With its tradition of a job for life for most citizens, Japan once had a much lower unemployment rate than that of the United States; from 1960 to 1995, the unemployment rate in Japan exceeded 3% only once. However, since the crash of its stock market in 1989 and slow economic growth in the 1990s, the job-for-life system has broken down and unemployment rose to more than 5% in 2003.

a. Explain the likely effect of the breakdown of the job-forlife system in Japan on the Japanese natural rate of unemployment.

b. As the accompanying diagram shows, the rate of growth of real GDP picked up in Japan aer 2001 and before the global economic crisis of 2007–2009. Explain the likely effect of this increase in real GDP growth on the unemployment rate. Was the likely cause of the change in the unemployment rate during this period a change in the natural rate of unemployment or a change in the cyclical unemployment rate?

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Real GDP growth rate 3% 2 7 0 0.2% 0.3% 1.4% 2.7% 1.9% 2.2% 1.8% 2001 2002 2003 2004 2005 2006 2007 Year