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.
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.