Question 2 - Mercat de treball i atur · Introducció a la Macroeconomia UPF 2019

d) Can monetary policy alter the structural/natural rate of unemployment? Propose two concrete economic measures capable of reducing $u_n$.

Solución: No, monetary policy cannot affect structural unemployment; it is neutral in the medium/long run and merely manages cyclical demand fluctuations. To permanently decrease $u_n$, supply-side labor and product market structural reforms are required, such as: reducing product market regulations and barriers to entry (lowering firm markups $\mu$), or improving active labor market training policies / reducing labor market mismatch.

e) Explain the effects on real wages and natural unemployment of raising the legal minimum wage.

Solución: A higher minimum wage increases the institutional markup on wages, shifting the Wage-Setting (WS) schedule upward/rightward to $WS'$. Because the Price-Setting relation $W/P = A/(1 + \mu)$ remains unchanged, firms will not concede higher equilibrium real wages. Thus, the new equilibrium moves along the horizontal PS line to $A'$, resulting in an unchanged real wage ($W/P$) but a strictly higher natural rate of unemployment ($u_n' > u_n$).

e) Illustrate the consequences of this policy using the Wage-Setting / Price-Setting (WS-PS) diagram. Label axes and curves, identify equilibria before and after the reform.

Solución: The WS-PS diagram has unemployment rate $u$ on the horizontal axis and the real wage $W/P$ on the vertical axis. The horizontal line is the Price-Setting relation $PS$ at height $A/(1+\mu)$. The downward-sloping Wage-Setting curve $WS$ shifts upward/rightward to $WS'$. The initial equilibrium $A$ is at $(u_n, A/(1+\mu))$, and the new equilibrium $A'$ is at $(u_n', A/(1+\mu))$, showing an increase in the natural rate of unemployment from $u_n$ to $u_n'$.