Question

If the United States legislated that all employers could only terminate an employee for “just cause” (and thus eliminating the doctrine of “employment at will”) we would expect (over time), all things being held the same, that:

the natural rate of unemployment will rise

cyclical unemployment would fall

frictional unemployment would fall because companies will want to hire workers quickly

structural unemployment would fall because workers will work harder consistent with the efficiency wage hypothesis

Answer 1

1 - Option B

Cyclical unemployment will fall

Cyclical unemployment is the difference between actual and natural rate of unemployment. Frictional and structural unemployment will not fall in this condition , or rise in this condition. Hence there will be no impact upon the natural rate of unemployment. But , now the companies will not be able to fire an employee without any just cause. The company will not hire workers more quickly now. Hence Options other than B will be wrong.