natural rate of unemployment

Also found in: Dictionary, Acronyms, Wikipedia.

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 ?
Figure 7 plots the unemployment rate together with estimates of the natural rate of unemployment ([u.
Potential output and the natural rate of unemployment are useful economic concepts, but they are measured with considerable error.
The slow fall in the natural rate of unemployment implied by our results offsets a small portion of those effects.
A systems approach to estimating the natural rate of unemployment and potential output for the United States, IMF Working Paper.
The time series for the CBO estimate of the natural rate of unemployment has been downloaded from FRED.
2) This way of approaching the problem quickly led to the conclusion that the level of employment was a function of inflation not anticipated by economic agents or, more rigorously, the difference between the current unemployment rate and the natural rate of unemployment is a function of the "rate of unanticipated inflation.
Natural rate of Unemployment Rate of Unemployment: New Evidence for OECD Countries.
The possibility that the amount of mismatch has increased is of most concern because it suggests that the shift in the Beveridge curve might be very persistent, potentially leading to an increase in the natural rate of unemployment.
Hardwired into our macroeconomic thinking, particularly about policy issues, is the notion of a natural rate of unemployment.
A search-and-matching model that incorporates incentives for vacancy creation indicates that this rightward shift is consistent with an increase in the natural rate of unemployment of about 0.
is a good candidate for what Milton Friedman has called the natural rate of unemployment.
As policy makers anticipate the jobless rate to push higher over the coming months and maintain a cautious outlook for the economy, households may turn increasingly pessimistic as economists forecast the natural rate of unemployment to rise to 7% from 5% during the mid 1990's.

Full browser ?