Explain the significance of the natural rate of unemployment within the context of unemployment.

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Expert Solution

The significance of the natural rate of unemployment are as follows:

1) The existence of a natural rate of unemployment at a level greater than zero is significant in the context of unemployment in the labor market, because 0% long-run unemployment rate requires a completely inflexible labor market, where workers are unable to quit their current job or leave to find a better one.

2) The natural rate of unemployment represents the lowest unemployment rate whereby inflation is stable or the unemployment rate that exists with non-accelerating inflation.

3) This states that there is a minimum unemployment rate that results from real or voluntary economic forces, that cannot permanently be reduced by demand management policies (including monetary policy), but that such policies can play a role in stabilizing variations in actual unemployment. Hence, the policy measures should not be pushed beyond a limit that it becomes inflationary while attempting to eliminate unemployment.

4) It represents the number of people unemployed due to the structure of the labor force, including those replaced by technology or those who lack the skills necessary to get hired

5) Existence of the natural rate of unemployment signals that the labor market is flexible, which allows workers to flow to and from companies.

Rahul Sunny answered 1 year ago

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