Natural Rate of Unemployment
Quick Definition
The unemployment rate consistent with stable inflation, comprising frictional and structural unemployment but not cyclical unemployment.
Key Takeaways
- The unemployment rate at which inflation remains stable
- Includes frictional and structural unemployment, but not cyclical
- Also known as NAIRU (Non-Accelerating Inflation Rate of Unemployment)
- Estimated at approximately 4-5% for the U.S., but varies over time
- Pushing unemployment permanently below NRU leads to accelerating inflation
What Is Natural Rate of Unemployment?
The Natural Rate of Unemployment (NRU), also called the Non-Accelerating Inflation Rate of Unemployment (NAIRU), is the unemployment rate at which inflation remains stable—neither accelerating nor decelerating. It includes frictional unemployment (workers transitioning between jobs) and structural unemployment (mismatch between worker skills and job requirements) but excludes cyclical unemployment caused by economic downturns. The concept, developed by Milton Friedman and Edmund Phelps, implies that attempting to push unemployment permanently below the natural rate through monetary or fiscal stimulus will only result in accelerating inflation. The natural rate is not fixed—it changes over time due to demographics, labor market policies, technology, and institutional factors. For the U.S., it is estimated at approximately 4-5%, though the exact level is debated.
Natural Rate of Unemployment Example
- 1When unemployment fell to 3.5% in 2019—well below the estimated natural rate of 4.4%—economists debated whether this would trigger accelerating inflation.
- 2The Fed estimates the natural rate of unemployment at approximately 4.1%, below which inflationary pressures tend to build.
- 3Improved job-matching through online platforms may have lowered the natural rate of unemployment by reducing frictional unemployment.
Related Terms
Unemployment Rate
The percentage of the labor force that is jobless and actively seeking employment, a key indicator of economic health.
Phillips Curve
An economic model showing an inverse relationship between unemployment and inflation, suggesting policymakers face a trade-off between the two.
Inflation
The rate at which the general level of prices for goods and services rises over time, reducing the purchasing power of money.
Okun's Law
An empirical relationship stating that for every 1% increase in unemployment above the natural rate, GDP falls approximately 2% below its potential.
Business Cycle
The recurring pattern of expansion and contraction in economic activity, typically measured by changes in real GDP and employment.
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