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  Institutions and the Natural Rate

Institutions and the Natural Rate:

Subsequent institutions have a powerful influence over the natural rate. Several economies have strong labor unions other economies have weak ones. A number of unions sacrifice employment in their industry for higher wages others settle for lower wages in return for employment guarantees. A few economies lack apprenticeship programs that make the transition from education to employment relatively straightforward others make the school-to-work transition easy. In every pair, the first increase and the second reduces the natural rate of unemployment. Fence to worker mobility raise the natural rate whether the barrier be subsidized housing that workers lose if they move (as in Britain in the 1970s and the 1980s) or high taxes that a firm should pay to hire a worker (as in France from the 1970s to today).

Nevertheless the link between economic institutions and the natural rate is neither simple nor straightforward. The institutional features various observers today point to as a source of high European unemployment now were also present in the European economies in the 1970s--when European unemployment was low. Once more the quantitative relationships are not well understood.

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