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 caused an economic slowdown, a drop in output, and the liquidation of businesses. This resulted in widespread unemployment throughout the economy.

Step-by-step solution

Step 1. Define unemployment.

Unemployment is defined as those above a certain age who are not in paid job or self-employment but are currently looking for work during the reference period.

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

The financial crisis caused an economic slowdown, a drop in output, and the liquidation of businesses. This resulted in widespread unemployment throughout the economy.

Economists distinguish between three categories of unemployment. One is fictitious, owing to typical job turnover in a healthy financial market. The second type is structural, which means that an obsolete skill or new technology has supplanted the prior one, leaving older workers unemployed. The third is cyclical, which occurs as the economy slows.

The natural rate of unemployment is the unemployment rate produced by natural movements rather than economic movements. Unemployment generated by an economic slowdown or a financial crisis is not included in the natural rate of unemployment.

As a result, a drop in labor mobility as a result of the financial crisis will have no effect on the natural rate of unemployment.