Describe the role of government policies in determining the natural rate of unemployment in a country

Answer 1

Government policies clearly affect the natural rate of unemployment that persists even when an economy is growing. On the supply side of the labor market, public policies to assist the unemployed can affect how eager people are to find work. For example, if a worker who loses a job is guaranteed a hearty package of unemployment insurance, welfare benefits, food stamps, and government medical benefits, then the opportunity cost of being unemployed is lower. That worker will be less eager to seek a new job. What seems to matter most is not just the generosity of these benefits, but also how long such benefits last. A society that provides generous help for the unemployed that cuts off after, say, six months may provide less of an incentive for unemployment than a society that provides less generous help that lasts for several years. Conversely, government assistance for job searches or retraining can, in some cases, encourage people to get back to work more quickly.
On the demand side of the labor market, government rules and social institutions can affect the willingness of firms to hire. For example, if government makes it hard to start a new business or to expand an existing one by wrapping these endeavors in bureaucratic red tape, then businesses will become more discouraged about hiring. Moreover, government regulations can make it harder to get a new business off the ground by requiring that business to obtain a slew of permits and pay a string of hefty fees, or by restricting the types and quality of products that the new business is able to sell.
Other government regulations, such as zoning laws, may limit where business can be conducted, or whether businesses are allowed to be open during evenings or on holidays.
Whatever defenses may be offered for such laws in terms of social value, these kinds of restrictions impose a barrier between some willing workers and other willing employers and thus contribute to a higher natural rate of unemployment. Similarly, if government makes it difficult to fire or lay off workers, businesses may react by trying not to hire more workers than strictly necessary, since laying these workers off would be costly and difficult. High minimum wages may discourage businesses from hiring low-skill workers. Government rules may encourage and support powerful unions, pushing up wages for union workers, but at a cost of discouraging businesses from hiring those workers.