Economics is an art and science that deals with allocation of scarce resources to unlimited human wants. Resources are the means of production, which include the human and non-human capital. Human capital encompasses the labour resource, which is the human effort and skill devoted to production in an economy. The process of engaging the human efforts in production is known as employment. This paper explores the unemployment rate of human labour in respect with the causal economic dynamics. Unemployment takes up various forms in nature but this paper identifies the structural and the cyclical forms of unemployment as closely linked to the natural rate of unemployment. This investigation specifically narrows down to the natural rate of unemployment, which means the proportion of people in employment positions as compared to the population not employed (Belsie, 2012). The big question in this investigation is; what determines the natural rate of unemployment?
Governments try to adjust the labour natural equilibrium through increasing the labour demand in the full employment by lowering their regulations on firms hiring. For instance, this may function to increase the firms demand for labour hence attracting more people. If this happens at the flexible market structures, it means that the more the people are employed, the more the real wages decrease. If the plan is implemented on a constant real wage, then market forces will act to correct the created demand due to strain in the wages. Natural rate of unemployment is only sustainable under the flexible labour market structure and without evoking any inflationary reactions in an economy (Lazear, 2013).
The flexible labour environment ensues in an economy that does not have market imperfections like trade unions, minimum wages, and benefits. Trade unions bring about rigidities in the labour market by bargaining wages with employers. A push for higher wages reduces the number of employment positions offered in the labour industry. This causes frictional unemployment due to the high skill requirement in the available few opportunities in the market. These bids up the wages making it harder for the unemployed to find jobs, due to increased employer costs. Initiating a minimum wage creates a labour market failure because the firms are forced to change their price line with respect to the real wages. An increase in prevailing wage line acts to increase the natural rate of unemployment (Belsie, 2012).
Works cited
Belsie, Laurent. "The United States Labour Market: Status Quo or A New Normal?” The national bureau of economic research. Version 18386. Recent NBER research, news, and press citations, 2 Sept. 2012. Web. 9 Nov. 2013.
<http://www.nber.org/digest/jan13/w18386.html>.
Lazear, Edward. "The Hidden Jobless Disaster." WSJ.com. Version 431. The wall street journal, 5 June 2013. Web. 10 Nov. 2013.
<http://online.wsj.com/news/articles/SB10001424127887323728204578514183323171670>.
