Suppose a worker earns 50$ per working hour. The effort he puts in his work implies a disutility equal to 5$ per hour. There is an unemployment benefit equal to 30$ per working hour, and the worker suffers a psychological cost of 1$ per working hour if he is unemployed. Assuming there are no other firms on the market, is it convenient for the worker to stay employed or to leave work? Assuming that the unemployment benefit is increased to 47$, what would the worker do?
Answers
Let’s close our introduction to unemployment with another look at the natural rate. The natural rate of unemployment is the unemployment rate that would exist in a growing and healthy economy. In other words, the natural rate of unemployment includes only frictional and structural unemployment, and not cyclical unemployment.
The natural rate of unemployment is related to two other important concepts: full employment and potential real GDP. The economy is considered to be at full employment when the actual unemployment rate is equal to the natural rate. When the economy is at full employment, real GDP is equal to potential real GDP. By contrast, when the economy is below full employment, the unemployment rate is greater than the natural unemployment rate and real GDP is less than potential. Finally, when the economy is above full employment, then the unemployment rate is less than the natural unemployment rate and real GDP is greater than potential. Operating above potential is only possible for a short while, since it is analogous to workers working overtime.