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What is Natural Unemployment?

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Natural unemployment is the level of unemployment that is inevitable in the long-term performance of an economy. It is the type of unemployment that is independent of business cycles and short-term economic fluctuations. The term has been in use since the 1960s, when it was used to invalidate the long-term link between inflation and unemployment rates. The natural rate of unemployment is a hypothetical one that assumes markets are competitive and adjust quickly to changing conditions. Causes of natural unemployment include voluntary reasons as well as technological change.

The natural rate of unemployment was popularized in large part by American economist Milton Friedman in the 1960s. Economic theory prior to the 1960s generally associated high inflation with low unemployment, a correlation known as the Phillips curve. While the Phillips curve implied that governments could manipulate the economy by trading low inflation for low unemployment, the 1960s and 1970s saw both high inflation and high unemployment. This phenomenon, known as stagflation, caused most economists to rebuke the long-term relationship between inflation and unemployment. Rather, Friedman suggested an amount of natural unemployment would always be present in an economy.

Natural unemployment includes unemployment due to voluntary job transitions, technological changes, and geographical mismatch between job-seekers and job opportunities. Each of these factors will always be present in a real-world economy to some degree. Economists often disagree on the extent that natural unemployment will exist, but few claim that these factors can be eliminated entirely.

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In a market economy, workers occasionally leave their jobs voluntarily in pursuit of a career change. These workers seldom are unemployed for a very long time, but this happens with enough frequency to significantly contribute to natural unemployment. Unpredictable technological change can leave certain industries in positions that are no longer competitive. When this happens, workers who were skilled in that industry can find their skills no longer helpful in finding a job. Finally, changing technology can shift the location where new jobs arise to other regions of the country or world.

The type of unemployment that rises during economic recessions and depressions is not considered natural unemployment. This unemployment results from business cycles, which cause fluctuations in the total level of economic activity. Though business cycles do not repeat themselves exactly, they are considered to be inseparable from a market economy. Times of economic recession may see unemployment rise above the natural rate, while times of prosperity may see it fall below the natural level.

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FrameMaker
Post 5

@Georgesplane- A lot goes into determining the natural level of unemployment, and I am not sure exactly how economists come up with this figure, but I do know that the theory of a natural rate of unemployment is being replaced by another unstable economic theory called the non-accelerated inflation rate of unemployment (NAIRU).

NAIRU is essentially the level of unemployment before inflation begins to rise. Monetarists adopted the new term because there is really no natural level of unemployment. The flaw in this new measure of unemployment is that an increase in unemployment tends to cause an increase in the NAIRU even if inflation is not present.

Natural unemployment can be changed by changing the supply side structure of the

economy; similar to the plan Fiorite discussed in that if you build it they will come, and you will have reduced unemployment in the process. More people are put to work building the economy, who may have had no place in the workforce before.
Georgesplane
Post 4

How do economists determine the natural unemployment rate? I always hear about the natural unemployment rate and the underemployment rate, but I have no idea how experts settle on these figures. How do economists determine the number of people who have given up on looking for a job, and wouldn't this contribute to the unemployment rate?

It seems like it is a spin on statistics when the government says the unemployment rate has fallen right after a major extension to unemployment insurance has ended, or when people are just too discouraged to look. If we want an honest view of our nation's economy, I think we should count the unemployment rate as all employable people (those not retired or on disability) who are unemployed. Can someone help me clarify how these figures are determined?

Fiorite
Post 3

@GenevaMech- The President and the government can do some to reduce unemployment, but there are so many factors that cause increases in unemployment that neither can reduce unemployment as much as needed.

The easiest way for the government to affect unemployment is to hire through government initiatives or the expansion of government, or to change or create policy that gives businesses incentives to hire. I doubt there is enough political will or public support for any jobs incentives similar to those during the great depression, but the government can still do big things to stimulate job growth.

One great plan that I have heard is gaining traction is to create an infrastructure bank to push public private investment in the

nation's infrastructure. This type of bank would guarantee that companies could secure low interest loans for everything from bridge builders to energy developers, and it would not cost tax payers anything (in theory). The country's infrastructure is crumbling, and an infrastructure bank would allow the government to create a revenue stream while putting people to work, and improving infrastructure.
highlighter
Post 2

@GenevaMech- The article stated that the cyclical unemployment experienced during an economic recession is not the same as natural unemployment, but you may be on to something. The article also stated that during the 60s and 70s both high unemployment and high inflation occurred; something that went against economic thinking. The jobs problem that the nation has been going through for the past three years could be a symptom of fundamental changes in the nation's unemployment.

I believe it will take more than an economic cycle for many of the jobs lost to be replaced with meaningful jobs. It may sound pessimistic, but I do not think there will be an immediate solution to the jobs crisis. I think that

the most one could ask for is a move from unemployment to underemployment.

Jobs will be created, but until our education system catches up to the times, there will be little long-term relief. I have heard of a number of companies, especially those in technology, having trouble finding employees with the skills to perform the jobs they have available.

GenevaMech
Post 1

Would it be accurate to say that a large portion of the unemployment rate in the United States is due to natural unemployment caused by the exodus of manufacturing jobs? These jobs paid well, but they did not prepare workers for technological or economic changes that would result in fewer jobs. I have seen so many companies outsource these mid-level skilled labor jobs to developing countries where the number of qualified candidates is plentiful and the cost of labor is cheap.

I was watching a cable news show earlier, and one of the topics of discussion was the decline in manufacturing. It seems like the only way to reduce unemployment related to the loss of these jobs is to retrain

the manufacturing labor force. I will be entering the professional workforce (hopefully) in the next few years, but I am worried that there will not be that many jobs where I can make enough to pay off my school loans.

Does anyone else have any ideas about how to reduce unemployment in the short-term and natural unemployment in the long-term? What capability does the president or the government actually have in creating jobs?

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