Question

Unemployment rates have been higher in many European countries in recent decades than in the U.S. Is the main reason for this long-term difference in unemployment rates more likely to be cyclical unemployment or the natural rate of unemployment? Briefly explain.

Answer 1

This is basically the natural rate of unemployment that results from economic policies of the European countries. The compensation provided to the unemployed people in European countries is as high as 80% of the market wage rate which discourages unemployed workers to find a job. Secondly it is very difficult in many European countries to fire a worker because there is a huge compensation proposed which has to be made in advance by the employer. Because employers find it difficult to fire workers most of the jobs remain occupied and therefore very few jobs are available for the unemployed. Because of this reason also, employers set stringent conditions for the candidates applying for a job because they cannot fire them easily in the later stage. this indicates that both the structural unemployment and frictional unemployment are higher in European countries relative to the United States..