natural rate creates unemployment due to lacking skills of labour etc. This can create inefficiency in the performance of the economy. So, policies should be adopted maintaining the rate of unemployment at natural rate avoiding the consequences of structural and frictional unemployment.