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Chapter 32: Q.6 (page 781)

Explain how the natural rate of unemployment may be higher in low-income countries.

Short Answer

Expert verified

Short-term jobs cause higher frictional unemployment. Underdeveloped human capital cause higher structural unemployment. Thus, causing high natural unemployment.

Step by step solution

01

Step 1. Introduction

Unemployment refers to the situation where a person willing and able to work is actively looking for a job but is not able to find one. Natural unemployment refers to the unemployment that exists in absence of business cycles. It is comprised of frictional unemployment and structural unemployment.

02

Step 2. Explanation 

The natural unemployment rate is composed of frictional unemployment which is unemployment caused because of workers being in between jobs. In low-income countries, the labor market is not developed. Workers are often involved in short-term work and many workers provide for their own needs through farming, etc. So, frictional unemployment is relatively higher.

Structural unemployment is caused by a mismatch in skills required in the labor market and skills possessed by workers. Human capital is generally underdeveloped in low-income countries because of poor infrastructure, lack of government funding, etc. This contributes to higher structural unemployment.

Thus, the natural unemployment rate is relatively higher in low-income countries.

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