Natural Rate of Unemployment

What is the natural rate of unemployment?

It’s defined as the rate of unemployment that would occur in an economy if there were no cyclical unemployment (unemployment correlated with the ups and downs of the business cycle). The natural rate of unemployment is not actually observable, but we can estimate it.

Another way to think about the natural rate of unemployment is that it’s the combined frictional unemployment and structural unemployment.

If we can only estimate the natural rate of unemployment, you may be wondering why we even care about it. Economists think that, under some conditions, governments can reduce unemployment through fiscal and monetary policies. However, these measures only affect cyclical unemployment, not frictional or structural.

If unemployment is close to the estimated natural rate, that suggests that fiscal and monetary policy efforts will have less effect on unemployment.

Want to dive deeper into these topics? We cover Unemployment and Labor Force Participation, Business Fluctuations, Monetary Policy and the Federal Reserve, and Fiscal Policy in depth in our free Macroeconomics course.