Natural Unemployment

Updated on January 30, 2024
Article byPrakhar Gajendrakar
Reviewed byDheeraj Vaidya, CFA, FRM

Natural Unemployment Definition

Natural unemployment or natural rate of unemployment refers to the portion of unemployment in a healthy economy. It showcases the natural presence of unemployment in a full-employment economy. This phenomenon in the economy points to the fact that full employment is not necessarily a zero-unemployment scenario.

A healthy and active economy with an increasing GDP level conveys that the country has full employment. However, there will be a percentage of unemployment. Zero unemployment is a theoretical concept, and ideally, it cannot be achieved no matter how well or boom a nation’s economy is.

Key Takeaways

  • The natural rate of unemployment definition portrays it as the small percent of unemployment existing in a healthy economy, eliminating the concept of zero unemployment.
  • The three main components are frictional, structural, and surplus unemployment.
  • The unemployment rate calculates the number of unemployed individuals as a percentage of the entire labor force.
  • The Congressional Budget Office in the United States estimated that the rate in the United States is 4.4 percent in 2020.

Natural Unemployment Explained

The natural unemployment concept is relevant when the economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.read more is flourishing and exhibits a positive economic growth scenario. It also indicates that there is no cyclical unemploymentCyclical UnemploymentCyclical unemployment is one of the types of unemployment, which usually happens during the contraction phase of the business cycle where the unemployment rate starts rising as businesses start laying off its employees during the recession period & unemployment rate decreases during the expansionary phase of the business cycle.read more, unlike when the economy shows negative growth like a recession. However, even in healthy economies, there are people between jobs, people who lost their jobs due to government policies, technological evolution, etc. Hence this concept is more inclined toward healthy economies with abundant opportunities. 

The unemployment rate calculates the number of unemployed as a percentage of the total labor force. In the United States, for unemployment rate calculation, the labor force includes all working and jobless people aged 16 and above, except active-duty military personnel or institutionalized. Individuals are deemed employed if they get paid for work or profit from work in the preceding week. If a person is unemployed but has not sought employment in the past four weeks, is not immediately available for work, or both, that person is not counted as part of the labor force.

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Components

There are different factors contributing to unemployment in a nation. These factors are categorized into cyclical, structural, frictional, surplus, etc. If all these are absent, the unemployment rate falls to zero. Structural, frictional, and surplus components contribute to natural unemployment.

Components of Natural Unemployment

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#1 – Frictional unemployment

Frictional unemploymentFrictional UnemploymentFrictional unemployment occurs when unemployed individuals look for jobs as a part of life transitions or after quitting previous employment to find a better one. Short-lived frictional unemployment, in a way, reflects that the economy has enough jobs for workers to have the courage to quit and find a replacement. read more is filled with graduates searching for their first jobs, people in between jobs, people who left jobs due to personal reasons and searching for jobs again, employees looking for ways to enhance their career through a career change, etc. It shows the gap between transferring from one job to another. Hence, sometimes, it is also known as search unemployment.

#2 – Structural unemployment

Structural unemploymentStructural UnemploymentStructural unemployment is caused when there is a disparity between the knowledge and skills that are demanded by the employer and that which are offered by his or her employees and it is usually generated as a result of several changes like recession, deindustrialization, etc. in the economy and in such a situation individuals are unable to source work on account of different skills requirements.read more occurs when there is a mismatch between skills offered by the workers and the skillset demanded by the employers. This gap induces natural structural unemployment because the workers are not suitable for the positions with their current skill set, and the employer will search for other qualified candidates.

Common examples of its causes are the technological shift in the industry, an adaption of automation in factories, or a desk job that requires knowledge of a certain upgraded version of applications. However, it is possible to nullify the negative side effects of this scenario by providing effective training to employees.

#3 – Surplus unemployment

Surplus natural unemployment is caused by government intervention. Governments can intervene with the wage structure of businesses by setting policies restricting wages falling below a benchmark value. Suppose the organizations cannot align with the government’s established minimum wage due to reasons like profit concerns and financial issues. In that case, they resort to cutting down a specific number of workers, ultimately inducing natural unemployment in the country.

Example

Nebraska is a state in the United States. According to the Nebraska Department of Labor reports in December 2021, Nebraska’s Unemployment is at a Historic Low of 1.7%. At a glance, the rate is good for the state. However, it is perceived as not good for employers, unlike workers.

The reason why it is not good for workers is discernable from the explanation given by Dr. Eric Thompson, a professor of economicsEconomicsEconomics is an area of social science that studies the production, distribution, and consumption of limited resources within a society.read more at the University of Nebraska-Lincoln. He compared unemployment with body fat, pointing to the relevance of an optimal level, an unemployment rate below or above is not favorable. He explains that the rate can fall below the normal rate if the employers are desperate for workers and willing to compromise. In such situations, the employers may bear the cost of workers’ demand, and smaller businesses may not be able to afford the situation and may close or shrink their business.

Frequently Asked Questions (FAQs)

What are the types of natural unemployment?

The three types are:
1. Frictional unemployment: Caused when workers or graduates search for new jobs
2. Surplus unemployment: Caused by a mismatch between the workers’ skillset and the skills demanded by employers
3. Structural unemployment: Caused by government intervention

What is the natural unemployment rate formula?

It is the ratio of unemployed people to the number of people in the labor force. It can be elaborated into the following formula:
 
NU = (FU + SU)/LF*100
 
NU= Natural rate of unemployment in percentage
FU= Number of frictionally unemployed people
SU= Number of structurally unemployed people
LF= Number of people in the labor force (employed and unemployed)

What is the US natural unemployment rate?

The Congressional Budget Office in the United States estimated that the rate in the United States is 4.4 percent in 2020. It is relevant and analyzed when the economy is at its full potential and healthy, with structural and frictional unemployment and no cyclical unemployment.

This has been a Guide to What is Natural Unemployment & its Definition. We explain the natural rate of unemployment, formula, example & the rate in the US. You can learn more from the following articles – 

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