Chapter 13, Problem 3CYU

To determine

The question requires us to determine the impact of unemployment benefits on the natural rate of unemployment.

Explanation of Solution

The unemployment rate that occurs from the effects of structural unemployment and frictional unemployment is considered the natural rate of unemployment.

If the government increases the unemployment benefits significantly, the unemployed people will have less incentive to search for new jobs and thus they will prefer to stay unemployed. Such a situation will generate frictional unemployment in the market. As frictional unemployment is part of the natural rate of unemployment. So, an increase in frictional unemployment will increase the natural rate of unemployment in the labor market.

Therefore, a significant increase in unemployment benefits will increase the natural rate of unemployment.