Natural Rate of Unemployment

1. The natural rate of unemployment depends on factors that affect the behavior of both workers and firms. Make lists of possible factors affecting workers and firms that you believe are likely to influence the natural rate of unemployment.

2. Suppose that people who previously had held jobs become cyclically unemployed at the same time the inflation rate declines. Would the result be a movement along or a shift of the short-run Phillips curve? Explain your reasoning.

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Suppose that the greater availability of online job placement services generates a reduction in frictional unemployment during an interval in which the inflation rate remains unchanged. Would the result be a movement along or a shift of the short-run Phillips curve? Explain your reasoning.

3. During the first half of the 1960s, two island countries with nearly identical levels of per capita real GDP—about $2,700—and the same populations—just over 1,700,000 at that time—became independent nations.

One was Jamaica, and the other was Singapore. Since that time, Jamaica’s population has grown to 2,700,000 people. Singapore’s population has grown to 3,500,000. Today, Jamaica’s per capita real GDP is about $4,800. In contrast, Singapore’s per capita real GDP exceeds $31,000.

Why has Jamaica’s per capita real GDP grown so much less than Singapore’s, even though Singapore’s population has increased at a faster pace? The fundamental answer is that people in Jamaica have considerably less economic freedom. In contrast to Singapore, which has business taxation and regulations rated among the least burdensome in the world, tax rates and regulatory rules in Jamaica rank among the most oppressive. As a consequence, rates of growth of saving, investment, and productivity—and, hence, per capita real GDP—in Jamaica have been far below corresponding growth rates in Singapore.

In Jamaica, the cost of registering a business is 13 percent of the value of a firm’s capital, as compared with less than 0.2 percent in Singapore. In which country would you guess that more new companies are started each year?

4. Part A. A nation’s current annual rate of growth of per capita real GDP is 3.0 percent, and its annual rate of population growth is 3.4 percent. What is the nation’s annual rate of growth of real GDP?

Part B: Assume that each $1 billion in net capital investment generates 0.3 percentage point of the average percentage rate of growth of per capita real GDP, given the nation’s labor resources. Firms have been investing exactly $6 billion in capital goods each year, so the annual average rate of growth of per capita real GDP has been 1.8 percent. Now a government that fails to consistently adhere to the rule of law has come to power, and firms must pay $100 million in bribes to gain official approval for every $1 billion in investment in capital goods. In response, companies cut back their total investment spending to $4 billion per year. If other things are equal and companies maintain this rate of investment, what will be the nation’s new average annual rate of growth of per capita real GDP? For more information on Natural Rate of Unemployment see this:

Natural Rate of Unemployment

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