The concept of the natural1 rate of unemployment has been influential in macroeconomics for about 40 years. At the end of the 1960s, Friedman and Phelps broke with Keynesian orthodoxy and argued that government efforts to keep unemployment below the natural rate by aggregate demand management would be ineffective in the longer term. Their ideas, and the concept of a natural rate of unemployment in particular, played a major role in shifting policy-makers towards thinking about the treatment of the unemployed and job-seekers in general, for instance by promoting ‘active labour market policies’ (see 1994 OECD Jobs Strategy and OECD 2006).
Your essay should (1) outline the textbook explanation of unemployment and what determines the natural rate of unemployment. (2) illustrate any long-standing international differences in unemployment rates and related statistics among countries of the region, and (3) explain the main policy variables that are considered to determine these long-standing international differences.
Unemployment refers to a citizen out of work or the marketplace. One might move from employment to unemployment because of changes in a firm, such as a decreases in demand and thus layoffs, personal dismissals or any other reasons that might require a firm to reduce its costs. Although there are a number of people who are out of work, or not working, this does not mean they are included in the unemployment rate calculations. The civilian labour force consists of the non-institutional civilian population, of the total population. This means those who are not in compulsory school, legal to work, incarcerated, working with the Armed Forces and not those who are generally institutionalised (e.g psychiatric hospitals, retirement homes). It also does not include those out of the labour force; these are people who are also non-institutional civilians, however are not looking for work or are not in the marketplace. The civilian labour force is then divided between those who are employed and those who are unemployed. Another group that is often overlooked are discouraged workers, who are not actively looking for jobs but would take one if they had the chance, for this reasons some economists prefer to look at employment as the total population minus all those employed. When looking at unemployment we can also look at the participation rate which show us more information about how many people out of the working population are in the civilian labour force and have decided to ‘participate’ . This reveals differences between the groups in those employed and unemployed, for example men and women, or younger women and older women etc. It allows us to analyse the unemployment rate which doesn’t reflect differences among the different groups of workers. The unemployment rate is defined as the ratio of the unemployed to the labour force and it plays a huge role in the labour market cycle regarding wages and prices and demand. Unemployment in a country has 2 different implications that result in different outcomes for those without work. In the first, a country with a high unemployment rate might have multiple separations and hires in which citizens are likely to be happier because they are still able to enter employment. However in the latter scenario, when unemployment is high but there are few separations and hires, a sclerotic labour market is reflected and the unemployment pool is stagnant. Each scenario can be indicated by calculating the duration of employment which would be higher if unemployment was a stagnant pool of workers. The natural rate of employment is determined by the equilibrium point at which the price setting relation is equal to the wage setting relation. This means it is also affected by changes in the components such as the markup of the price over the cost set by firms and z, the variable that represents all other variables that can affect the