Chapter 17, Problem 17.1LO

To determine

Why the actual unemployment rate might depart from its natural rate?

Explanation of Solution

Natural rate of unemployment is the rate of temporary unemployment, thus that unemployment which is natural in a stable economy. There is a time lag when people switch from one job to another. Unemployment in that time period for the same set of people is called the natural rate of unemployment.

In the logical sense, the actual rate of unemployment is bound to differ from the natural rate in the sense that the actual rate includes all those who are willing to work and cannot find work, whereas natural rate consist of unemployment by choice or temporary unemployment.

Thus, actual unemployment rate departs from its natural rate because of the conceptual difference and the difference in the analysis.

Economics Concept Introduction

Introduction:

Natural Rate of Unemployment - When people switch jobs, there is a time lag and the unemployment of people during that time lag is called Natural rate of Unemployment. It is the combination of structural and frictional unemployment.

Actual Rate of Unemployment - It is the rate of unemployment of those people who want to work at the existing wage rate but are not able to find the work. Unemployment rate can be determined by dividing the number of unemployed by the total labor force.