Question

1.a) Please explain the reason why frictional unemployment occurs in the economy.

b) Frictional unemployment occurs even when wages are flexible and there are enough jobs to go around. Provide two reasons why we have frictional unemployment (In the class, I introduced 5 reasons why we have frictional unemployment).

c) Select one of three reasons why we have wage rigidity and explain why it causes structural unemployment in the economy.

Answer 1

Answer 1:

a. The Frictional unemployment is a transitional unemployment that occurs in the economy due to people moving between jobs. It occurs because workers are searching for new jobs or are in transition from one job to another.

b. The two reasons of frictional unemployment in the economy are as follows:

1. A mismatch between the workers and available jobs: If there is mismatch between job seekers and available jobs in the market, then it is considered as frictional unemployment.

2. Workers are not satisfied with the prevailing work conditions: The anxiety of workers towards salaries, benefits, work location, responsibilities of job etc may force them to quit the current job and search for new jobs in the market.

c. Wage Rigidity is caused by the suppression of the wage renegotiation because bargaining is costly. The negotiation between the employers and employees is costly which leads to wage rigidity in the markets. Since wages are rigid, the level of structural unemployment increases in the economy because the wages are kept same no matter what is the nature of job being done in the economy. Thus, wage rigidity leads to structural unemployment.