natural rate of unemployment


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Non-Accelerating Inflation Rate of Unemployment

Also called NAIRU. The unemployment rate in an economy below which inflation will begin to rise. The idea behind NAIRU states that a certain unemployment rate is built in to an economy. If unemployment falls too far, the economy will begin to overheat and inflation will rise. This analysis is highly controversial; some economists hold full employment is possible without these negative side effects. Milton Friedman was a major proponent of the NAIRU idea. See also: Phillips curve.
Natural rate of unemploymentclick for a larger image
Fig. 134 Natural rate of unemployment. Phillips curve depicting the natural rate of unemployment.

natural rate of unemployment

the underlying rate of UNEMPLOYMENT below which it is not possible to reduce unemployment further without increasing the rate of INFLATION. The term ‘natural rate of unemployment’ is often used synonymously with the NON-ACCELERATING INFLATION RATE OF UNEMPLOYMENT (NAIRU).

The natural rate of unemployment can be depicted by reference to the PHILLIPS CURVE.

In Fig. 134, the rate of unemployment is shown on the horizontal axis and the rate of inflation is shown on the vertical axis, with the Phillips curve showing the ‘trade-off between unemployment and inflation. Point X, where the Phillips curve intersects the horizontal axis, depicts the natural rate of unemployment. If unemployment is pushed below the natural rate of unemployment (currently estimated at around 5% in the UK), then inflation starts to accelerate. The natural rate of unemployment includes FRICTIONAL UNEMPLOYMENT, STRUCTURAL UNEMPLOYMENT and, in particular, ‘voluntary’ unemployment (people who are out of work because they are not prepared to take work at the ‘going’ wage rate). See main UNEMPLOYMENT entry for further discussion.

However, the term ‘natural’ rate of unemployment is somewhat a misnomer insofar as it implies that it is ‘immutable’. This is far from the case, as the natural rate of unemployment can vary between countries and also within countries over time. Structural unemployment, for example, can be reduced by training schemes that improve occupational mobility while ‘voluntary’ unemployment can be reduced by lowering the ‘cushion’ of social security benefits and improving incentives to work (e.g. the Working Families’ Tax Credit Scheme). See EXPECTATIONS-ADJUSTED/AUGMENTED PHILLIPS CURVE.

References in periodicals archive ?
The concept of the natural rate of unemployment (NRU) represents the hypothetical unemployment rate consistent with aggregate production being at the "long-run" level.
As shown in Table 2, in the 2004 and 1994 episodes, liftoff occurred while the unemployment rate was almost half a percentage point and almost 1 percentage point, respectively, above the estimates of the natural rate of unemployment the CBO had published at that time.
The CBO's estimate of the natural rate of unemployment is also fluid, though the revisions are much smaller.
To the extent that the exceptionally large share of long-term unemployment reflects structural change and a higher natural rate of unemployment, policymakers should seriously consider the possibility that a high unemployment rate does not necessarily equate to a large unemployment gap.
In the final sections, we examine the impact of our LFP results on the estimate of the natural rate of unemployment and describe our estimates of trend payroll employment growth.
In summary, a housing market crisis slows the labor market's adjustment toward a natural rate of unemployment and causes persistence in unemployment rates (Katz 2010; Frey 2009).
Daly and others [2012] review this literature and conclude that mismatch played only a small role in the overall rise in the unemployment rate or the natural rate of unemployment.
A systems approach to estimating the natural rate of unemployment and potential output for the United States, IMF Working Paper.
Today's numbers send a clear warning that the labour market has reached its natural rate of unemployment," said Carsten Brzeski, senior economist at ING.
2) The natural rate of unemployment is too high from the perspective of economic efficiency, so the central bank seeks to increase social welfare by lowering the unemployment rate below it.
Today, if national economies including the US are unable to generate a knowledge economy cycle, they will not be able to reduce the unemployment rate to the natural rate of unemployment.
While it is true that the economy returns to the natural rate of unemployment after a boom-bust cycle, the post-boom "natural rate" is not the same as the one that preceded the cycle.

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