Natural Unemployment
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Natural Rate of Unemployment: Concepts
Milton Friedman and Edmund Phelps developed the concept of natural rate of unemployment in the 1960s. It is basically the lowest unemployment rate that is consistent with the long run aggregate production. According to the Keynesian view, lower rate of unemployment was consistent with a high rate of inflation. But such an increase in the employment rate will be short lived. Unemployment will revert back to its earlier position with the inflation rate remaining high. So, natural rate of unemployment can also be defined as that low level of unemployment at which the economy faces a stable inflation rate. For this reason the natural rate of unemployment is also termed as the non-accelerating inflation rate of unemployment or the NAIRU.
There are certain cyclical factors that can cause deviation of the economy from the natural rate of unemployment. The natural rate of unemployment cannot be lowered with the help of monetary policies. Monetary policies, on the contrary, can be used to curb actual unemployment, which is a deviation from the natural rate of unemployment.
Natural Rate of Unemployment in US
The natural rate of unemployment was set at 5.5% to 6% in the 1990s. Any deviation from this level would imply sticky wages and inflation. By May 1999, the unemployment rate in US was 4.2% and this was accompanied by an increase in the Consumer Price Index by 1.6% in 1998.
In the recent times, economists are of the view that the natural rate of unemployment differs across nations. The natural rate of unemployment is also different across different time horizons for the same country. This variation is a result of divergent policies formulated by the government, attitude of the workers and business practices.
Different factors are attributed behind the fall in the natural rate of unemployment in the United States of America after the late 1970s till the late 1990s.
Firstly, the aged workforce is less prone to job-hopping. This has decreased the natural rate of unemployment by 0.4 percentage points.
Secondly, the temporary- help agencies have contributed to increase the employment by almost four times from 1980 to 1998. This has further reduced the natural rate of unemployment by 0.2% points.
Thirdly, the number of prisoners, who were previously unemployed has also increased. This has again contributed to a 0.2% percentage points fall in the natural rate of unemployment.
All the above-mentioned factors have contribute to a fall in the natural rate of unemployment from 5% to 4.5%.
The recent trend in the labor supply shows that there is an increase in the natural rate of unemployment. A rising natural rate of unemployment together with low actual unemployment is indicative of low inflationary pressures in the economy. An important factor that has contributed to this change is the change in the composition of the labor force. Again, since the 9/11 incident, there has been a rapid immigration in the skilled labor force.
