Increases in which of the following (could be more than one) increase the natural rate of...

Increases in which of the following (could be more than one) increase the natural rate of unemployment?

1.		Employment protection legislation
2.		Responsiveness of wage demands to unemployment.
3.		The product market power of firms.
4.		The efficiency of the hiring process in the labour market.

Solutions

Expert Solution

The correct answer to this question is 1 and 3.

Increase in the employment protection legislation will increase the natural rate of unemployment. The natural rate of unemployment is maintained because people switch between jobs. The employers fire inefficient workers in order to hire more efficient people. In case of excessive regulation, the employers can't fire a person working inefficiently and reducing the production. To maintain the cost-effectiveness of the firm the firm will hire less and use more machines to do their work which would lead to increased unemployment or jobless growth.

The increasing product market power of the firm means increasing monopoly of the firm. IF the firm has a monopoly they will produce less than efficient amount of goods and hire less labor to manufacture those. This could increase the natural rate of unemployment as fewer and fewer people will be employed for producing a lesser amount of good.

Rahul Sunny answered 1 year ago

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