Discuss why it is very difficult to reduce the unemployment rate below the natural rate?

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Expert Solution

Natural rate of unemployment is comprised of frictional rate of unemployment and structural rate of unemployment. Now this implies that if the civilian unemployment rate (which includes cyclical rate of unemployment, frictional rate of unemployment and structural rate of unemployment) has to be reduced below the natural rate, not only cyclical rate of unemployment should be reduced, there should be a reduction in frictional rate of unemployment and structural rate of unemployment.

Only long term reforms and structural changes can bring change in structural rate of unemployment so it is difficult to reduce it in the short run. Also, frictional rate of unemployment is reduced when there are easy job matching incentives. In case we do work upon this and reduce the unemployment rate below the natural rate, then we would require to create more jobs, increase the demand for labor, which increases wages and and prices. This indicates that the cost of bringing down the unemployment rate below the natural rate is high enough.

Rahul Sunny answered 1 year ago

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