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 ?
Labor's share, and the natural rate of unemployment. In Economics of wage determination, ed.
7 Is the natural rate of unemployment lower than expected?
A further possibility exists, namely that there has been a structural shift in the UK economy such that the natural rate of unemployment, or the NAIRU, has shifted downwards.
A lower natural rate of unemployment in the economy might explain why lower actual levels of unemployment are not driving up wages and prices as quickly as some expected.
First, although monetary policy cannot affect the growth rate of potential output or the long-run natural rate of unemployment, it needs to take these into account as part of the economic environment, and to consider the downward pressure demographics put on both relative to their historical levels.
If we again assume Okun's law and a 5 percent natural rate of unemployment, the unemployment rate in 2023 is 5 - (5.8)/2 = 2.1 percent.
The concept of the natural rate of unemployment (NRU) represents the hypothetical unemployment rate consistent with aggregate production being at the "long-run" level.
Potential output and the natural rate of unemployment are useful economic concepts, but they are measured with considerable error.
The natural rate of unemployment is sometimes called the nonaccelerating inflation rate of unemployment (NAIRU) because it is consistent with an economy that is growing at its long-term potential so there is no upward or downward pressure on inflation.
Macroeconomic theory defines the natural rate of unemployment as the hypothetical level of unemployment that would obtain in the absence of any distortions, such as impediments to free adjustment of nominal prices and wages.
The slow fall in the natural rate of unemployment implied by our results offsets a small portion of those effects.
Projecting the level of unemployment and determining the natural rate of unemployment are significant for policymakers.

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