A Model of the Natural Rate of Unemployment

Macroeconomics presently treats unemployment as a rational search by unemployed labor for available vacancies in the labor markets. In this context, wages are viewed as being somewhat flexible, resulting from contracts between employers and employees. It is further hypothesized that a natural or frictional rate of unemployment exists, and will always exist. This natural unemployment level is attributed to imperfections in available information in the labor markets and to frictions in the job search process. Some unemployment will always arise as workers leave a job to search for a more preferred position. These workers who are between jobs constitute a major portion of the natural level of unemployment. Employers seek to offset employee turnover through development of appropriate wage policies. Employee turnover provides an unnecessary cost to the employer. The research model employed here is intended to prove that the natural level of unemployment is one which cannot be eliminated by either government monetary or fiscal policy. It is shown that market wages do not clear due to inforation inefficiencies, causing the natural unemployment. Figures.