Participate in a discussion with your classmates regarding natural unemployment.
ID: 1200511 • Letter: P
Question
Participate in a discussion with your classmates regarding natural unemployment. Review the “EYE on Your Life” caption titled, Natural Unemployment, on page 207 in the textbook. Now that we have learned that potential GDP is the value of real GDP when all the economy’s factors of production - labor, capital, land, and entrepreneurial ability - are fully employed, discuss how these factors render natural unemployment as productive when considering potential GDP. Please apply the production function and labor market concepts as explained in the textbook when sharing your discussion.
Explanation / Answer
Keynesian macroeconomics asserts that government intervention is needed to achieve full employment. The consensus view believes that classical macroeconomics best describes the economy at full employment. The relationship that shows the maximum quantity of real GDP that can be produced as the quantity of labor employed changes is the production function. The quantity of labor demanded increases as the real wage rate falls and the quantity of labor supplied decreases as the real wage rate falls. If the real wage rate exceeds the equilibrium real wage rate, there is a surplus of labor. When the labor market is in equilibrium, there is full employment of labor and real GDP equals potential GDP.
Determinate of the natural unemployment rate. • Job search -Job search is the activity of looking for an acceptable vacant job. Job search is influenced by demographic changes, unemployment benefits, and structural change. • Job rationing -Job rationing is a situation that arises when the real wage rate is above the full-employment equilibrium level. An efficiency wage, a minimum wage, or a union wage can lead to job rationing.
while further explaning this - Production function & equilibrium in a market has to be kept in view.The production function shows the maximum quantity of real GDP that can be produced as the quantity of labor employed changes and all other influences on production remain constant. • Equilibrium in a market The equilibrium in a market occurs at the intersection of the demand and supply curves.The production function is a graphical representation of to show the relationship between labor and real GDP. The labor demand curve shows the relationship between the real wage rate and the quantity of labor demanded. The labor supply curve shows the relationship between the real wage rate and the quantity of labor supplied
Therefore,An increase in unemployment benefits increases job search. Job rationing occurs when the real wage rate is above the equilibrium level. A minimum wage set above the equilibrium wage rate creates unemployment. If the real wage rate is above the full-employment equilibrium level, the natural unemployment rate increases.