What is the Natural Rate of Unemployment?
Last Updated: 09/08/86
The unemployment rate is the composite of three distinct types of unemployment: frictional, cyclical, and structural. This fact poses a potentially serious problem for government policymakers because high unemployment rates are not necessarily indicative of a slack economy. Structural change as well as cyclical factors affect the unemployment rate. If policymakers are not able to distinguish higher unemployment rates due to a change in the structure of employment from higher unemployment rates due to a weak economy, then they run the risk of implementing expansionary policies at the wrong time, thereby creating or adding to inflationary pressures. Hence, to adequately gauge the state of the economy, it is necessary to know what portion of the current unemployment rate is due to purely cyclical phenomena as opposed to structural and frictional.