Question

Natural rate of unemployment:

a) Suppose that Congress passes legislation making it more difficult for firms to fire workers. (An example is a law requiring several months of severance pay for fired workers.) If this legislation reduces the rate of job separation without affecting the rate of job finding, how would the natural rate of unemployment change?
b) Do you think it’s plausible that the legislation would not affect the job finding rate? Briefly explain why or why not.
c) This question is actually more typical of policy debates in Europe than in the U.S. For example, it’s notoriously difficult for firms to fire workers in many European countries. How might this be a factor in the higher natural rate of unemployment that is often estimated for those countries?

Answer 1

(a)

Common pace of joblessness is a mix of auxiliary and frictional joblessness.

Basic Unemployment: Occurs contribution to modern rearrangement or innovative change.

Frictional Unemployment: When individuals are in the middle of occupations for example the way toward moving from one occupation to other.

On the off chance that an enactment making it progressively hard for the organizations to terminate laborers is presented, at that point despite the fact that the activity discovering rate will stay consistent, the consistent state joblessness will stay steady. Less individuals will stay jobless at a specific time.

(b)

The activity discovering rate will change provided that prerequisite of a severance bundle will build the expense of work. This implies the business will most likely decrease the pace of contracting which will along these lines increment the pace of joblessness. Subsequently, the enactment would diminish the activity discovering rate.

(c)

The expense of contracting will increment if an enactment like this is passed. The enactment presents the idea of severance bundle for terminated laborers. This expands the expense of employing for the firm. Along these lines, the business will diminish the employing to decrease the expenses. This will diminish the business rate in a nation which will make a higher regular pace of joblessness.