How do structural and cyclical unemployment differ?

Natural unemployment rate

This article examines the natural unemployment and dedicates himself after a short definition and classification of Calculation of the natural unemployment rate with the associated formula. It is shown how the Unemployment rate can be read and what role other variables such as the Market power of a company.

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  • Natural unemployment rate definition
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  • Natural unemployment rate formula
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  • Natural unemployment rate calculation
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  • Calculate unemployment rate
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Natural unemployment rate definition

The natural unemployment rate (natural rate of unemployment) states that in an economy, even in a macroeconomic equilibrium, owing to Market imperfections a certain natural unemployment prevails, given Real wages.

What is the natural unemployment rate?

Consequently, denotes the natural unemployment the state of a steady Underemployment levelswhich cannot be eliminated. This is the case, for example, due to a lack of information, demographic and mobility-related barriers or other market imperfections. When it comes to reducing unemployment, it is crucial to distinguish between short-term, that is cyclical unemployment and longer term, so structural unemployment. In the long term, the different types of unemployment can result from structural measures be counteracted. In the short or medium term, the natural unemployment rate will depend on the immacroeconomic balance fall behind certain levels and are subject to annual fluctuations.

Macroeconomics natural unemployment rate

On thelabour market the macroeconomic theory becomes the natural unemployment through thePricing and theWage policy certainly. The unemployment rate is used as an indicator of that Economic Policy Goals used, as well as in macroeconomic theories and models such as the AS AD model and the Phillips curve.

Natural unemployment rate formula

After learning in the last few posts how prices and wages relate to labour market result, let us now deal with the resulting unemployment rate u. We get this from the point at which the Real wages correspond exactly to both considerations. As a reminder, we will show you the two formulas for the wage again:

and for the price:

We'll use another graphic as an aid and first of all consider how we should label the axes.

Graph natural unemployment rate

The is on the X-axis Unemployment rate u, because we want to determine this. For the Y-axis we are looking for another parameter that occurs in both equations. To do this, we will first use a simplification: The expected Price level From now on, P_e corresponds to the actual price level P. This gives us the modified wage equation:

Now we can use both equations according to the Real wages convert and maintain:

Real wages as a parameter for the Y-axis

So we choose the for our Y-axis Real wages W through P. Before we plot the curves, however, we want to introduce two important abbreviations. WS stands for "dare setting", so the Wage curve, PS stands for "price setting", so the Price curve.

You should know these abbreviations, they are used in most textbooks. Let's come to Wage curve. This takes a descending course in our coordinate system. This is because the wage decreases as the unemployment rate rises, as it causes a Bargaining advantage for the employer. If you are not quite sure how the curve changes, watch our video againWage policyat.

The price curve

The Price curve, which through thePricing comes about, simply describes a horizontal straight line, since there is no u in the formula and it cannot be changed. The real wage is therefore independent of the Unemployment rate.

As you can already guess, we want to go back in now balance determine from the two curves. For this we are looking for the intersection, i.e. the point at which the two Real wages are exactly the same. In our example, the curves meet at point A - here we denote them Unemployment rate as natural unemployment rate un. Although the name suggests it, this is not given by nature, but rather can be changed by the variables and z.

Unemployment benefits are increasing

For example, that increases Unemployment benefit, also increases the Collective variable z. For you, this means that you are less afraid of the unemployment must have and accordingly higher real wages can demand. Our WS curve shifts upwards and forms the new curve WS ‘. You can already see that we are now getting a new intersection point A ‘. The natural unemployment rate shifts to the right and thus increases from un on un‘. We remember: The increase in z leads to an increase in un.

The profit markup

Now let's get to the Profit markup and think about what might affect it. We already learned this Mark Up as a direct indicator of the Market power of a company can be understood. If you own the only pizzeria in town you can choose the prices however you want and people will buy from you anyway because there are no alternatives. If, however, two competitors also open a pizzeria, your market power will decrease and you will have to lower your profit premium.

The Competition entry can thus lead to a smaller μ. But what does that mean for our horsepower curve? Very simple: Since the μ is in the denominator of the PS equation, the straight line shifts upwards. We denote this straight line as PS ‘with the Profit markup μ dash. The natural unemployment rate thus drops to the new value un‘. So it is important: if it sinks Profit markup, our un.

Natural unemployment rate calculation

Given the natural unemployment rate, we also receive a natural level of employment. For the derivation we consider the definition of Unemployment rate in the formula notation:

Small u is therefore the same Number of unemployed capital U through the Working population L. In order to maintain the employment level, let us now expand the formula. For this we describe the number of Unemployed with the difference between the total labor force L and the number of Labor force N. In the formula we get:

The number of Labor force N is exactly what you are looking for here Employment level. We have almost reached our goal. We are now converting the formula to:

And already we have a connection for that Employment level derived. For the natural level of employment in equilibrium, this is due to the natural unemployment rate un given is:

For the production it follows about the well-known Production function Y equals N the relationship:

So, quite simply, we have the equation for that natural level of production certainly.

Calculate unemployment rate

The unemployment rate describes the employment rate of an economy (or a region). To calculate it, you divide the number of unemployed by the number of people who would be able to work. These are the group of the employed and the unemployed.

The formula to calculate the unemployment rate is:

Unemployment rate = unemployed / (employed + unemployed) * 100

Let's look at an example of how to calculate the unemployment rate for Germany in 2018. The average number of unemployed was 2,340,000. The number of employed averaged around 44,830,000 according to the Employment Agency. All we have to do is insert the values ​​into the formula and get the unemployment rate.

Unemployment rate = = 4,96%

The unemployment rate is an important indicator for recording and comparing the economic situation of certain regions.