The Natural Rate Of Unemployment Essay Examples

Full employment is an ideal state of economy when every single labor unit is employed. Basically, the term ‘full employment’ means that the rate of unemployment equals zero. In other words every available employee in the country is provided with a job. This condition is considered to be ideal as labor demand and supply are not constant and tend to fluctuate thus creating unemployment. Moreover, not everyone capable of working in the country really wants to be employed. Therefore full unemployment in classical economic theory is a condition of market that excludes cyclical (or deficient-demand unemployment). In other words, everyone who is looking for the job can find it. Deficient demand unemployment arises when demand for labor for force is insufficient to satisfy all employees willing to work. But even when the demand for labor force can satisfy every single employee in the country the employment level still will not reach 100 percent. Economists distinguish two main reasons for that – the existence of structural and frictional unemployment.
Structural unemployment usually occurs due to fundamental changes in the industry. It is caused by the new requirements in skills that cannot be fully satisfied by existing labor market. Structural unemployment is often caused by automation and robotization of production processes when human labor is substituted with machines. In some hi-tech industries the demand for skillful employees is often unsatisfied as they require extremely high skills and profound knowledge. Structural unemployment also occurs as it takes time to train specialists for just discovered industries.
At the same time employees always want to earn more and work less. It drives them to look for new jobs and change workplaces. This fact creates frictional unemployment. Frictional unemployment refers to employees that are in search of new job or are in the process of transition from one job to another. Frictional unemployment exists due to enhanced differentiation of such factors as work conditions, salary rate, location or individual preferences.
Structural and frictional unemployment are considered to be natural unemployment that cannot be eradicated with economic means. Therefore in terms of traditional economic theory the full employment is the point at which the natural rate of unemployment equals the actual rate. According to the data presented by the Federal Reserve Bank of St. Louis the natural rate of unemployment for the 2Q of 2014 equaled 5.61 percent. The average actual unemployment rate in the same period was 6.20 percent based on the data provided by the US Bureau of Labor Statistics. The negative difference between actual and natural rates of unemployment tells that US economy has not achieved full employment in the 2Q of 2014. It can be stated that 0.59 percent share of unemployment is stipulated by cyclical unemployment caused by the downturn US economy has been experiencing since 2009. If the natural rate of unemployment is put aside, US economy has achieved almost full employment.
Daly et al. in their work research the behavior of natural rate of unemployment during the last financial crisis. The authors state that the natural unemployment has increased by 1-1.5 percent during the last recession. The change was caused by three structural factors: mismatch between the characteristics of job openings and characteristics of unemployed; extended unemployment benefits; and uncertainty about economic conditions.
The mismatch was caused by the imbalance occurred in the labor market after the 2007. Although a certain level of mismatch is always observed, the recession has strengthened the occupational discrepancy increasing unemployment rate by about 0.6-1.7 percent while geographical mismatch remained quantitatively insignificant. The mismatch is the reaction of labor market on the economic conditions. The firms are concerned about cost-cutting procedures setting up higher requirements for job candidates, and unemployed seek for reliable job options that are not always available.
Unemployment insurance benefits were extended during the recession of 2007-2009. The increased duration of unemployment payments resulted in the extension of job seeking process. The social government policy directed at easing the unemployment phase for jobless people has actually discouraged potential workers to search for new jobs and thus weakened the activity of labor markets, inflicting enormous budget spendings at the same time. Moreover, part of the people who were not searching for job started to pretend they actually do in order to receive insurance benefits. Daly et al. indicate that a “10 percent increase in the overall value of unemployment insurance benefits increases unemployment durations by 4-8 percent” (21). The silver lining is that the extended unemployment insurance has insignificant effect on unemployment in the long run.
The financial crisis is always followed by the lack of business confidence. The firms are aware of instability of the environment they operate in. It is revealed in unwillingness to expand the business or even necessity to lower business activity and optimize the structural organization by reducing the number of employees. In such circumstances the demand for labor force reduces, employers act more selective in the market and labor conditions become harsh. It is anticipated that economic uncertainty is a temporary condition that should not affect unemployment rate in the long-term period.

Works sited

"Natural Rate of Unemployment (Short-Term)." Federal Reserve Bank of St. Louis. Web. 5 Mar. 2015. <http://research.stlouisfed.org/fred2/series/NROUST>.
"Labor Force Statistics from the Current Population Survey." Bureau of Labor Statistics Data. Web. 5 Mar. 2015. <http://data.bls.gov/timeseries/LNS14000000>.
Daly, Mary C, Bart Hobijn, Ayşegül Şahin, and Robert G Valletta. "A Search and Matching Approach to Labor Markets: Did the Natural Rate of Unemployment Rise?" Journal of Economic Perspectives 26.3 (2012): 3-26. Print.