Question OneThe estimate of the natural rate of unemployment for the first quarter of 2015 was 5.07% according to the Federal Bank of St. Louis’ estimate of the Natural Rate of Unemployment (short-term). Full employment is a macroeconomics term used to refer to the level of unemployment rates at which there is neither cyclical nor deficient-demand unemployment. Mainstream economists define it as a tolerable level of unemployment somewhat above 0%. The disparity from 0% results from non-cyclical kinds of unemployment like frictional unemployment. Unemployment over 0% is viewed as a prerequisite for control of inflation in a capitalist economic system by checking acceleration of inflation. This perception is founded on a theory revolving around the premise of the Non-Accelerating Inflation Rate of Unemployment (NAIRU). In the contemporary world, many mainstream economists imply NAIRU when talking about full employment. NAIRU has similarly been described by economists as the natural rate of unemployment or the structural rate of unemployment.
On the other hand, frictional unemployment refers to the interval between occupation when a worker is looking for, or transitioning from one occupation to another. Frictional employment is occasionally referred to as search unemployment and can be determined by the situations of the unemployed person. It exists because jobs, as well as workers, are heterogeneous resulting in a mismatch between the features of demand and supply. Such a mismatch may be linked to payment, location, taste, skills, work time, attitude and other numerous factors. Both employers and workers tolerate a certain level of risk, imperfection or compromise though not abruptly. Instead, they will spend some effort and time to get a match. Frictional unemployment is beneficial to the economy because it helps in resources allocation. Nevertheless, if the hunt for a job is quite long, and mismatches are more often, the economy suffers because some work won’t be done.
On its part, structural unemployment refers to a form of unemployment that results from a mismatch between skills, which workers in the economy can supply, and the labor skills demanded from workers by employers. Structural unemployment is frequently caused by changes in technology, which render the work skills of a majority of contemporary workers obsolete. It can be solved by offering better information to structurally unemployed workers or through retraining such workers to occupy new opportunities, which are highly demanded in the economy.
The rate of unemployment in respect to full employment is a critical issue for economic policy makers. Slight gap in the prospective rate of full employment results in significant changes in the policy reaction to economic growth. Natural rate of unemployment, frictional unemployment rate, structural unemployment rate and the actual unemployment rate can be used to establish whether the economy has attained full employment. Full employment is viewed as an achievement of the perfect unemployment rate characterized by the absence of types of unemployment, which shows labor market inefficiency such as structural unemployment. However, some frictional or voluntary unemployment does not invalidate attainment of full employment.
First reason given by economist for the increase is a mismatch between the features of job opportunities for instance location or skills requirements and the skills of unemployed. This scenario is referred to as frictional rate of unemployment in economics.
The second causes offered by economist as a probable cause of the increase is the supply of extended unemployment insurance benefits that may lower the aggressiveness of job search. Alternatively, it can cause some beneficiary to claim they are searching for a job, which is a condition for benefits receipt, when in the actual sense they effectively quit from employment.
The last explanation given by economist for the increase is the issue of uncertainty in economic conditions. This might have induced businesses to concentrate their efforts on increasing productivity together with output with no extensive recruitment of additional employees.