Question 2 a) The unemployment rate has recently fallen in the United States to

Question

Question 2

a) The unemployment rate has recently fallen in the United States to the record low. Some economists have stated that this is not a sign of good news, but rather bad news.

(i) Why does this mean that the drop-in unemployment is bad news?

(ii) What types of unemployment are included in the natural rate of unemployment?

b) There is considerable interest Australia in whether the minimum wage rate contributes to youth unemployment. Draw a supply and demand diagram for the unskilled labour market and discuss the effects of a minimum wage. Who is helped and who is hurt by the minimum wage?

Explanation / Answer

2) i) As we know there is an inverse relationship between unemployment and inflation . This inverse relationship is known as Phillips curve. Phillips curve tell us that as unemployment decreses inflation will increase and vice versa. So if there is fall in unemployment rate then this means inflation is increasing persistently. Moderate inflation is ok but persistent inflation will eat growth and thus growth rate of GDP will be dampen which could lead to stagnation and turing into depression.

Ii) There are three type of unemployment viz frictional, structural and cyclical. However only frictional and structural makes up natural rate of unemployment.

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