The natural rate of unemployment Suppose that the markup of the prices of products over wage cost,
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The natural rate of unemployment Suppose that the markup of the prices of products over wage cost, \(z\), is \(10 \%\), and that the wage-setting equation is
\[
W=P(1-2 m+z)
\]
where \(m\) is the unemployment rate and \(z\) is the unemployment benefit/minimum wage.
a. What is the real wage, as determined by the price-setting equation?
b. Solve for the natural rate of unemployment
c. What happens to the natural rate of unemployment if \(z\) falls from \(10 \%\) to \(5 \%\) ? Explain your answer.
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