Chapter 7: Problem 28

After several years of economic growth, would you expect the unemployment in an economy to be mainly cyclical or mainly due to the natural rate of unemployment? Why?

Short Answer

Expert verified

After several years of economic growth, the unemployment in an economy would mainly be due to the natural rate of unemployment. This is because economic growth helps to reduce or eliminate cyclical unemployment, while the natural rate persists due to frictional and structural factors that are not directly influenced by economic growth.

Step by step solution

Define cyclical unemployment

: Cyclical unemployment is the type of unemployment that occurs when the economy goes through a period of economic slowdown or recession, resulting in a decreased demand for goods and services. This leads to businesses cutting down on production and laying off workers, which further contributes to higher unemployment rates.

Define natural rate of unemployment

: The natural rate of unemployment is the level of unemployment that occurs in an economy even when it's operating at its full potential or at its natural rate of output. This type of unemployment can be caused by factors such as frictional unemployment (people temporarily between jobs) and structural unemployment (workers lacking the skills needed for available jobs).

Understand the impact of economic growth

: Economic growth can have a significant impact on the unemployment rate in an economy. When an economy is growing, it typically leads to an increase in demand for goods and services, and businesses expand production to meet this demand, resulting in job creation. This can lead to a reduction in cyclical unemployment. However, the natural rate of unemployment might still persist, as it is not directly related to economic fluctuations.

Determine the type of unemployment

: After several years of economic growth, it's likely that the unemployment in the economy would be mainly due to the natural rate of unemployment because the growth should have helped to reduce or eliminate cyclical unemployment. The natural rate of unemployment, on the other hand, would still exist due to frictional and structural factors, which are not directly influenced by economic growth.

Conclusion

: In conclusion, after several years of economic growth, the unemployment in an economy would mainly be due to the natural rate of unemployment. This is because economic growth eliminates the cyclical component of unemployment, while the natural rate persists due to frictional and structural factors.