Question

In the aftermath of the financial crisis in the United States, labor mobility has decreased significantly. How, if at all, might this affect the natural rate of unemployment?

Short answer

The financial crisis resulted in a slowing of the economy, a decline in output, and the liquidation of firms. As a result, widespread unemployment prevailed throughout the economy.

Step-by-step solution

Step 1. Define unemployment.

Unemployment is defined as persons over a particular age who are not employed or self-employed but are looking for work during the reference period.

Step 2. How might the current situation affect the natural rate of unemployment?

The financial crisis resulted in a slowing of the economy, a decline in output, and the liquidation of firms. As a result, widespread unemployment prevailed throughout the economy.

Economists categorise unemployment into three types. One is made up as a result of ordinary job turnover in a robust financial market. The second type is structural, in which an obsolete skill or new technology has overtaken the previous one, leaving older workers unemployed. The third type is cyclical, and it occurs when the economy slows.

The natural rate of unemployment is the rate of unemployment caused by natural rather than economic movements. The natural rate of unemployment does not include unemployment caused by an economic downturn or a financial crisis.