Technological change, coupled with labor market institutions, can also
affect the natural rate of unemployment.
Technological change probably leads to an increase in the demand for
skilled workers who are familiar with the relevant technology and a reduc-
tion in the demand for unskilled workers. Economic theory predicts that
wages should increase for skilled workers and decrease for unskilled work-
ers. But if wages for unskilled workers cannot go down—say, due to a bind-
ing minimum wage—increased structural unemployment, and therefore a
higher natural rate of unemployment, will result.
Changes in Government Policies A high minimum wage can cause struc-
tural unemployment. Generous unemployment benefits can increase both
structural and frictional unemployment. So government policies intended
to help workers can have the undesirable side effect of raising the natural
rate of unemployment.
Some government policies, however, may reduce the natural rate. Two ex-
amples are job training and employment subsidies. Job -training programs are
supposed to provide unemployed workers with skills that widen the range of
jobs they can perform. Employment subsidies are payments either to workers
or to employers that provide a financial incentive to accept or offer jobs.132 section 3 Measurement of Economic Performance
Monster.com
Structural Unemployment in Eastern Germany
In one of the most dramatic events in world his-
tory, a spontaneous popular uprising in 1989
overthrew the communist dictatorship in East Ger-
many. Citizens quickly tore down the wall that had
divided Berlin, and in short order East and West
Germany became a united, democratic nation.
Then the trouble started.
After reunification, employment in East Ger-
many plunged and the unemployment rate
soared. This high unemployment rate has per-
sisted: despite receiving massive aid from the
federal German government, the economy of
the former East Germany has remained persist-ently depressed, with an unemployment rate of
12.1% in December 2009, compared to West
Germany’s unemployment rate of 6.7%. Other
parts of formerly communist Eastern Europe
have done much better. For example, the Czech
Republic, which was often cited along with East
Germany as a relatively successful communist
economy, had a comparatively lower unemploy-
ment rate of only 9.2% in December 2009.
What went wrong in East Germany?
The answer is that, through nobody’s fault, East
Germany found itself suffering from severe struc-
tural unemployment. When Germany was reuni-fied, it became clear that workers in East Ger-
many were much less productive than their
cousins in the west. Yet unions initially demanded
wage rates equal to those in West Germany, and
these wage rates have been slow to come down
because East German workers don’t want to be
treated as inferior to their West German counter-
parts. Meanwhile, productivity in the former East
Germany has remained well below West German
levels, in part because of decades of misguided
investment. The result has been a persistently
large mismatch between the number of workers
demanded and the number of those seeking jobs.fyi
Module 13 AP Review
Check Your Understanding
- Explain the following.
a. Frictional unemployment always exists.
b. Frictional unemployment accounts for a larger share of total
unemployment when the unemployment rate is low.
2 .Why does collective bargaining have the same general effect on
unemployment as a minimum wage? Illustrate your answer
with a diagram.
3 .Suppose the United States dramatically increases benefits for
unemployed workers. Explain what will happen to the natural
rate of unemployment.Solutions appear at the back of the book.