Page 174 - Krugmans Economics for AP Text Book_Neat

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
Monster.com 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.

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Structural Unemployment in Eastern Germany
In one of the most dramatic events in world his- ently depressed, with an unemployment rate of fied, it became clear that workers in East Ger-
tory, a spontaneous popular uprising in 1989 12.1% in December 2009, compared to West many were much less productive than their
overthrew the communist dictatorship in East Ger- Germany’s unemployment rate of 6.7%. Other cousins in the west. Yet unions initially demanded
many. Citizens quickly tore down the wall that had parts of formerly communist Eastern Europe wage rates equal to those in West Germany, and
divided Berlin, and in short order East and West have done much better. For example, the Czech these wage rates have been slow to come down
Germany became a united, democratic nation. Republic, which was often cited along with East because East German workers don’t want to be
Then the trouble started. Germany as a relatively successful communist treated as inferior to their West German counter-
After reunification, employment in East Ger- economy, had a comparatively lower unemploy- parts. Meanwhile, productivity in the former East
many plunged and the unemployment rate ment rate of only 9.2% in December 2009. Germany has remained well below West German
soared. This high unemployment rate has per- What went wrong in East Germany? levels, in part because of decades of misguided
sisted: despite receiving massive aid from the The answer is that, through nobody’s fault, East investment. The result has been a persistently
federal German government, the economy of Germany found itself suffering from severe struc- large mismatch between the number of workers
the former East Germany has remained persist- tural unemployment. When Germany was reuni- demanded and the number of those seeking jobs.

Module 13 AP Review
Solutions appear at the back of the book.

Check Your Understanding
1. Explain the following. 2. Why does collective bargaining have the same general effect on
a. Frictional unemployment always exists. unemployment as a minimum wage? Illustrate your answer
b. Frictional unemployment accounts for a larger share of total with a diagram.
unemployment when the unemployment rate is low.
3. Suppose the United States dramatically increases benefits for
unemployed workers. Explain what will happen to the natural
rate of unemployment.
132 section 3 Measurement of Economic Performance