Explain the factors which might determine the natural rate of unemployment (15 marks)

The natural rate of unemployment is where labour demand matches labour supply despite normal levels of unemployment occurring within the economy. This unemployment may be structural or frictional.

The magnitude of the natural rate is determined firstly by the quantity of skills and education. If the labour force is better educated, people are able to apply for a wider range of jobs. This increases the level of occupational mobility and therefore decreases the level of frictional unemployment. Furthermore, the frictional component of the natural rate can be determined by the level of labour mobility. This includes factors such as geographical mobility. Therefore, the quality and quantity of transportational infrastructure can impact on the natural rate of unemployment.

Also, hysterisis and deskilling may also determine the natural rate. Hysterisis is caused by cyclical recessions, where some demand-deficient unemployment never recovers as the economy faces an upturn in the economic cycle. As a result, people unlearn skills that they had. Finally, the flexibility of the labour market can also determine the natural rate of unemployment. This is because strong trade unions are able to decrease the supply of labour.