Natural Rate of Unemployment
AdvancedThe natural rate of unemployment is the level of unemployment that exists when the economy is operating at its sustainable potential, made up of frictional and structural unemployment but not cyclical unemployment.
Even in a healthy economy, some people are unemployed while they move between jobs or because their skills do not match available jobs. The natural rate reflects this normal level of unemployment.
When actual unemployment falls below the natural rate, labour becomes scarce and wage and price inflation tends to rise. When it is above the natural rate, there is slack in the economy, and inflation tends to fall.
For example, if the natural rate in an economy is estimated at 4.5% and actual unemployment is 3.5%, policymakers may worry that the labour market is overheating.
The natural rate cannot be measured directly and changes over time with factors such as demographics, education, labour market rules, job search technology and unemployment benefits. A closely related concept is the non-accelerating inflation rate of unemployment, often shortened to NAIRU. Estimates are uncertain, which complicates decisions about interest rates.
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