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Chapter 31.3

ECO100 Chapter 31.3- Unemployment Fluctuations and the NAIRU.docx

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Kalina Staub

Chapter 31(31.3)- Unemployment Fluctuations and the NAIRU 31.3 What Determines the NAIRU • When unemployment rate = NAIRU, there is only frictional and structural unemployment Frictional Unemployment • Frictional Unemployment- Unemployment that results from the turnover in the labour market as workers move between jobs; workers are frictionally unemployed or in search unemployment • The normal turnover of labour causes frictional unemployment to persist, even if the economy is at potential output • Frictional unemployment could be voluntary or involuntary Structural Unemployment • Structural Unemployment- Unemployment caused by a mismatch in skills, industry, or location between available jobs and unemployed workers • Natural Causes  Structural unemployment will increase if there is either an increase i the pace at which the structure of the demand for labour is changing or a decrease in the pace at which labour is adapting to these changes • Policy Causes  Government policies can influence the speed with which labour markets adopt to changes  The unemployment insurance program contributes to structural unemployment due to: 1. Canadian EI system ties worker’s benefits to the regional unemployment rate in such a way that unemployed workers can collect EI benefits for more weeks in regions where unemployment is high than where it is low 2. Workers are eligible for employment insurance only if they have worked for a given number of weeks in the previous year (entrance requirements)  Labour market policies that make it difficult or costly for firms to fire workers also make employees more reluctant to hire workers in the first place (reduce turnover) The Fictional­Struc
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