The Natural Rate of Unemployment Research Proposal

The Natural Rate of Unemployment - Research Proposal Example According to the model, the workers and the firms undertake negotiation in order to decide on the nominal this. This negotiation is done irrespective of the expected price level of the economy. The nominal wage is determined as the product of the target real wage rate and the expected level of price in the economy. Most of the economists are of the opinion that the nominal wage in the economy is sticky in the short run. With a sticky nominal wage in the economy, the prices would increase from P to P0. This would reduce the real wage rate in the economy. Since the wages are the prices for labor the demand curve for labor would be a downward sloping curve and the supply curve would be an upward rising one. The now the labor market would comprise of the employed and the unemployed labor force. Thus the total labor in the economy would be Therefore the level of unemployed in the economy would be LN, where L is the total labor force, N is the employed and U is unemployed. Therefore the natural rate of unemployment in the economy would be U* / L. Now the wage setting relation establishes a negative relationship between the real wage that exists in the economy and the rate of unemployment existing in the economy. This relation can be represented by the downward sloping curve that is shown in the diagram below. As the rate of unemployment in the economy would increase the wages that the laborers would demand would be less (Broughton, 2009. pp. 3-5).