Since unemployment rates are consistently higher in Canada and some Western European countries than in the United States, it appears that the natural rate of unemployment is lower in the United States. What might explain this difference?
The text offers two explanations for the natural rate of unemployment. The first is frictional unemployment, which results from people and employers taking time to search for the best match. Frictional unemployment would be higher in countries that have frequent and large sectoral shifts and generous unemployment compensation. It seems unlikely that Canada and Western European countries would have greater sectoral shifts than the United States, so some of the difference might be due to more generous unemployment compensation in Canada and Western Europe.
The second explanation for the natural rate of unemployment is that wages in some labor markets are above equilibrium. One rationale for setting wages above equilibrium is to attract and retain productive workers. There is no obvious reason why these efficiency wages should contribute to unemployment more in Canada and Western Europe than in the United States. Wages can also be above equilibrium in some markets because of minimum-wage laws. So, some unemployment in Canada and Western Europe might result from higher minimum wages. Finally, unions may negotiate higher wages for their members causing a rise in unemployment. Canada and Western Europe have greater union membership rates and more powerful unions.
You might also like to view...
Inflation burdens those individuals living on fixed incomes
Indicate whether the statement is true or false
Which of the following best describes the difference between cost-of-service regulation and rate-of-return regulation?
A) Costs determine prices in cost-of-service regulation and prices determine costs in rate-of-return regulation. B) Costs determine prices in cost-of-service regulation and prices are set in rate-of-return regulation so the firm can make a normal rate of return. C) Variable costs determine prices in cost-of-service regulation and prices are set in rate-of-return regulation so the firm can make an economic profit. D) Regulators determine prices in cost-of-service regulation and market forces determine prices in rate-of-return regulation.
The shape of the long-run average cost curve reflects
a. market demand b. economies and diseconomies of scale c. increasing and diminishing marginal returns d. productivity of fixed inputs e. all of the above
Measured as a share of GDP, the net federal debt
a. increased during the 1990s, but fell sharply during 2001-2011. b. fell during most of the 1990s, but rose sharply during 2001-2011. c. was virtually unchanged during the 1990s, but fell sharply during 2001-2011. d. fell during the 1990s, but was virtually unchanged during 2001-2011.