Natural rate of unemployment
Topic: Employment, Unemployment and Informalisation · NCERT: Beyond NCERT
Meaning
The natural rate of unemployment is the rate of unemployment that exists even when the economy is at full employment.
Natural rate = frictional + structural unemployment.
Frictional unemployment covers short spells while people search for or switch jobs. Structural unemployment comes from a mismatch of skills or location. In the long run the economy tends towards this rate (Friedman-Phelps). It is linked to NAIRU, the non-accelerating-inflation rate of unemployment. So full employment does not mean zero unemployment.
Example
Even in a booming economy, a graduate may spend a few weeks on the National Career Service portal looking for a job, and a handloom weaver displaced by powerlooms may need reskilling. Both still count as unemployed.
Don't confuse with
- Cyclical unemployment: this is caused by weak demand in a recession and is not part of the natural rate.
- Hysteresis: a long recession can raise the natural rate itself.
Related concepts
- Voluntary unemployment
- Involuntary unemployment
- Frictional unemployment
- Structural unemployment
- Cyclical unemployment
- Technological unemployment
- Hysteresis
- Okun's law
- Efficiency wage
- Labour arbitrage