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The natural rate of unemployment in europe

By the standards of other high-income economies, the natural rate of unemployment in the U.S. economy appears relatively low. Through good economic years and bad, many European economies have had unemployment rates hovering near 10%, or even higher, since the 1970s. European rates of unemployment have been higher not because recessions in Europe have been deeper, but rather because the conditions underlying supply and demand for labor have been different in Europe, in a way that has created a much higher natural rate of unemployment.

Many European countries have a combination of generous welfare and unemployment benefits, together with nests of rules that impose additional costs on businesses when they hire. In addition, many countries have laws that require firms to give workers months of notice before laying them off and to provide substantial severance or retraining packages after laying them off. The legally required notice before laying off a worker can be more than three months in Spain, Germany, Denmark, and Belgium, and the legally required severance package can be as high as a year’s salary or more in Austria, Spain, Portugal, Italy, and Greece. Such laws will surely discourage laying off or firing current workers. But when companies know that it will be difficult to fire or lay off workers, they also become hesitant about hiring in the first place.

The typically higher levels of unemployment in many European countries in recent years, which have prevailed even when economies are growing at a solid pace, are attributable to the fact that the sorts of laws and regulations that lead to a high natural rate of unemployment are much more prevalent in Europe than in the United States.

A preview of policies to fight unemployment

The Government Budgets and Fiscal Policy and Macroeconomic Policy Around the World chapters provide a detailed discussion of how to fight unemployment, when these policies can be discussed in the context of the full array of macroeconomic goals and frameworks for analysis. But even at this preliminary stage, it is useful to preview the main issues concerning policies to fight unemployment.

The remedy for unemployment will depend on the diagnosis. Cyclical unemployment is a short-term problem, caused because the economy is in a recession. Thus, the preferred solution will be to avoid or minimize recessions. As Government Budgets and Fiscal Policy discusses, this policy can be enacted by stimulating the overall buying power in the economy, so that firms perceive that sales and profits are possible, which makes them eager to hire.

Dealing with the natural rate of unemployment is trickier. There is not much to be done about the fact that in a market-oriented economy, firms will hire and fire workers. Nor is there much to be done about how the evolving age structure of the economy, or unexpected shifts in productivity, will affect the natural rate of unemployment for a time. However, as the example of high ongoing unemployment rates for many European countries illustrates, government policy clearly can affect the natural rate of unemployment that will persist even when GDP is growing.

When a government enacts policies that will affect workers or employers, it must examine how these policies will affect the information and incentives employees and employers have to seek each other out. For example, the government may have a role to play in helping some of the unemployed with job searches. The design of government programs that offer assistance to unemployed workers and protections to employed workers may need to be rethought so that they will not unduly discourage the supply of labor. Similarly, rules that make it difficult for businesses to begin or to expand may need to be redesigned so that they will not unduly discourage the demand for labor. The message is not that all laws affecting labor markets should be repealed, but only that when such laws are enacted, a society that cares about unemployment will need to consider the tradeoffs involved.

The mysterious case of the missing candidates

After reading the chapter you might think the current unemployment conundrum may be due to structural unemployment. Indeed, there is a mismatch between the skills employers are seeking and the skills the unemployed possess. But Peter Cappelli has a slightly different view on this—it is called the purple squirrel. The what?

In human resource parlance, a purple squirrel is a job candidate who is a perfect fit for all of the many different responsibilities of a position. A purple squirrel candidate could step into a multi-faceted position with no training and permit the firm to higher fewer people because the worker is so versatile. During the Great Recession, Human Resources (HR) positions were reduced. This means today’s hiring managers are drafting job descriptions and requirements without much, if any HR feedback. “It turns out it's typically the case that employers' requirements are crazy, they're not paying enough, or their applicant screening is so rigid that nobody gets through,” Cappelli stated in a 2012 Knowledge@Wharton interview about the findings in his book, Why Good People Can’t Find Jobs: Chasing After the Purple Squirrel . In short, managers are searching for “purple squirrels” when what they really need are just versatile workers. There really is not a shortage of “normal squirrels”—candidates who are versatile workers. The managers just cannot find them because their requirements, screening processes, and compensation will filter out all but the “purple” ones.

Key concepts and summary

The natural rate of unemployment is the rate of unemployment that would be caused by the economic, social, and political forces in the economy even when the economy is not in a recession. These factors include the frictional unemployment that occurs when people are put out of work for a time by the shifts of a dynamic and changing economy and any laws concerning conditions of hiring and firing have the undesired side effect of discouraging job formation. They also include structural unemployment, which occurs when demand shifts permanently away from a certain type of job skill.


As the baby boomer generation retires, what should happen to wages and employment? Can you show this graphically?

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Bureau of Labor Statistics. Labor Force Statistics from the Current Population Survey. Accessed March 6, 2015 http://data.bls.gov/timeseries/LNS14000000.

Cappelli, P. (20 June 2012). “Why Good People Can’t Get Jobs: Chasing After the Purple Squirrel.” http://knowledge.wharton.upenn.edu/article.cfm?articleid=3027.

Questions & Answers

what is macroeconomic analysis
Deogratius Reply
Macroeconomics is a branch of the economics that studies how the aggregate economy behaves. In macroeconomics, a variety of economy-wide phenomena is thoroughly examined such as inflation, price levels, rate of growth, national income, gross domestic product (GDP) and changes in unemployment Read m
Macroeconomics is a branch of the economics that studies how the aggregate economy behaves. In macroeconomics, a variety of economy-wide phenomena is thoroughly examined such as inflation, price levels, rate of growth, national income, gross domestic product (GDP) and changes in unemployment
what is economic
Wajeed Reply
Economics is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. 
what is inflation
Junaid Reply
Inflation is simply a situation in an economy where there is a persistent rise or increase in the prices of goods and services in a particular year(say current year)
It can still be defined as a situation in an economy where there's a persistent fall in the value of money
it is the persistent rise in the general price of goods and services in an economy leading to the fall in the values of money
It could mean the central bank has a deficit in reserve unable to cope with low export and exit of foreign investments.
what is willingness
Bilal Reply
Is a person Able,Capable and Anxious to something
Is when a person is able,capable and Anxious to do something
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u are welcome
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who about my question What is MPC
is marginal propensity to consume
a little more
sorry muafue sir you are little bit wrong about willingness *willingness reffers how much wants . it could be wants for payment or wants for something to do.
MPC reffers *How much want to consume*.
MPC is Marginal Propensity to Consume. MPC is proportion of additional spent on consumption.
MPC is Marginal Propensity to Consume. MPC is the proportion of additional income spent on consumption.
What is difference between GNP and GDP?
GNP is gross national product. In calculating GNP we include net national income from abroad while GDP is gross domestic product and in calculating it we use on expenditure, income and output from within the country. My name is JERRY NGONDA from Cameron
GNP.the total value of good $service currently produce w a given period of time by domestic owner GNP=NFI+GDP:GDP is a market value of final good $service currently produce in a given period of time w in a country boundery or territors.its take produce currently $etc
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when spending by the federal government exceeds net taxes?
stefany Reply
unemployed means people are not in the labor force, who have no job, are actively looking for job, they might be return to workforce.
tiffany Reply
the number of unemployed worker out of total number of people in workforce times 100
Explain the necessity of studying macroeconomics.
mrinmoyee Reply
how is DDP calculated
sheikh Reply
the question is not understood
when demand curve change
Manoj Reply
Due to unemployment rate change for example
Due to external environments change
Due to increase country GDP and 8ncome
Due to tax rate change
substitution effects government policy change in incomes
curve of demand which type?
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when demand curve is change
Manoj Reply
Due to many reasons
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Tech Reply
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What is the Cobb-Douglas production function about?
Dorothy Reply
The Cobb Douglas production function is a particular functional form of production,widely used to represent the technological relationship between the amount of two or more inputs and the amount of outputs that can be produced by those inputs.
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for whom to produce
Keynesian theory of employment
Saidul Reply
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for poor ,rich,and middle
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riy Reply
Equilibrium is a state of balance e.g supply equals demand then there is no oversupply or shortage of goods

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