What is Natural Unemployment?
649 reads · Last updated: December 5, 2024
The natural unemployment rate is the minimum unemployment rate resulting from real or voluntary economic forces. Natural unemployment reflects workers moving from job to job, the number of unemployed replaced by technology, or those lacking the skills to gain employment.
Definition
The natural rate of unemployment is the lowest level of unemployment caused by actual or voluntary economic forces. It reflects the mobility of workers changing jobs, the number of people unemployed due to technological changes, and those lacking employment skills.
Origin
The concept of the natural rate of unemployment originated in the 1960s, introduced by economists Milton Friedman and Edmund Phelps. They argued that even in a stable economy, there would be a certain level of unemployment due to frictional and structural factors in the labor market.
Categories and Features
The natural rate of unemployment mainly includes frictional and structural unemployment. Frictional unemployment refers to short-term unemployment during job transitions, while structural unemployment is due to changes in the economic structure that render certain skills obsolete. A key feature of the natural rate is that it does not significantly change with economic cycles.
Case Studies
A typical case is the U.S. economy in the 1970s, where technological advancements and industrial restructuring led to job losses, considered part of the natural unemployment. Another example is Germany in the early 2000s, where labor market reforms improved worker skills and mobility, reducing the natural rate of unemployment.
Common Issues
Investors often misunderstand the natural rate of unemployment, thinking it can be completely eliminated. In reality, it is a part of a healthy economy, and complete elimination is unrealistic. Moreover, excessive policy intervention might lead to inflation rather than reducing unemployment.
